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P 200844Z AUG 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 9387
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 BEIJING 003205 
 
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NSC FOR HERMANN/SHRIER/LOI 
TREASURY FOR OASIA/ISA/DOHNER/HOLMER/WRIGHT 
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E.O. 12958: N/A 
TAGS: ECON EFIN CH
SUBJECT: SED HAILED IN SECRETARY PAULSON'S MEETINGS 
WITH CHINESE VICE PREMIER WANG AND FINANCE MINISTER 
XIE 
 
¶1. (SBU) Summary. In separate meetings with PRC Vice 
Premier Wang Qishan (August 13) and Finance Minister 
Xie Xuren (August 12), Treasury Secretary Paulson 
emphasized the importance of sustaining the Strategic 
Economic Dialogue (SED).  Paulson stressed that 
significant accomplishments are needed at SED V to 
demonstrate to the incoming U.S. Administration the 
benefits of the SED.  Wang said both countries fully 
recognize the importance of the SED, which President 
Hu and Premier Wen have decided to prioritize as a 
platform to address difficult issues from a strategic 
perspective and resolve problems in a concrete 
manner.  Minister of Finance Xie also hailed the SED 
for producing concrete outcomes while, more 
importantly, promoting mutual understanding and trust. 
Paulson, Wang, and Xie agreed that the Ten-Year 
Framework (TYF) on energy and the environment is 
important to both countries and should be 
significantly developed for SED V.  Paulson confirmed 
to Xie that he will keep working to ensure the SED's 
durability during the transition, and cited progress 
on the TYF as well as the Bilateral Investment Treaty 
(BIT) and financial services as key priorities for SED 
¶V. 
 
¶2. (SBU) Summary, continued:  Turning to Doha, VP Wang 
noted that there were different readouts from Geneva, 
and suggested these issues were not helpful in moving 
to the next stage.  Wang had told MOFCOM Minister Chen 
Deming to prepare a new plan to implement President 
Hu's desire for a successful Doha round.  Wang said 
the JCCT would be a good venue for further discussions 
on Doha.  Paulson reassured VP Wang that the U.S. 
government would continue to take resolute action to 
address stress in its financial sector, and Minister 
Xie praised Secretary Paulson's quick action to 
stabilize markets following the sub-prime mortgage 
crisis and the Fannie Mae and Freddie Mac "crisis." 
End Summary. 
 
Future of the SED 
----------------- 
 
¶3. (SBU) In an August 13 meeting with Vice Premier 
Wang Qishan and Commerce Minister Chen Deming, 
Secretary Paulson  stressed that the sustainability of 
the SED is important to support the U.S.-China 
relationship, which is the most important bilateral 
relationship in the world.  Paulson stressed that 
significant accomplishments are needed at SED V to 
demonstrate to the incoming Administration the 
benefits of the SED. 
 
¶4. (SBU) Citing the meeting between President Hu and 
President Bush, Wang said that it is clear that both 
countries fully recognize the importance of the SED, 
and that the U.S. side is correct in its understanding 
that President Hu and Premier Wen are making the 
decision to prioritize this mechanism which provides a 
platform to address difficult issues from a strategic 
perspective and resolve problems in a concrete 
manner.  "Both speak highly about the SED," he 
said.  "In this they see eye to eye with President 
Bush."  It contributed to good relations by providing 
a framework to discuss such issues as the 
international response to the Sichuan earthquake 
and stress in the U.S. financial sector.  Wang also 
emphasized that China has not adopted any measures 
that would set back the issues discussed in the 
SED.  Paulson agreed and noted that the SED has also 
been an important framework to address product safety 
concerns.  Wang added that the U.S. and China have a 
long relationship and doubted that it would be easily 
changed by a new Administration. 
 
¶5. (SBU) Paulson called the Ten-Year Framework (TYF) 
on energy and the environment the "centerpiece" of SED 
¶V.  Wang agreed that the TYF is important to both 
countries and expressed his desire to see it 
significantly developed for SED V.  He said that he 
hopes to have concrete outcomes related to the TYF at 
 
BEIJING 00003205  002 OF 004 
 
 
every SED. 
 
¶6. (SBU) In a separate meeting with Secretary Paulson 
on August 12, Minister of Finance Xie Xuren also 
hailed the SED, resulting not only in concrete 
outcomes, but also more importantly promoting mutual 
understanding and trust.  He noted that with the 
upcoming change in U.S. administration, it was 
important to "institutionalize" the dialogue.  Paulson 
confirmed to Xie that he will keep working on ensuring 
the SED's durability during the transition, and cited 
progress on the TYF, the BIT, and financial services 
as key priorities for SED V. 
 
Bilateral Investment Treaty 
--------------------------- 
 
¶7. (SBU) Paulson noted to VP Wang that the BIT does 
not have the same power to resonate broadly in the 
U.S. as the TYF, but that it is very important to 
continued and increased investment flows in both 
countries.  Further, he expressed concern that it is 
controversial enough in both our countries that if 
enough momentum is not created by December, the new 
administration might not take it up.  Given 
disagreements on core issues, getting enough done to 
create this momentum will require bold action by both 
sides. 
 
¶8. (SBU) Wang responded that President Hu had called 
him after the meeting with President Bush and made a 
special mention of the BIT, and that Hu and Premier 
Wen responded positively to what Wang had 
proposed.  Wang noted that Paulson's discussion with 
President Hu last April had helped break a long- 
standing stalemate on the issue.  The Chinese side was 
pleased to hear that the U.S. is consulting with 
industry on what it sees as most important for the 
BIT.  Wang stressed the U.S. and China should not 
conclude a BIT just to produce good news, but should 
reflect on what is in our mutual interest. 
 
