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PP RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHBJ #3662/01 2670552
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P 230552Z SEP 08
FM AMEMBASSY BEIJING
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INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHINGTON DC PRIORITY
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UNCLAS SECTION 01 OF 05 BEIJING 003662 
 
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SIPDIS 
 
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CLARK/CRYSTAL/DAWSON 
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STATE FOR EAP/CM AND EEB/OMA 
 
E.O. 12958: N/A 
EFIN, ECON, EINV, PGOV, CH 
SUBJECT: Beijing Welcomes Coordination in Financial 
Crisis; Concerns about Growth Going Forward 
 
REF: A. Hong Kong 1747 and previous, B. E-mail 
Shanghai Financial Update, Friday, September 19, 2008 
¶C. e-mail Shanghai Update 9-18-2008: Local Reaction to 
the U.S. Financial Crisis D. Shanghai 402 and previous 
¶E. Beijing 3501 
 
¶1. Summary. Chinese Government officials praised U.S. 
Government willingness to brief them regularly on 
developments in the financial sector, particularly 
given their exposure to GSE debt.  Although the direct 
exposure of Chinese firms to other troubled financial 
institutions is limited, most Beijing officials and 
academics expressed concern about the adverse impact 
on U.S. domestic demand and global market sentiment. 
Several officials noted China's desire to deploy its 
foreign assets in a way that promotes financial 
stability, but foreign exchange managers remain 
cautious about risky investments and uncertain as to 
whether they can overcome U.S. regulatory barriers and 
perceived U.S. political resistance to greater Chinese 
investment in U.S. financial institutions.  The crisis 
has driven home the fact that China is now integrated 
into the world economy, leading to some comments in 
the popular media that it should seek to insulate 
itself.  Others have blamed the United States for 
exporting the cost of recovery to the world, or even 
causing the crisis itself.  These views, however, have 
been characterized as "extreme" and have not been 
espoused by mainstream media, officials or academics. 
End Summary. 
 
Officials Welcome Explanations 
------------------------------ 
 
¶2. (SBU) Chinese Central Government officials 
expressed appreciation for USG efforts to explain the 
details of plans to handle troubled American financial 
institutions.  They have been particularly interested 
in Fannie Mae and Freddie Mac (see ref E).  (Note: The 
State Administration for Foreign Exchange holds about 
half a trillion dollars of Fannie Mae and Freddie Mac 
debt.  A combined Treasury/Morgan Stanley team briefed 
officials from the State Administration of Foreign 
Exchange (SAFE), China Investment Corporation (CIC), 
the People's Bank of China (PBOC), Ministry of Finance 
(MOF), China Banking and Regulatory Commission (CBRC), 
Industrial and Commercial Bank of China (ICBC) and the 
Agricultural Bank of China (ABC) on the situation 
surrounding Fannie Mae and Freddie Mac.  Treasury 
Under Secretary McCormick has called counterparts at 
the SAFE, PBOC, CBRC and MOF.  Embassy officials have 
also discussed the bailout with academics at the 
Chinese Academy of Social Sciences (CASS) and the 
National Development Reform Commission (NDRC).  End 
note.) 
 
¶3. (SBU) While noting that China's direct exposure to 
other troubled private institutions is limited (see 
ref B and C), Chinese officials have praised the USG's 
willingness to keep the Chinese Government constantly 
apprised of current actions.  Vice Premier Wang Qishan 
told Secretary Paulson in a phone conversation that 
China appreciates and supports all of the measures the 
U.S. Government has taken, and also Under Secretary 
McCormick's efforts to reach out to CIC, PBOC and SAFE. 
Prominent NDRC economist Xia Bin noted that, because 
of ties built during the Strategic Economic Dialogue 
(SED), U.S. and Chinese officials are now able to pick 
up the phone and talk to each other in order to 
coordinate responses to economic crises. 
 
China Response 
-------------- 
 
¶4. (SBU) The Chinese official media reported that 
President Hu Jintao expressed hope that U.S. 
 
BEIJING 00003662  002 OF 005 
 
 
Government efforts would succeed in stabilizing the 
U.S. financial system, which he said would be in the 
interests of both the United States and China.  In a 
private conversation with Treasury Secretary Paulson, 
Vice Premier Wang stated very clearly that China will 
do whatever it can to help, but this must be done on 
the basis of the "win-win" principle and be mutually 
beneficial.  MOF officials similarly told Embassy 
officials that they stand ready to assist if necessary, 
asking if there was anything they should do. 
 
¶5. (SBU) Chinese academics echoed this response.  A 
CASS economist in the Economic Research office had a 
very positive view of the USG's response to the 
financial crisis.  Although U.S. measures to "rescue" 
the financial markets were certainly motivated by U.S. 
self-interest, he said China and other countries 
should nevertheless cooperate with the United States, 
as this is a situation that will impact everyone given 
the extent of globalization.  The USG acted 
"responsibly" by signaling to the international 
community that the United States will use all of its 
assets to reduce the current market difficulties, he 
emphasized. 
 
