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UNCLAS SECTION 01 OF 04 BEIJING 002076 
 
STATE FOR EAP/CM and EB 
STATE PASS USTR FOR STRATFORD/WINELAND/READE/WINTERS 
NSC FOR SHRIER/TONG 
TREASURY FOR OASIA/ISA/DOHNER/HAARSAGER 
HHS FOR OGHA STEIGER 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EFIN ENV CH
SUBJECT:  SED Ambassador Alan Holmer Previews SED IV During 
May 22-23 Visit to Beijing 
 
 
(U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
HANDLE ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG 
CHANNELS. 
 
¶1. (SBU) Summary: Treasury Special Envoy for China and the 
Strategic Economic Dialogue (SED) Ambassador Alan Holmer 
discussed plans for the fourth round of the SED with 
Chinese officials during a May 22-23 visit to Beijing.  In 
his discussion with NPC Vice Minister Wu Xiaoling, Holmer 
praised China's relief efforts following the May 12 
earthquake in Sichuan Province, pressed for further 
financial sector liberalization, and encouraged greater 
exchange rate flexibility.  General Administration of 
Quality, Supervision, Inspection and Quarantine (AQSIQ) 
Vice Minister Wei Chuanzhong sought Holmer's assistance in 
moving forward with two draft MOUs with the Department of 
Agriculture and the Department of Commerce.  VM Wei also 
indicated that AQSIQ's relationships with the Department of 
Health and Human Services (HHS), the Consumer Product 
Safety Commission and the Environmental Protection Agency 
(EPA) have evolved over the past year and through signing 
of agreements at SED III have been productive and helped 
resolve problems.  In a meeting with Ministry of Railways 
(MOR) Chief Economist Yu Bangli, Holmer and Department of 
Transportation Deputy Assistant Secretary for 
Transportation Policy Joel Szabat encouraged MOR to 
participate in the upcoming SED Transportation Dialogue. 
Ambassador Holmer also held meetings with a large group of 
American business representatives, leading Chinese 
academics, and Chinese and foreign media.  End Summary. 
 
NPC VM Wu Xiaoling: Sichuan Earthquake and Inflation 
--------------------------------------------- ------- 
 
¶2. (SBU) Treasury Special Envoy for China and the Strategic 
Economic Dialogue (SED) Ambassador Alan Holmer met May 22 
with Wu Xiaoling, Vice Chair of the Financial and Economic 
Committee of the National People's Congress.  Holmer 
praised the Chinese government's timely response and 
transparency following the devastating May 12 earthquake in 
Sichuan Province.  Wu noted the Chinese government has 
became more mature in its response to crises, beginning 
with SARS in 2003, and continuing this year with the 
Chinese New Year snowstorms, and the Sichuan earthquake. 
According to Wu, the Chinese government has learned that 
transparency can improve public understanding of the 
challenges the government faces during crises.  She 
contrasted the government's openness following the 
earthquake, which led to positive international press 
coverage, with the tight media restrictions following the 
March protests in Tibet and the negative press stories that 
ensued.  [Note: Wu later in the meeting seemed to backtrack 
on this point by noting the restrictions on foreign 
journalists in Tibet were for the journalists' own safety. 
End note].  In response to Holmer's question on the impact 
of the Sichuan earthquake on China's economy, Wu noted that 
while the disaster has had a large impact on the local 
economy, Sichuan is not home to key industrial sectors so 
the earthquake will have only a limited effect on the 
Chinese economy as a whole. 
 
¶3. (SBU) Wu said inflation remained the top economic 
concern of the Chinese government and predicted the 
continuation of China's tight monetary policy.  Wu argued 
that U.S. policies were exacerbating Chinese inflation. 
First, an important factor for rising inflationary 
pressures in China is the higher price of imported 
commodities, such as oil.  Since prices of oil and other 
commodities are settled in U.S. dollars, a weaker dollar 
tends to lead to higher commodity prices.  Second, while 
the Federal Reserve's loosening of monetary policy and 
provision of large scale liquidity support is 
understandable given U.S. circumstances, the increase in 
global liquidity is flowing to other countries and 
contributing to global inflationary pressures.  Given this, 
Wu said it is important for the U.S. government to take 
actions to achieve a greater degree of exchange rate 
 