Next Steps 
---------- 
 
¶9. (SBU) Paulson stressed that continued incremental 
gains on financial services, such as what was agreed 
to in SED IV, was also a priority.  While liberalizing 
equity caps on FDI in the financial sector remains a 
priority, if this is not possible in the near term, it 
would be helpful if CBRC and CSRC studies on foreign 
investment could signal positive momentum in the 
future. 
 
¶10. (SBU) For SED V, Wang suggested focusing on easy 
issues first, as focusing on more difficult issues 
would not create a good atmosphere.  Paulson agreed 
this was the right approach for the Ten-Year 
Framework, but for the BIT unless some of the toughest 
issues are tackled now, there is increased risk that 
the BIT will "die" in the next administration.  Wang 
said, in that case, he would focus quickly on the BIT 
to understand better outstanding issues. 
 
Doha 
---- 
 
¶11. (SBU) Turning to Doha, Wang said he understood 
Lamy has decided to launch another round in 
September.  He noted that there were different 
readouts from Geneva, and suggested these issues were 
not helpful in moving to the next stage.  Wang noted 
that Chen's performance in Doha had been widely 
praised and that he gained respect and credibility 
from many of his counterparts, including Lamy and 
Mandelson.  President Hu and premier Wen both heard 
President Bush's emphasis on Doha and the Chinese 
leaders want to see a successful Doha round.  He had 
told Minister Chen to draw up a new plan to implement 
President Hu's desire to see a successful Doha round. 
 
 
BEIJING 00003205  003 OF 004 
 
 
¶12. (SBU) Wang said he will see Ambassador Schwab at 
the JCCT in September and suggested this would be a 
good venue to further discuss Doha.  He also noted the 
importance of the JCCT as the venue to discuss in 
greater detail issues like IPR that have been raised 
in the SED.  Further, he has already convened several 
meetings on the JCCT and is personally engaging in 
JCCT preparations. 
 
Fannie Mae and Freddie Mac 
-------------------------- 
 
¶13. (SBU) On the U.S. financial sector, Fannie Mae and 
Freddie Mac, Paulson reassured VP Wang that the U.S. 
government would continue to take resolute 
action.  Paulson was grateful for China's 
understanding and patience and noted that there would 
be many opportunities to consult on developments in 
the months ahead.  Minister Xie praised Secretary 
Paulson's quick action to stabilize markets following 
the sub-prime mortgage crisis and the Fannie Mae and 
Freddie Mac "crisis."  Fannie Mae and Freddie Mac's 
problems, he speculated, derived from the size of 
their balance sheets, making them systemic risks.  As 
financial innovation brought new products such as 
derivatives into the market, new regulation was 
needed.  (Comment:  As a major holder of Fannie and 
Freddie debt, Chinese officials have been following 
the recent situation closely.  They now appear more at 
ease, following passage of U.S. legislation providing 
a line of credit, that the greatest risks to the GSE's 
creditors have passed.  However, government and 
industry sources have told Emboffs that senior 
officials and bankers are still not distinguishing 
between GSE's debt and equity prices, and the USG's 
efforts to safeguard systemic financial stability 
without bailing out shareholders.  Thus many tend to 
see declines in equity prices as indications of 
increased credit risk.  End Comment.) 
 
Condition of China's Economy 
--------------------------- 
 
¶14. (SBU) Minister Xie said China had successfully 
lowered its real GDP growth rate to 10.4 percent, 
within the target range, for the first half of 2008. 
While acknowledging that Chinese companies, 
particularly small- and medium-sized enterprises, are 
facing difficulties from higher input costs and lower 
demand, Xie posited that their troubles were due in 
part to their inability to access credit.  (Comment: 
Many analysts say credit quotas have 
disproportionately impacted lending to SMEs, most of 
which have less established relations with the large 
state banks.  End Comment.)  Xie said the Chinese 
government wanted stable development and growth, but 
gave "priority" to curbing inflation.  (Comment:  This 
differs from recent Chinese official statements that 
called for "fast" growth and listed controlling price 
increases as only an important "task."  End Comment.) 
 
Earthquake Effect 
----------------- 
 
¶15. (SBU) Xie said that beyond the devastating human 
toll and huge property losses, the May earthquake in 
Sichuan Province would have little effect on China's 
economy.  He noted that reconstruction and increased 
government investment that follow natural disasters 
end up increasing GDP growth. 
 
Comment 
------- 
 
¶16.  (SBU) Paulson's interlocutors made clear that 
Chinese senior leadership views sustaining the SED as 
an important anchor for strong bilateral economic 
relations.  There was also clear support from senior 
leaders for the TYF and the BIT, though for the 
latter, no indications on whether this means the 
Chinese will agree to all core BIT commitments. 
 
BEIJING 00003205  004 OF 004 
 
 
Chinese economic officials appear comfortable with the 
stance they took in the Geneva Doha discussions, while 
at the same time, signaling they support a 
resurrection of negotiations.  Among senior Chinese 
economic officials, interest in U.S. financial sector 
developments and policy responses remains high, first 
due to concerns about the impact on the U.S. real 
economy (and thus Chinese exports) and second due to 
concerns about the impact on Chinese official and bank 
holdings of US fixed income securities. 
 
RANDT