Should China "Buy American" 
--------------------------- 
 
¶6. (SBU) A few observers have noted that China, both 
through official and commercial financial institutions, 
has the foreign assets to rescue troubled U.S. 
financial firms.  China Securities Regulatory 
Commission (CSRC) International Affairs Director 
General Tong Daochi asked whether the United States 
would be receptive towards Chinese firms taking large 
stakes in U.S. financial firms, both from a regulatory 
and more importantly political perspective.  China 
Export-Import Bank Chairman Li Ruogu also commented to 
an Embassy official that U.S. efforts to stabilize 
financial markets should be done in cooperation with 
China and utilize China's large reserves of capital. 
 
¶7. (SBU) CIC Deputy General Manager Jessie Wang, 
however, said that given losses on high profile 
investments in the U.S. financial sector to date (e.g. 
Blackstone), China's State Council is being more 
cautious about letting Chinese firms invest abroad in 
the financial sector.  Chinese firms are cautious, 
despite low prices, because they see U.S. investors, 
who have a greater understanding of risks, hesitating. 
 
Concern Over Broader Impact 
--------------------------- 
 
¶8. (SBU) Although Chinese officials point out that 
Chinese firms have little direct exposure to U.S. 
financial institutions beyond the GSEs, many note that 
continued financial stress will adversely impact U.S. 
domestic demand and result in lower growth for China. 
CSRC's Tong said the Chinese side is concerned about 
the impact on the real economy and demand for Chinese 
exports.  There is also an additional psychological 
impact, as a weak U.S. economy and financial markets 
could depress Chinese investor sentiment. 
 
¶9. (SBU) A CASS industrial economist said the US 
financial bailout is definitely affecting Chinese 
industrial sectors which have higher ratios of export 
dependency.  He noted, however, that the media has 
exaggerated the U.S. financial bailout's impact on 
China.  He said that industrial production was already 
slowing for a variety of reasons independent of 
overseas demand. 
 
Reform Threatened? 
------------------ 
 
BEIJING 00003662  003 OF 005 
 
 
 
¶10. (SBU) Many officials have noted that the global 
economic situation may reduce support for continued 
market reform, particularly in the financial sector. 
Next month's Third Plenum of the Communist Party's 
17th Central Committee is expected to address major 
macroeconomic issues such as rebalancing the economy 
away from an excessive reliance on exports and towards 
increasing rural incomes.  A CASS foreign policy 
academic noted that the Government's ability to do so 
will be hindered, however, if the current crisis 
dramatically impacts Chinese exports now. 
 
¶11. (SBU) The academic said that the West has been 
pressing for further reform and opening of the PRC's 
financial markets.  But the current crisis has sparked 
a significant debate within China, with some arguing 
that the ongoing financial troubles demonstrate that 
China should not integrate with or open further to the 
international financial system.  Others, however, are 
arguing that China, like its national basketball team, 
has no choice but to open itself further to 
international competition, particularly if it is to 
remain competitive globally. 
 
¶12. (SBU) Regarding specific reforms, China will 
certainly proceed cautiously in the next few months 
with financial deregulation.  CSRC Assistant Chairman 
Jiang Yang announced last week that China will proceed 
"safely" with futures market innovations, and they 
will be more cautious regarding arrangements for stock 
index futures.  Many officials are still supporting 
innovation.  PBOC Survey and Statistics Department 
Director General Zhang Tao told reporters that his 
lesson from the U.S. crisis was that market 
supervisors did not monitor markets.  He proposed that 
China improve its financial supervision, but should 
not abandon developing a mortgage-backed securities 
market. 
 
More Active Government Role in Markets Considered 
--------------------------------------------- ---- 
 
¶13. (SBU) The CASS foreign policy scholar noted that, 
in recent years the Chinese Government has been 
reluctant to intervene aggressively in China's stock 
and real estate markets.  After witnessing the USG's 
massive intervention in these same sectors, however, 
some Chinese officials and scholars are reconsidering 
the role Beijing should play. 
 
¶14. (SBU) Some observers have countered the call for a 
more activist Chinese Government approach to markets. 
Hu Shili, Editor of the respected economic weekly 
Caijing, published an editorial stating that "the U.S. 
bailout has nothing in common with a wished-for 
shoring up of the Chinese property market... There are 
no signs that property market risks are spreading to 
other institutions."  CSRC's Tong said the recent 
moves by the Federal Reserve and Treasury gave CSRC 
cover to intervene in the market as part of global 
actions without increasing expectations for future 
intervention (see refs A and B). 
 
China Tied In 
------------- 
 
¶15. (SBU) America's financial woes have driven home to 
many Chinese academics and officials exactly how 
involved China is in the global economy.  The CASS 
foreign policy scholar,  who admintted he is not 
normally involved in economic issues noted that, after 
30 years of reform, China's integration into the world 
economy means that China undoubtedly will be affected 
by the current U.S. financial crisis. 
 