BEIJING 00002076  002 OF 004 
 
 
stability (she did not specify what policies). She 
suggested the SED focus on the impact of U.S. monetary 
policy on developing countries and how to increase 
coordination among financial regulators 
 
RMB Appreciation and IMF Report 
------------------------------- 
 
¶4. (SBU) In response to Ambassador Holmer's inquiry on the 
role of RMB appreciation in reducing domestic inflation, Wu 
replied that RMB appreciation should help, however, there 
was a risk of over-shooting, which, coming at a time of 
weakening external demand, could  harm excessively 
exporters in the coastal areas, leading to large job losses. 
Wu said the Chinese government remained focused on 
reforming exchange rate policy, but it is unrealistic to 
expect the RMB to continue its recent rapid appreciation. 
Wu said Congress and the Administration should be patient 
with the pace of RMB exchange rate reform.  Holmer said the 
SED provided a forum for the frank exchange of views on 
sensitive topics such as exchange rates, and said he hoped 
China would move rapidly toward a more flexible exchange 
rate regime. 
 
¶5. (SBU) Responding to FINATT's question on the Chinese 
reaction to the expected decision by the IMF to describe 
the RMB as "fundamentally misaligned," Wu complained the 
IMF looks excessively at foreign reserve holdings to judge 
whether a currency is misaligned.  She said this approach 
ignores the importance of holding USD as the world's key 
reserve currency and may be based on faulty assumptions on 
how much foreign reserve is necessary to deal with external 
risks. 
 
Energy and Environment Cooperation 
---------------------------------- 
 
¶6. (SBU) Wu praised the SED's ten-year framework to deal 
with energy and environmental issues. She said it is 
important for the United States to ratify the Kyoto 
Protocol and provide strong leadership on a post-Kyoto 
accord.  She also stressed the United States' energy- 
intensive lifestyle will need to change, and the U.S. 
should do more to reduce energy consumption to allow for 
the development of poorer countries.  Wu said it was not 
realistic for the United States to ask China to reduce its 
greenhouse gas emissions while not committing to do the 
same thing.  Ambassador Holmer noted the Administration is 
playing a leadership role in developing a post-Kyoto 
framework and looks forward to continue to work closely 
with China on this issue. 
 
AQSIQ Vice Minister Wei Chuanzhong 
---------------------------------- 
 
¶7. (SBU) In his May 23 meeting with General Administration 
of Quality Supervision, Inspection and Quarantine (AQSIQ) 
Vice Minister Wei Chuanzhong, Ambassador Holmer expressed 
condolences for the losses suffered during the Sichuan 
earthquake and reiterated the United States' offer of 
assistance.  Vice Minister Wei thanked Holmer for his 
expressions of concern and noted AQSIQ has already sent 29 
rescue teams, or more than 600 people, to participate in 
the relief effort. 
 
Food and Product Safety 
----------------------- 
 
¶8. (SBU) Ambassador Holmer and Vice Minister Wei reviewed 
the achievements of the previous rounds of the Strategic 
Economic Dialogue.  At SED III, AQSIQ signed three 
agreements with U.S. agencies, including an MOU on food and 
feed safety with the Department of Health and Human 
Services (HHS), an MOU on trade in alcohol and tobacco with 
Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB), 
and an MOU on protection of human health and the 
environment with the Environmental Protection Agency (EPA). 
 
BEIJING 00002076  003 OF 004 
 
 
Vice Minister Wei expressed his appreciation for previous 
cooperation with the EPA, the Consumer Product Safety 
Commission (CPSC) and HHS and said that these relationships 
have strengthened cooperative solutions and prevented 
problems.  Ambassador Holmer agreed the two sides had made 
good progress on these issues. 
 
