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RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7421

UNCLAS SECTION 01 OF 05 SHANGHAI 000187 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR AMB. HOLMER, WRIGHT, TSMITH, AND OASIA - DOHNER, 
HAARSAGER, CUSHMAN 
USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN 
NSC FOR WILDER AND TONG 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ETRD EFIN KIPR ENRG SENV EWWT CH
SUBJECT: SED ENVOY HOLMER VISITS SHANGHAI AND NINGBO 
 
 
SHANGHAI 00000187  001.2 OF 005 
 
 
¶1.  (SBU) Summary.  During a May 18-20 visit to Shanghai and 
Ningbo, Special Envoy for China and the Strategic Economic 
Dialogue (SED) Ambassador Alan Holmer, Managing Director for 
China and the SED Dan Wright, and Deputy Assistant Secretary for 
Transportation Policy Joel Szabat engaged U.S. business 
representatives, Shanghai academics and the national media on 
SED-related issues.  Both academics and the U.S. business 
community were vocal in their support for a continuation of the 
SED dialogue in the next administration.  The delegation also 
met with China Customs officials and Yangshan Free Trade Zone 
Administrative Committee representatives to discuss 
implementation of SED-related Customs agreements, IPR protection 
and other transportation and port-related issues.  While 
visiting Ningbo, the delegation toured a newly-established 
wetlands area, discussed local trade issues with Ningbo Foreign 
Affairs officials, and engaged an official from Yinzhou Bank, a 
small, agriculture-focused bank, on its efforts to serve farmers 
and SMEs.  End summary. 
 
AmCham Shanghai: Hopeful for Continuation of SED 
 
--------------------------------------------- --- 
 
¶2.  (SBU) In a roundtable discussion with 18 members of the U.S. 
business community, Ambassador Holmer briefed the group on U.S. 
disaster relief assistance in Sichuan Province and discussed SED 
progress and opportunities for progress.  Business 
representatives were positive about the results of the SED and 
queried whether the SED would continue with the next 
administration.  AIG General Insurance Company China Limited 
Assistant Vice President Eric Zheng attributed AIG's success in 
obtaining a business license approval to the SED and said his 
company had now established a wholly-owned foreign subsidiary in 
Shanghai.  AIG is now "testing" the waters further by applying 
for three branch offices simultaneously.  Javelin Investments 
Chairman and CEO Kim Woodard urged the SED to push for greater 
transparency on merger and acquisition rules for both sides.  He 
opined the borders between "national economic security" and 
old-fashioned protectionism were increasingly blurring in China. 
 
 
¶3.  (SBU) Davis Wright and Tremaine Partner Ron Cai pointed out 
that there is unequal treatment for trucking license approvals, 
particularly in transporting HAZMATS and argued the issue should 
be addressed in the SED.  In response to Ambassador Holmer's 
query regarding the impact of the RMB appreciation, Better Asian 
Sources Chief Representative Daniel Krassenstein said the RMB 
appreciation, inflation, and increased labor costs have driven 
up the cost of export goods to the United States by as much as 
20 percent, which U.S. consumers are not willing to accept.  As 
a result, some Chinese vendors have begun substituting materials 
in products, which creates safety concerns in some cases.  He 
added that there is a great deal of confusion in China over 
safety standards because there are different standards between 
the United States and E.U. and even within the United States. 
Krassenstein urged the United States to work more closely with 
the E.U. to develop consistent and unified safety requirements 
for Chinese goods.  Tyson Foods China Director James Rice added 
that the United States should be more actively engaged in 
general with China in setting standards, rather than allow the 
E.U. or Japan to gain the advantage. 
 
IPR Is Still An Issue 
 
--------------------- 
 
¶4.  (SBU) Cai expressed that protection of intellectual property 
rights (IPR) is a real concern for companies who have 
environmentally-friendly technology that could assist China.  As 
a result companies are not exporting their newest and latest 
energy efficient and environmentally-friendly technology to 
China.  Rouse and Co. International Senior Consultant Diana 
Matthias said more rights holders are resorting to litigation to 
protect their IPR since the courts in the major cities such as 
Shanghai and Beijing are becoming more reliable.  The problem is 
finding a viable entity against which to litigate.  Matthias 
added that most counterfeits are not originating out of the 
ports in Shanghai or Ningbo because these port are more thorough 
in their screening.  Most of the counterfeits are originating in 
smaller ports with less vigorous checks, and Customs in larger 
ports such as Shanghai does not recheck the goods.  She also 
offered that many Chinese pirated goods are being shipped via 
Vietnam and Thailand. 
 
