VZCZCXRO7518
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7595/01 3550936
ZNR UUUUU ZZH
R 210936Z DEC 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 4182
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 04 BEIJING 007595 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM SECOR/YAMAMOTO 
STATE PASS USTR FOR STRATFORD/WINTER/MAIN/WINELAND 
 
E.O. 12958: N/A 
TAGS: EINV ETRD ECON CH
SUBJECT: SED SESSION VI: ADVANCING BILATERAL INVESTMENT, 
DECEMBER 13, 2007 
 
REF:   A. STATE 168294 
  ¶B. BEIJING 7557 
  ¶C. BEIJING 7579 
  ¶D. BEIJING 7581 
  ¶E. BEIJING 7593 
 
(U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
HANDLE ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG 
CHANNELS. 
 
Summary 
------- 
 
¶1. (SBU) Summary:  During the December 13 investment 
session of the third SED, both sides agreed that increased 
Chinese investment in the United States would strengthen 
bilateral ties.  Chinese officials expressed frustration 
over how the Committee on Foreign Investment in the United 
States (CFIUS) evaluates the national security implications 
of inward investment.  United States officials complained 
about the limitations China imposes on foreign investment 
in some sectors and the vague criteria with which China 
screens inward investment.  Treasury Secretary Henry 
Paulson said the United States welcomes investment from 
abroad, including from countries that do not offer 
reciprocal investment access, like China.  The United 
States and China agreed to establish a sustained senior- 
level dialogue on investment policies, practices, and 
climates and to intensify ongoing talks on a bilateral 
investment agreement, noting the talks to date had proven 
valuable in helping the two sides understand each others 
investment regimes.  End Summary. 
 
Paulson: U.S. Open to Foreign Investment 
---------------------------------------- 
 
¶2. (SBU) During the December 13 discussion on advancing 
bilateral investment, Treasury Secretary Henry Paulson said 
the United States was open to inward investment in all but 
a few sectors.  United States Trade Representative (USTR) 
Susan Schwab noted the U.S. open investment policy had led 
to a surge in foreign investment in the United States, 
which had provided jobs that paid more than the national 
average and contributed to exports.  According to Schwab, 
investment between the United States and China was less 
than one would expect and smaller than cross border 
investments between the United States and its other major 
trading partners. 
 
¶3. (SBU) Commerce Vice Minister Chen Deming agreed that 
Chinese investment in the United States was small and 
needed to grow.  Chinese firms wanted to invest in the 
United States, but progress had not been smooth.  He said 
China hoped to see the United States implement a plan to 
attract investment, which could guarantee national 
treatment, streamline the review of mergers and 
acquisitions, and improve transparency. 
 
¶4. (SBU) National Development and Reform Commission (NDRC) 
Vice Chairman Zhang Xiaoqiang agreed that expanded 
investment promoted and deepened bilateral cooperation. 
But two-way investment remained modest.  Chinese and U.S. 
firms had a strong interest in expanding investment, 
especially in chemicals, transport, electricity, energy, 
environmental protection, and modern services.  China, 
Zhang said, was interested in more cooperation. 
 
¶5. (SBU) Commerce Secretary Carlos Gutierrez noted that all 
United States governors and mayors were looking to attract 
inward investment.  More Chinese investment in the United 
States would go a long way in strengthening the bilateral 
relationship.  When the average American thought of China, 
they thought of jobs going overseas, with no examples of 
Chinese firms creating jobs in the United States. 
Gutierrez urged China to consider the long-term benefits of 
becoming a major investor in the United States. 
 
China: CIFIUS Process Not Clear 
------------------------------- 
 
¶6. (SBU) Chen said China was concerned about how the 
 
BEIJING 00007595  002 OF 004 
 
 
Committee on Foreign Investment in the United States (CFIUS) 
screens potential investments.  Chen said the CFIUS process 
did not offer a clear definition of Qnational security, 
which has led to misgivings in the Chinese business 
community about investment in the United States.  In the 
Joint Commission on Commerce and Trade (JCCT) session that 
preceded the SED, the United States had expressed a 
readiness to come up with a clearer definition, he said, 
which China welcomed. 
 