 
BEIJING 00003662  004.2 OF 005 
 
 
¶16. (SBU) A CASS international economist, however, was 
not daunted by that integration, and was highly 
confident in China's ability to confront this crisis. 
"Nothing is impossible in China," he said, noting that 
the PRC Party-State is, after all, the system that 
threw tremendous resources at confronting the massive 
snowstorms and the Sichuan earthquake earlier this 
year, not to mention pulling off a spectacular 
Olympics.  The Chinese system can handle the shocks 
produced by this crisis, he averred. 
 
A New Model 
----------- 
 
¶17. (SBU) Some popular media and blogs have called for 
China to try to extricate itself from this dependence 
on foreign markets.  The official People's Daily, in 
an overseas edition editorial by Shi Jianxun, states 
that the "sub-prime crisis has exposed immense gaps in 
the United States' financial oversight and 
supervision... the world urgently needs to create a 
diversified currency and financial system and fair and 
just financial order that is not dependent on the 
United States." 
 
U.S. Image 
---------- 
 
¶18. (SBU) Although most Chinese reporting on the 
crisis has been fairly straightforward, some media 
reports blamed the United States for making mistakes 
and then forcing the rest of the world to bear the 
costs.  For example, the official Communist Party 
international news publication Global Times (widely 
recognized for its nationalist views) on September 17 
reported that "the whole world is bearing the price of 
the U.S. financial crisis... U.S. national egotism, 
which uses the U.S. dollar's hegemonic position to 
exploit the world, is the primary cause of the 
crisis." 
 
¶19. (SBU) Most media and academic experts dismissed 
this rhetoric.  The September 22 edition of the 
International Herald Leader commented, "The U.S. 
economic position is unchallengeable....  U.S. 
vitality is experiencing some challenges.  Whether or 
not the U.S. will fall depends on how effectively it 
adjusts its hegemonic mold, acclimating to the world." 
The CASS foreign policy academic did not think the 
crisis would harm the image of the United States in 
the region.  He had no sense that people were 
questioning the U.S.'s leadership role or its 
trustworthiness.  He had heard no one comparing the 
current crisis to the 1998 Asian financial crisis, 
arguing that the parallel people here are drawing is 
to 1929 -- and the obvious desire to avoid that 
outcome -- not 1998. 
 
¶20. (SBU) The CASS international economist noted that 
there were some academics arguing that the United 
States was itself behind the current crisis and is now 
attempting to force the burden caused by it on the 
rest of the world.  However, he characterized these 
views as "extreme" and said they were held only by a 
minority of "leftists." 
 
¶21. (SBU) Chinese business has certainly lost some 
confidence in U.S. financial institutions, with one 
investor stating that U.S. financial operators had 
failed to accurately assess risk.  An American working 
in Beijing at a major firm handling overseas IPOs, 
however, still thought that once stability returns to 
the markets,  the U.S. exchanges will be the premier 
place for Chinese companies to list. 
 
Comment 
 
BEIJING 00003662  005 OF 005 
 
 
------- 
 
¶22. (SBU) Most Chinese officials, academics, and the 
official media have publicly and privately supported 
the U.S. approach to restoring confidence in U.S. 
financial markets.  They have been especially thankful 
for timely and frequent personal briefings on U.S. 
government actions.  Chinese officials' statements 
have been extremely disciplined, sticking to a few 
safe talking points generally endorsing moves that 
will enhance stability and letting PBOC Governor Zhou 
take the lead.  Several financial officials 
acknowledge that China's official reserves are too 
large to meaningfully reallocate assets without 
adversely impacting the value of its investments. For 
the time being, Beijing appears unlikely to make any 
dramatic decisions regarding their approach to the 
United States. 
 
¶23. (SBU) Over time, as markets stabilize, the events 
of the last month may strengthen the hand of opinion 
leaders advocating a more diversified and independent 
approach to international economic and financial 
engagement that involves a larger role for China.  A 
Japanese central banker recently said that Chinese 
officials have approached him about etablishing a 
"yuan-yen" basis for trading in Asia.  MOF officials 
have stressed how existing international financial 
institutions, such as the IMF, appear to be 
increasingly irrelevant in dealing with global 
economic problems. 
 
¶24. (SBU) The downturn in the U.S. economy is likely 
to spur efforts by Chinese firms to continue to 
diversify their exports markets.  Moreover, as Chinese 
firms become increasingly export oriented and 
established in overseas markets, China's economic and 
financial integration with, and its vulnerability to 
changes in, the global economy will continue to 
increase, irrespective of government policies.  And 
despite the public rhetoric about the need to reduce 
their dependence on the U.S. financial system and 
policies, Chinese authorities do not yet appear 
prepared to adopt the main reforms needed to achieve 
this, namely de-linking the RMB from the U.S. dollar, 
which would allow China to have a more independent 
monetary policy, and allowing unhindered capital flows, 
so the RMB can be used as the basis for international 
trade and financial transactions. 
 
Randt