SHANGHAI 00000187  002.2 OF 005 
 
 
 
More Work Need on Environment and Energy 
 
---------------------------------------- 
 
¶5.  (SBU) Business representatives also asked if there have been 
any tangible results on energy and environmental issues as a 
result of the SED and whether the Olympics has moved these 
issues into the Chinese mainstream thinking.  Ambassador Holmer 
replied that the Chinese are taking these issues with great 
seriousness and that in addressing these issues in the SED we 
are "pushing on an open door."  Wright also enumerated the 
10-year framework and five goals agreed to in the SED, which are 
established to address these issues.  Squire Sanders Counsel and 
AmCham Environmental Committee Co-Chair Charles McElwee noted 
there is a vacuum of Chinese standards on the environmental 
side.  In particular there are no standards on green products. 
He also urged a liberalization of investment regulations in 
these critical areas. 
 
Brainstorm - An Opportunity for Public Outreach 
 
--------------------------------------------- -- 
 
¶6.  (SBU) During a two hour media event on "Brainstorm," a 
popular, Shanghai talk show reminiscent of "Crossfire," 
Ambassador Holmer responded to remarks and questions from a 
four-member panel of experts, a large studio audience and the 
talk show host.  The program, which will air on Channel Business 
News Asia, a partner of CNBC, will reach no less than 100 
million viewers not only in East China but also throughout East 
Asia and in the United States.  Ambassador Holmer began the 
program by reiterating U.S. condolences with respect to the 
three-day mourning period for the May 12 Sichuan earthquake.  He 
then discussed his role as the Special Envoy for China and the 
SED, noting he was both an envoy to the Chinese Government as 
well as to the Chinese people.  He also emphasized the strategic 
nature and long-term approach to resolving issues in the SED. 
Panelists, the talk show host, and audience members raised a 
wide-range of questions ranging from the state of the U.S. 
economy to prospects for changes in U.S./China trade relations. 
 
Shanghai Customs: Working on Implementing SED Agreements 
 
--------------------------------------------- ----------- 
 
¶7.  (SBU) The delegation also traveled to Shanghai's Yangshan 
Deepwater Port and met with China Customs Director General for 
Duty Collections Gao Rongkun (who traveled down from Beijing for 
the event), Shanghai Customs Deputy Director General Chen 
Xudong, and Director of Yangshan Port Customs Shao Xiaoping. 
Gao outlined the role of China Customs and noted efforts in 
cooperation with the United States such as efforts to stop 
shipments of IP infringing goods and illegally-logged lumber, 
sharing of trade statistics, and counter-terrorism efforts. 
Shao briefed the delegation on Yangshan Port operations, noting 
that the port is now in its third phase of development that will 
be completed by the end of 2008.  It is expected that Yangshan 
will handle 15 million TEU by 2010 with a total of 26 deepwater 
berths.  Currently 60 percent of the containers arrive by truck, 
with the remaining 40 percent arriving by water (only a tiny 
fraction are international transshipments).  Shao estimated 
within a few years  the three components will be roughly one 
third of the total.  Shao noted that Shanghai Customs does not 
re-inspect containers that have been cleared by other Customs 
offices throughout China; it only checks to ensure the seals 
have not been tampered with.  Yangshan is also making an effort 
to induce foreign manufactures to move to the surrounding free 
trade zone area as a means to increase usage of the port.  In 
2007, Shanghai Customs collected RMB 23.8 billion (about USD 3.4 
billion), almost doubling over the RMB 12.6 billion (USD 1.8 
billion) collected in 2006. 
 
Achieving Results on IPR Efforts 
 
-------------------------------- 
 
¶8.  (SBU) Regarding IPR issues, Shao emphasized that Shanghai 
Customs attaches great importance to the 2007 SED Custom-related 
agreement with the United States.  In 2007, Shanghai Customs 
intercepted 29 cases of IP infringing goods, valued at RMB 16.62 
million.  As of May 1, 2008, Shanghai Customs has caught 23 
cases of infringing goods, valued at RMB 4 million.  Shao noted 
 
SHANGHAI 00000187  003.2 OF 005 
 
 
that these numbers are a great improvement from the first four 
years (1994-1998) Shanghai Customs began monitoring for 
IP-infringing goods during which only 26 cases were uncovered. 
Shanghai Customs uses a system of targeting high risk goods and 
exporters for special examination.  Although some cases are 
initiated by the rights holders, the vast majority are ex 
officio.  Customs regulations require that each IPR-related case 
be reported to Customs headquarters.  Chen added that Customs 
maintains a "blacklist" of traders, many of whom are reported by 
the United States.  Customs intensely scrutinizes these traders 
for infringing goods. 
 