¶7. (SBU) Secretary Paulson said CFIUS screens foreign 
investment for national security risks only, and there were 
no exceptions limiting investment in so-called Qstrategic 
industriesQ or to protect Qnational champions.Q  Congress 
passed the Foreign Investment and National Security Act of 
2007 (FINSA) to clarify the CFIUS screening process and 
increase transparency.  Among the 150 or so transactions 
CFIUS had screened during PaulsonQs tenure, almost all had 
closed without controversy.  USTR Schwab reiterated that 
CFIUS reviews were narrow in scope, and the United States 
maintained limited restrictions on foreign ownership in 
only a few sectors. 
 
U.S. Biased Against State Owned Enterprises? 
-------------------------------------------- 
 
¶8. (SBU) PeopleQs Bank of China Governor Zhou Xiaochuan 
noted that many Chinese firms that were formerly state- 
owned had now been privatized and listed.  The state often 
remained a shareholder, but there were other investment 
partners as well.  Zhou said these companies had to 
consider the interests of all their shareholders and could 
not simply take directions from the state.  He commented 
tht apart from the China Investment Corporation, ll the 
Chinese firms that were strong enough t make investments 
overseas were private. 
 
9 (SBU) In order to facilitate bilateral investment, Vice 
Chairman Zhang proposed establishing an information sharing 
system on major investments.  The two countries could 
designate agencies and departments to inform each other of 
changes in laws and regulations and major investment areas 
and give feedback to relevant enterprises and associations. 
China also wanted to increase dialogue so that each side 
could brief the other on their latest laws and regulations 
and their implementation.  China wanted the United States 
to provide a clearer definition of Qnational security. 
China was also trying to simplify approval procedures and 
encouraged competent, reputable Chinese firms to cooperate 
with foreign partners. 
 
Bilateral Investment Treaty 
--------------------------- 
 
¶10. (SBU) Vice Minister Chen said talks about the 
possibility of negotiating a bilateral investment treaty 
had been positive, and China planned to send a delegation 
to the United States in January 2008 to continue these 
discussions.  But, Chen noted, there were obstacles to 
overcome.  China hopes the United States will not 
discriminate against firms simply because they may be 
state-owned.  No matter who owns the firms that seek to 
invest in the United States, they all would have to follow 
U.S. laws.  As Chinese firms had matured and as ChinaQs 
foreign exchange reserves had grown, the United States 
would become a key destination for ChinaQs outbound 
investment. 
 
¶11. (SBU) USTR Schwab said an agreement would provide 
meaningful legal protections to investors from both 
countries while also signaling a commitment to an open 
global economy.  However, there were key differences in 
approaches to investment treaties, including ChinaQs 
requirement for an affirmative approval for all new 
investments compared to the United StatesQ pre- 
establishment right to invest, subject to limited explicit 
exceptions.  The United States also prohibited measures 
that discriminated against foreign investors, subject to 
limited, explicit exceptions, whereas China exempted all 
existing discriminatory measures.  For next steps, the two 
sides would broaden and intensify their discussions by 
 
BEIJING 00007595  003 OF 004 
 
 
focusing on national treatment and other obligations and 
undertake frequent and intensive expert-level discussions 
on fundamental investment protections. 
 
China Committed to Opening Up and Reform 
---------------------------------------- 
 
¶12. (SBU) Chen said China was committed to opening up and 
reform, as Vice Premier Wi Yi had reaffirmed earlier in the 
SED.  A reversal, Chen said, would lead to a Qblind alley. 
To improve the environment for foreign investment, China 
had strengthened intellectual property rights (IPR) 
protection, improved laws and regulations, and increased 
transparency by unifying tax rates and publishing a new 
investment catalogue.  China allowed investment in all 22 
categories of manufacturing and 100 service sectors that it 
had committed to open in its WTO accession agreement. 
 