Looking Forward 
--------------- 
 
¶9. (SBU) Vice Minister Wei raised the issue of three 
safety-related documents that both sides have been working 
on recently.  The first is a Memorandum of Understanding 
concerning standards and conformity assessment; the 
document has been reviewed by AQSIQ and is currently under 
final review at the Department of Commerce.  The signing 
deadline for this document was originally set for December 
31, 2008, although AQSIQ would like to sign the document as 
soon as possible.  The second document is a "progress 
report and work plan" related to the 2007 MOA between HHS 
and AQSIQ on Food and Feed Safety, which Minister Li 
Changjiang and HHS Secretary Leavitt would sign during SED 
IV.  This document has been reviewed by AQSIQ and returned 
to the Food and Drug Administration (FDA) for consideration 
and comment.  The third agreement is a draft MOU with the 
U.S. Department of Agriculture (USDA); Wei said AQSIQ is 
still awaiting comments from the U.S. side and asked 
Ambassador Holmer to urge USDA to respond quickly. 
[Note: AQSIQ and USDA technical level officials have been 
exchanging drafts and working toward agreement on several 
difficult issues in an effort to craft a MOU that can be 
signed at SED IV.  End Note.] 
 
Ministry of Railways 
-------------------- 
 
¶10. (SBU) During a May 23 meeting with Ministry of Railways 
(MOR) Chief Economist Yu Bangli, SED Ambassador Holmer 
expressed his deepest condolences for the loss of life and 
devastation resulting from the earthquake in Sichuan 
Province.  He also invited MOR to join the SED IV 
transportation forum, which is expected to focus on the 
areas on infrastructure, innovative finance, congestion and 
supply chain logistics.  Yu said he personally agreed that 
a transportation forum would be useful and indicated that 
MOR would coordinate with the Ministry of Finance (MOF) and 
Ministry of Transportation (MOT). 
 
¶11. (SBU) Department of Transportation Deputy Assistant 
Secretary for Transportation Policy Joel Szabat said the 
forum would focus on transportation challenges that affect 
trade and commerce between the United States and China. 
Szabat stressed that incorporating rail was vital to the 
Forum's success and noted that one of the biggest 
challenges facing both countries was connecting roads and 
railroads to ports and airports.  Yu agreed that rail was 
important to such a forum and said most Chinese travel via 
rail.  He remarked that 140 million Chinese traveled by 
rail during the Chinese Lunar New Year this past February. 
Yu also noted that there is a Medium and Long-Term Plan and 
an 11th Five Year Plan for intermodal railway development. 
 
¶12.  (SBU) MOR Deputy Director General Zhang Jianping 
said the Medium and Long-Term Plan covers 2003-2020 and was 
approved by the State Council in early 2004.  According to 
Zhang, the plan initially called for China to have 100,000 
kilometers of railway tracks by 2020.  However, due to 
rapid economic development, Zhang said the plan was 
adjusted to establish a new goal of 120,000 kilometers of 
railway tracks by 2020. 
 
Public Diplomacy 
---------------- 
 
¶13.  (SBU) Ambassador Holmer conducted a breakfast briefing 
for approximately 75 American business representatives at 
an event co-hosted by AmCham, the U.S.-China Business 
 
BEIJING 00002076  004 OF 004 
 
 
Council, and the U.S. Information Technology Office.  In 
addition, Ambassador Holmer discussed U.S.-China economic 
relations with Professor Wang Jisi and Professor Wang Yong 
of Beijing University's Center for International and 
Strategic Studies and held a roundtable with Beijing 
University students. 
 
¶14.  (SBU) Ambassador Holmer participated in a webchat with 
China.org and conducted interviews with China Radio 
International (CRI), the 21st Century Business Herald (circ 
480,000), and Dow Jones Newswire.  The wire service article 
appeared the same day, while 21st Century Business Herald 
ran its article on May 23 noting the purpose of Ambassador 
Holmer's visit and his comments on U.S. assistance to China 
for the Sichuan earthquake.  The webchat was available 
online from Monday, May 26, the same day CRI aired the 
radio interview.  The press events allowed Ambassador 
Holmer to underscore the "win-win" framework of the SED and 
the importance of open markets to the global economy. 
 
¶15. (U) Ambassdor Holmer's delegation cleared this cable. 
 
PICCUTA