VZCZCXRO7373
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7593/01 3550625
ZNR UUUUU ZZH
R 210625Z DEC 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 4179
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAEPA/HQ EPA WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEAUSA/DEPT OF HHS WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 007593 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM SECOR/YAMAMOTO 
STATE PASS USTR FOR STRATFORD/WINTER/MAIN/WINELAND 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD CH
SUBJECT: SED SESSION III: BALANCED ECONOMIC DEVELOPMENT, DECEMBER 
12, 2007 
 
REF:  A. STATE 168294 
  ¶B. BEIJING 7557 
  ¶C. BEIJING 7579 
  ¶D. BEIJING 7581 
 
(U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS. 
 
Summary 
------- 
 
¶1. (SBU) Summary.  The third session of the U.S.-China Strategic 
Economic Dialogue (SED) focused on Balanced Economic Development. 
Both sides agreed on the need for further economic reforms, but 
Chinese interlocutors insisted that reforms take place gradually to 
avoid "overshooting."  The Chinese side expressed concern that the 
United States sub-prime mortgage crisis would adversely affect the 
Chinese economy.  Treasury Secretary Paulson underscored U.S. 
efforts to address the sub-prime crisis and assured his counterparts 
that the U.S. economy would continue to serve as an engine for 
growth.  End Summary. 
 
Paulson Urges Quickening the Pace of Reform 
------------------------------------------- 
 
¶2. (SBU) During a discussion on Balanced Economic Growth on December 
12, Treasury Secretary Henry Paulson attributed imbalances in both 
the U.S. and Chinese economies to structural issues.  He described 
U.S. efforts to address U.S. domestic imbalances by resolving the 
sub-prime mortgage crisis, addressing the entitlement process, and 
increasing domestic savings rates.  Paulson urged Chinese leaders to 
quicken the pace of Chinese domestic reforms, noting that reforms 
work best if executed during a time of economic strength rather than 
in response to a crisis.  Commerce Secretary Carlos Gutierrez echoed 
Paulson's support for reforms, and encouraged Chinese leaders to 
continue efforts to build a social safety net for its citizens and 
strengthen innovation by further opening the market to foreign 
competition. 
 
PBOC: China Must Go Slow 
------------------------ 
¶3. (SBU) People's Bank of China (PBOC) Governor Zhou Xiaochuan 
agreed that China should move forward with economic reforms but at a 
gradual pace.  He warned that moving too quickly could lead to an 
"overshooting" of corrections, tipping imbalances in the opposite 
direction and generating new problems.  Zhou cited a cultural 
analogy to describe the differences between U.S. and Chinese 
approaches to reform: "Chinese people use traditional Chinese 
medicine to address the root causes of a disease, but it often takes 
longer for the body to get well.  The United States, on the other 
hand, uses Western medicine to address only the symptoms of a 
disease, but this does not necessarily resolve the underlying 
illness."  China's reform measures -- aimed at reducing income gaps 
across the country and shifting the economy away from an 
export-driven growth model -- similarly target the root causes of 
China's economic imbalances, but will take a longer time to affect 
the economy as a whole. 
¶4. (SBU) Zhou said that domestic imbalances in both countries 
complement one another, and stressed the importance of lowering 
savings rates and increasing consumption in China, while increasing 
savings and reducing consumption in the United States.  He noted, 
however, that it is difficult to reach a proper equilibrium, as a 
high rate of consumption in the United States serves as an engine 
for global economic growth.  Zhou expressed concern about the impact 
of the sub-prime mortgage crisis on China's economy.  In Zhou's 
view, excess liquidity resulting from the U.S. Federal Reserve's 
lowering of interest rates in the wake of the sub-prime crisis could 
contribute to excess liquidity in China and other countries.  "China 
already faces an excess liquidity problem," he said, "so we are 
concerned that this will create ethical risks (moral hazard)." 
 