¶13. (SBU) Chen commented that the United States was one of 
the largest sources of foreign investment in China and U.S. 
companies had benefited from expanded market access in 
China.  The China operations of U.S. firms employed 2.2 
million people, boasted revenue of $120 billion in 2006, 
and generated $10 billion in profits, or a 17 percent 
return on investment, he noted.  China also benefited from 
the advanced technology, managerial expertise, and jobs 
that U.S. investment delivered. 
 
ChinaQs Investment Catalogue 
---------------------------- 
 
¶14. (SBU) Before publishing the new investment catalogue, 
China had solicited the views of foreign firms, according 
to Chen.  The catalogueQs guiding principle was to expand 
foreign investment, and China welcomed further discussion 
about the catalogue.  China also passed an anti-monopoly 
law that protects IPR and covers all enterprises, including 
state-owned monopolies.  China was aware the U.S. had 
concerns about these issues, and was ready for in-depth 
discussions in fields of interest. 
 
¶15. (SBU) USTR Schwab said China had heightened uncertainty 
among foreign investors by relying on the expansive and 
vague concept of Qnational economic securityQ to screen 
inward investment, noting the State-owned Assets 
Supervision and Administration Commission of the State 
Council (SASAC) had released a QGuiding OpinionQ in 
December 2006 calling for greater state control in 
Qimportant industries and key sectors.Q  Moreover, the 
Foreign Investment Catalogue had been issued without an 
opportunity for public comment.  Provisions of the August 
2007 Anti-monopoly law also could be used to shield state- 
owned firms from foreign competition and authorize 
QcompetitionQ decisions that actually promoted macro- 
economic goals. 
 
¶16. (SBU) Despite these concerns, Schwab said the United 
States and China had made progress discussing investment 
issues in the SED.  The United States was pleased that 
China had agreed to its proposal to establish a bilateral 
forum on investment policies, practices, and climates. 
 
Sovereign Wealth Funds 
---------------------- 
 
¶17. (SBU) Secretary Paulson noted there were philosophical 
differences about sovereign wealth funds (SWF).  Some 
people thought that allowing SWFs to buy assets in 
countries that had earlier privatized them would 
essentially undo the privatization.  This line of thinking 
did not represent the United States governmentQs view.  If 
SWFs could agree on best practices, it would help members 
of the Organization for Economic Cooperation and 
Development (OECD) to agree on principles, which would help 
ensure their markets remained open. 
 
¶18. (SBU) Chinese Foreign Minister Yang Jiechi noted that 
SWFs had existed for a number of years.  The United States 
needed a policy to deal with this; otherwise, the situation 
would become more serious for the United States.  Yang 
noted that American firms appeared to feel no reservations 
 
BEIJING 00007595  004 OF 004 
 
 
partnering with Chinese state-owned firms when hey 
invested in China.  Why then was there supicion if the 
same U.S. firms wanted topartner with a Chinese SOE in the 
United States, he asked.  Yang added that U.S. governors 
all sought Chinese investment, and said China would like 
the CFIUS examination to take into account the 50 states 
ideas and needs, instead of considering Qunnecessary 
elements. 
 
¶19. (SBU) Secretary Paulson replied that the United States 
had been open to investments from SWFs for a long time. 
The United StatesQ biggest concern was that European 
nations were not necessarily open to SWF investment.  CFIUS 
legislation maintained that the United States would remain 
open to investment, even in the case of SWFs and SOEs. 
Paulson noted that other countries sometimes said they 
needed a review similar to CFIUS, but in reality sought to 
screen investments in Qstrategic industries. 
 
Conclusion 
---------- 
 
¶20. (SBU) Secretary Paulson closed the discussion by noting 
that the quality of views exchanged in the session showed 
that there was no doubt about the importance of the high- 
level dialogue on investment to which both sides had agreed. 
The United States would like to see limits on investment 
lifted and China was seeking more clarity on U.S. 
regulations.  Paulson said this was not the first time he 
had heard China ask for a Qroadmap,Q to help avoid 
misunderstandings. 
 
Randt