VZCZCXRO4713
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3899 2880044
ZNR UUUUU ZZH
P 140044Z OCT 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0409
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC ASHDC

UNCLAS BEIJING 003899 
 
SIPDIS 
ENSITIVE 
 
FOR EAP/CM PAMELA PARK 
TREASURY FR OASIA/WINSHIP 
 
E.O. 12958: N/A 
TAGS: ECON EFIN CH
SUBJECT: China's SAFE Cautious about U.S. Lending 
 
Ref: Beijing 03888 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR 
INTERNET DISTRIBUTION. 
 
¶1. (SBU) Summary. State Administration of Foreign 
Exchange (SAFE) Deputy Director General Liu Jiahua on 
October 9 said his agency remained very concerned about 
counterparty risk in repo market lending to U.S. 
financial institutions.  While SAFE's policy towards U.S. 
Government-supported Enterprise (GSE) debt has not 
changed and the amount of debt purchased has not 
decreased, portfolio managers had shifted toward shorter- 
term debt.  Liu also said SAFE now was focusing more on 
sovereign risk among developed countries, in part due to 
concern that the large amount of debt guaranteed by the 
U.S. and European governments could impact their fiscal 
budgets and their ability to service debt.  Finally, Liu 
observed that the recent U.S. announcement of another 
arms sale to Taiwan made it more difficult for the 
Chinese Government to explain its policies supportive of 
the U.S. to the Chinese public.  End Summary. 
 
¶2. (SBU) SAFE DDG Liu Jiahua told Finatt on October 9 
that SAFE is very concerned over the danger involved in 
lending U.S. treasuries to U.S. financial institutions in 
the repurchase agreement (repo) market, without some kind 
of guarantee against counterparty risk.  With the 
collapse of Lehman Brothers, Liu said, they no longer 
believe any institution can be considered low risk.  In 
response, Finatt emphasized the stability of large, 
deposit-taking U.S. banks.  He also noted that the U.S. 
FDIC's expanded powers include the ability to guarantee 
bank liabilities to support the banking system and 
address the systemic financial risk that could be caused 
by a potential bank failure.  Liu remained non-committal 
on the possible resumption of lending, but agreed that 
SAFE had sufficient confidence in those institutions and 
would consider a system whereby the Federal Reserve or 
other U.S. government agency would act as a guarantor. 
 
¶3. (SBU) Liu stressed that SAFE's policy towards U.S. 
Government-supported Enterprise (GSE) debt - specifically, 
Fannie Mae and Freddie Mac -- has not changed, and he 
thought the amount of debt purchased has not 
decreased.  If there has been a shift by the portfolio 
managers toward shorter-term debt, he believed it was due 
to uncertainty on what might happen to Fannie Mae and 
Freddie Mac in the longer-term (beyond five years) future, 
particularly if those GSEs eventually are 
privatized.  Liu agreed that the ideal form would be to 
separate existing guaranteed liabilities from any new, 
privatized entities.  He emphasized that SAFE did not 
want to take any actions that would affect the market 
and/or undermine confidence in the GSEs. 
 
New Worry: Sovereign Risk 
------------------------- 
 
¶4. (SBU) Though Liu again emphasized that SAFE has not 
changed its policy, he said they now also are focusing 
more on sovereign risk among developed countries.  Given 
the large amount of debt guaranteed by the United States 
and European governments, Liu said there is concern that 
this could impact their fiscal budgets and their ability 
to service debt.  In that regard, Liu said USD 
depreciation is also a concern. 
 
Public Opinion a Factor 
----------------------- 
 
¶5. (SBU) In conclusion, Liu said SAFE has noted the 
actions taken to date by the U.S. government to provide 
relief and restore investor confidence; those measures 
are very welcome and positive.  The SAFE working group on 
the crisis would welcome opportunities to exchange views 
with their U.S. counterparts.  Liu - citing an Internet 
discussion forum -- said that as in the United States, 
the Chinese leadership must pay close attention to public 
opinion in forming policies.  In that regard, the recent 
announcement that the United States intends to sell 
another arms package to Taiwan increases the difficulty 
the Chinese Government faces in explaining any supporting 
policies to the Chinese public (ref). 
 
PICCUTA