¶9.  (SBU) Chen also said Customs has made significant progress 
over the past year on six Customs-related projects initiated 
under the SED; in particular he noted progress on the rules of 
origin.  Currently 56 percent of China's exported goods are 
produced by foreign-invested companies, many of which are U.S. 
enterprises.  China Customs is undertaking thorough study and 
research on the origin of goods so that both sides can make a 
correct and clear judgment of bilateral trade.  The United 
States and China also need to set clear standards on the rules 
of origin so as to set a clear example for other countries. 
Chen also said that he was not clear which U.S. agency was 
charged with coordinating SED-related issues with China Customs 
and asked for assistance in clarifying this issue.  Ambassador 
Holmer assured Chen that the United States is fully committed to 
ensuring it lives up to the Customs-related agreements made in 
the third round of the SED and promised to get back to Chen 
regarding the coordinator for the U.S. side. 
 
Financial Academics:  Exchange Rates, Inflation and More 
 
--------------------------------------------- ----------- 
 
¶10.  (SBU) In a roundtable meeting with Shanghai Institute of 
International Studies Vice President Chen Dongxiao, Shanghai 
Academy of Social Sciences Vice President Huang Renwei, Deputy 
Director of the Institute of World Economy Xu Mingqi, and 
Shanghai Stock Exchange Deputy Director James Liu, Ambassador 
Holmer discussed current economic trends in China and SED 
initiatives.  Huang welcomed that SED energy and environment 
initiatives are based on a 10-year plan and hopes the SED would 
continue into the next administration.  He also emphasized that 
the Chinese Government is particularly concerned about "hot 
money," and the Government is allowing fluctuations as a way to 
discourage these flows.  Chen agreed that the Chinese Government 
is in a quandary about hot money and said that the United States 
should make a joint statement with China as a way to discourage 
speculative funds.  In response to whether current financial 
issues in the United States had dampened China's appetite for 
financial liberalization, Chen replied it had not, but it had 
changed China's desire for new financial instruments.  Liu 
opined that China needs a true futures market that allows 
businesses to bet on the direction of the RMB/dollar exchange 
rate.  This would provide a more reliable indicator to the 
Government on the direction of market forces.  Liu also averred 
that the pause in RMB appreciation of the RMB is a political 
decision to help keep speculators off-balance. 
 
¶11.  (SBU) Chen also hoped the SED would be used to address the 
dramatic depreciation of the U.S. dollar and noted the Chinese 
Government is looking to the U.S. side for assurance that the 
U.S. economy will not worsen.  Regarding why the RMB had 
remained steady over the past month, Chen said some believe it 
is because of high Chinese inflation.  He believes overall RMB 
appreciation this year may be as much as 10 percent; however, it 
will largely depend on whether the appreciation has a measurable 
effect on cooling down the economy.  If it does not, the Chinese 
Government will not be enthusiastic about allowing the RMB to go 
higher.  Chen also opined that the U.S. election is factoring 
into China's decision to pursue new initiatives or wait unit the 
next administration.  Regarding China's inflation, he believed 
that China's price controls will only postpone higher inflation 
until a later date.  This will likely occur after the Olympics, 
which may also be the start of an economic slowdown because of 
changed investment expectations.  Xu and Huang also expressed 
concern that 2009 could be difficult year economically for 
China, noting slowing growth in 2008 of Chinese corporate 
profits, slowing exports and lower growth, added to which is the 
effects of RMB appreciation and increased labor costs on 
inefficient small and medium Chinese enterprises with already 
slim profit margins.  Xu wondered whether the RMB's exchange 
rate will begin to depreciate against the dollar in 2009 in 
 
SHANGHAI 00000187  004.2 OF 005 
 
 
light of those adverse trends. 
 