MOF: Maintain a Stable Dollar 
----------------------------- 
 
¶5.  (SBU) Minister of Finance Xie Xuren emphasized China's use of 
fiscal policy to promote balanced economic growth.  Xie stated that 
China is strengthening the central government's transfer payments 
system to promote growth in central and western regions.  He 
reported that China has also eliminated agricultural taxes and 
subsidized agricultural production to narrow the wealth gap between 
urban and rural areas.  In support of "scientific development" 
 
BEIJING 00007593  002 OF 002 
 
 
policies aimed at protecting the environment and steering investment 
toward high tech industries, China has also reduced and/or 
eliminated VAT refunds on certain categories of exports whose 
manufacture causes heavy pollution.  Xie asserted that "developed 
countries like the United States should shoulder more of the burden 
for addressing global economic imbalances."  He urged the United 
States to maintain the U.S. dollar at a stable exchange rate, 
increase technology exports, lower the budget deficit, and reduce 
trade protectionism.  Paulson replied that a large market-driven 
economy like the United States will always have ups and downs, and 
reminded Xie that the market determines the value of the U.S. 
dollar. 
 
CBRC on Financial Services 
-------------------------- 
 
¶6. (SBU) China Banking Regulatory Commission (CBRC) Chairman Liu 
Mingkang stated that CBRC will soon sign an Exchange of Letters 
(EOL) with the U.S. Securities and Exchange Commission that would 
facilitate Chinese fund managers to invest in U.S. stock markets. 
Liu also encouraged U.S. banks to focus on rural banking, noting 
that Citigroup and AIG have already expressed an interest in 
investing in new types of financial institutions in rural areas.  On 
pension management, Liu said that "once the greenlight is lit" 
foreign financial services firms will receive national treatment in 
the enterprise annuity (pension management) business, but declined 
to elaborate on a time frame.  Liu welcomed the recent licensing of 
China Merchants Bank's New York branch and encouraged the United 
States to reduce the time it will take to approve licenses for 
Industrial and Commercial Bank of China (ICBC) and China 
Construction Bank (CCB).  He also asked the United States to provide 
national treatment to Chinese banks already operating in the United 
States.  Noting concern about the recent sub-prime crisis, Liu urged 
the United States to prevent future crises through enhanced 
bilateral financial information sharing mechanisms and strengthened 
supervision of financial institutions.  Liu stressed recent progress 
on foreign bank cards, and noted that CBRC has already approved 
issuance of several foreign bank cards. The card data processing and 
storage however, must meet PBOC technical standards, he explained, 
urging U.S. financial institutions to continue discussions with 
PBOC. 
 
CSRC on Opening the Securities Market 
------------------------------------- 
 
¶7. (SBU) China Securities Regulatory Commission (CSRC) Chairman 
Shang Fulin stated that "China has faithfully followed up on 
commitments to open the securities market."  He cited recent 
achievements, including the approval of NYSE and NASDAQ offices in 
China and an extension of QFII quotas from USD 10 billion to USD 30 
billion.  He expressed concern about excess liquidity and weak 
infrastructure in domestic capital markets, stressing that the stock 
market has "accumulated risk." Shang stated that the CSRC will 
further open the securities sector, "under the precondition of 
ensuring financial stability." 
 
¶8. (SBU) U.S. Trade Representative Schwab urged China to end 
discriminatory treatment of foreign insurance firms opening branches 
in China, noting that foreign firms can file only one branch 
application at a time whereas Chinese firms can file multiple 
applications.  CIRC Chairman Wu Dingfu replied that premium income 
for foreign insurance companies in China continues to rise, and that 
foreign insurance firms' 48.7 percent growth rate is higher than 
that of Chinese firms.  "This proves we have been honoring our WTO 
commitment," he claimed. 
 
¶9. (SBU) Secretary Paulson closed the discussion, stating that the 
United States and China have a shared responsibility to address 
economic imbalances.  He encouraged China to move forward quickly 
with reforms and stressed that if regulation had preceded innovation 
in the United States, it would have had a negative impact on the 
development of the U.S. economy. 
 
Randt