Ningbo Wetlands:  A Testament to Sustainable Development 
 
--------------------------------------------- ----------- 
 
¶12.  (SBU) During a tour of the newly-established Ningbo-Cixi 
Wetland Project, Ningbo Municipal Development and Reform 
Commission Division Chief Li Zhibo explained the main reasons 
behind the project:  develop the wetlands as a habitat for 
international migratory birds, help reduce land-based 
contamination of coastal waters, promote wetland conservation 
and research, and provide a center for conservation education. 
The City of Cixi received a grant of USD 5 million from the 
Global Environment Facility, through the World Bank, to finance 
a wastewater treatment plant in Cixi and develop the 43.5 square 
kilometer wetlands area at the base of the just opened Hangzhou 
Bay Sea Bridge.  The wetlands include a reclaimed mudflat area 
created to provide a nesting site for migratory birds, an 
inter-tidal marsh area, and a small offshore island.  According 
to Li, the Ningbo-Cixi Wetlands is the largest man-made wetland 
project in China and one of the country's eight officially 
designated wetland sites.  Since its inception in 2005, the 
project has had a great impact on the bird population; the 
number of species has increased from 45 to 120.  Li also said he 
and other managers of the wetlands hope to link up with similar 
projects in the Chesapeake Bay area to share ideas.  He also 
proudly pointed out that projects like this show that 
sustainable development is "not just a slogan" in China. 
 
Ningbo FAO Director:  "We Want More High Tech Trade" 
 
--------------------------------------------- ------- 
 
¶13.  (SBU) Ningbo Foreign Affairs Office Director Kong Weiwei 
briefed the delegation on Ningbo's economic growth and 
aspirations for being a trading center for high-tech equipment 
from the United States.  Kong said that part of the bilateral 
trade imbalance could be addressed by the United States giving 
the "green light" to exports of technology and equipment that 
would help China increase energy efficiency and reduce 
pollution.  He noted that currently Ningbo's own trade 
statistics show a great imbalance with USD 18 billion of imports 
and 36 billion in exports.  Because Ningbo wants to be a center 
for high-tech imports, it is pursing a sister city relationship 
with Atlanta.  Kong added that the agreement has not been 
reached yet because of Atlanta's budget issues, which precluded 
Atlanta officials from traveling to Ningbo.  He noted that Wuhan 
is also courting Atlanta for a sister city relationship, and he 
hopes that both Chinese cities would be successful.  Ambassador 
Holmer emphasized that the United States is not restricting 
environmental and energy-related equipment and technology - 
rather, many U.S. companies are concerned about exporting due to 
IP protection concerns and many of the Chinese tariffs on such 
goods are prohibitively high. 
 
Yinzhou Bank - A Model of Rural Finance 
 
--------------------------------------- 
 
¶14.  (SBU) In Ningbo, the delegation also met with Yinzhou 
Agriculture Cooperation Bank President Zhou Jianbin to discuss 
local economic conditions and rural finance.  Zhou described his 
bank as one of the first agriculture-focused banks in China 
serving farmers and SMEs.  Although small in size with total 
deposits totaling around RMB 24.8 billion, the bank offers a 
wide variety of services ranging from credit cards to 
intermediary services.  At the behest of the National 
Development and Reform Commission, Yinzhou Bank has set up 
branches in small villages and begun extending micro loans to 
farmers.  Zhou emphasized that Yinzhou Bank also attaches great 
importance to corporate social responsibility, citing the bank's 
RMB 20 million donation to an underprivileged children's fund. 
 
¶15.  (SBU) Regarding growth risks from high inflation, global 
economic weakness, and RMB appreciation, Zhou maintained that 
China's strong organic growth is still intact.  He said the past 
30 year's strong output growth was driven by the economic 
development from coastal regions, such as Yangtze Delta Region, 
Pearl River Delta Region and Bohai Delta Region.  Economic 
development in the middle and west part of China lagged coastal 
regions.  If the pace of economic development in these two 
regions will pick up, 30 years of GDP growth shall be 
 
SHANGHAI 00000187  005.2 OF 005 
 
 
contributed from each, hence China still has 60 years of GDP 
growth ahead, Zhou reasoned.  Zhou believes the RMB appreciation 
will gradually slow down and the RMB will even depreciate 
against the U.S. dollar in the future.  He said that Yinzhou 
Bank had been marginally affected by the sub-prime credit crisis 
in the United States and added that the global credit crunch was 
felt most deeply by the China's four state-owned commercial 
banks.  Although there has been an overall tightening of 
liquidity, Yinzhou Bank has actually been able to issue more 
loans to enterprises as the larger banks contracted their loan 
portfolios. 
 
¶16.  (SBU)  Ambassador Holmer has cleared this cable. 
JARRETT