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INFO RUEHOO/CHINA POSTS COLLECTIVE
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UNCLAS SECTION 01 OF 04 BEIJING 004074 
 
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E.O. 12958: N/A 
TAGS: ECON EFIN CH
SUBJECT: OCTOBER 19-20 VISIT OF TREASURY U/S MCCORMICK TO 
BEIJING 
 
BEIJING 00004074  001.2 OF 004 
 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION. 
 
¶1. (SBU) Summary. Vice Premier Wang Qishan and other senior 
Chinese financial officials told U/S McCormick on October 
20 that China welcomed recent U.S. Government actions to 
address the financial crisis.  People's Bank of China 
Governor Zhou Xiaochuan and other officials raised 
questions about the continuity of U.S. policies into the 
next administration.  Zhou noted that some senior Chinese 
leaders are not fully aware of the extent of USG guarantees 
of U.S. banks' liabilities and commitment on Fannie and 
Freddie debt.  Interlocutors stressed that unless leaders' 
concerns about the viability of banks and U.S. government- 
sponsored enterprises (GSEs) are assuaged, lower level 
officials will be constrained from taking on greater 
counter-party risks or extending the maturity of the 
Chinese government's GSE holdings.  Zhou emphasized that, 
while the pace of RMB appreciation might slow periodically 
due to China's domestic factors, the decisions about its 
medium-term path have been made and the U.S. "should not 
worry."  Interlocutors said that while Chinese leaders and 
businessmen welcome the message that the U.S. is open to 
Chinese investment (including in the financial sector), 
they remain cautious, having suffered large financial and 
political setbacks from U.S. investments, including in 
Blackstone and the Reserve Fund.  End Summary. 
 
¶2. (SBU) During his October 19-20 visit to Beijing, 
Treasury U/S David McCormick briefed Vice Premier 
Wang Qishan and senior officials at the Ministry of 
Finance (MOF), People's Bank of China (PBOC), China 
Banking Regulatory Commission (CBRC), and China 
Securities Regulatory Commission (CSRC), as well as 
leaders of the China International Capital 
Corporation (CICC) and China Investment Corporation 
(CIC), on the four-part U.S. policy approach to 
stabilizing the markets and economy: 1) the Federal 
Reserve's purchase of commercial paper to inject 
liquidity; 2) the Securities and Exchange 
Commission's actions to safeguard market integrity 
and prevent market manipulation (including through 
limits on short-selling); 3) the Federal Deposit 
Insurance Corporation's guarantee of banks' short 
and medium-term liabilities (including non-interest 
bearing accounts) in order to assuage concerns about 
counter-party risks; and 4) Treasury's pledge to 
inject $700 billion into the U.S. banking sector, 
either through increased capital or purchases of 
impaired assets.  In each meeting, U/S McCormick 
also emphasized that even though the U.S. government 
did not explicitly guarantee GSE debt, it 
effectively did so by committing to inject up to 
$100 billion of equity in each institutions to avoid 
insolvency and that this contractual commitment 
would remain for the life of these institutions. He 
also stressed importance of the next session of the 
Strategic Economic Dialogue (SED), and in particular 
the importance of having tangible results, as both 
financial markets and the next administration will 
be watching and assessing the SED's merits. 
 
Vice Premier Wang Qishan 
------------------------ 
 
¶3. (SBU) Vice Premier Wang welcomed recent U.S. Government 
actions, saying they had addressed liquidity problems but 
had not solved equity market nor distressed debt problems. 
He speculated that the United States will have to 
recapitalize lenders, and expressed concern that the Fed's 
liquidity injects could lead to inflation if the US economy 
recovers next year.  Wang emphasized that China's leaders, 
including President Hu Jintao and Premier Wen Jiabao, do 
not want to see problems in the U.S. economy. (Comment: 
Wang was likely responding to articles in the Chinese press 
and on the web that had initially welcomed the financial 
disorder as the demise of U.S. economic "hegemony." End 
comment.)  U/S McCormick assured Wang that it would require 
an unprecedented act of Congress to renege on the contracts 
made to guarantee Fannie Mae and Freddie Mac debt.  He also 
explained that Chinese investment in financial services 
companies would be welcomed, and the Federal Reserve would 
be responsible for approving investments in banks and bank 
holding companies. 
 
 
BEIJING 00004074  002.2 OF 004 
 
 
¶4. (SBU) The Vice Premier praised Secretary Paulson's use 
of the Strategic Economic Dialogue (SED) mechanisms to 
coordinate with China throughout the crisis.  Wang 
stated that the Chinese government attaches great 
importance to the SED, and both Hu and Wen had spoken 
positively of the forum's form and substance.  Wang 
noted that in the U.S. media, some observers had 
focused on the need for the SED to deliver 
concrete results, while others -- including Senator Obama 
in a recent interview -- had emphasized the strategic 
economic relationship.  Wang agreed with U/S McCormick that 
the SED needed to cover both tactics and strategy. 
 
People's Bank of China 
---------------------- 
 
¶5. (SBU) PBOC Governor Zhou Xiaochuan inquired about the 
continuity of U.S. policies during the transition to the 
next U.S. administration.  On US agency debt, Zhou 
understood that the USG stands behind Fannie and Freddie 
debt fully, but believed that senior leaders as well as 
lower-level bank officers were not fully cognizant given 
that the USG did not explicitly guarantee the debt and 
uncertainly remains about the GSE's long-term structure and 
roles.  Similarly, Zhou agreed that depreciation of the RMB 
against either the USD or on a trade weighted basis at a 
time when demand in its major trading partners is weakening 
could be politically sensitive for China's trading partners, 
but added that this issue was not simple for China's top 
leadership.  Zhou said he believes it remains important 
that prices signals from a more appreciated exchange rate 
promote a reduction in China's domestic and external 
imbalances, but the State Council felt pressure to signal 
support for the export sector by limiting appreciation the 
RMB.  Given the expected sharp decline in external demand, 
Zhou said he did not think it useful or effective to try to 
promote exports by holding down the price of Chinese 
exports through the exchange rate, but that it was 
difficult to get a policy consensus for this.  Zhou added 
that periodic pauses in the pace of RMB appreciation should 
not be a concern to the U.S. as long as the long-term 
trajectory remained the same.  On Chinese investment in the 
U.S., Zhou said some Chinese political and business leaders 
appreciate the U.S. open investment message, but remain 
cautious after the losses suffered on investments to date, 
including Blackstone and the Reserve Fund investment by CIC. 
Despite encouraging rhetoric from senior USG officials, 
they also doubt that the regulatory and political climate 
is open to Chinese investment, including CFIUS. 
 
¶6. (SBU) Zhou expressed appreciation for U.S. assistance in 
China gaining membership in the IDB, as well as for the 
granting of a bank branch license to ICBC.  He added that 
neither issue was of particular importance to the PBOC 
itself, but that they had to pursue them vigorously on 
behalf of other constituencies, notably MOFCOM for the IDB. 
More generally, Zhou noted his appreciation for the ongoing 
close communication with Treasury.  He added that, after 
the Lehman Brothers' bankruptcy, Chinese banks remained 
nervous about counter-party risk in dealing with foreign 
banks.  He assured McCormick that the PBC would take steps 
to ensure foreign banks have access to liquidity, which 
was why the PBOC had decided recently to raise, on a 
temporary and exceptional basis, the foreign banks' foreign 
currency debt quota to allow them to access financing from 
their overseas parents.  Zhou said PBOC is also considering 
establishing a liquidity facility for banks similar to the 
one adopted by the Hong Kong Monetary Authority. 
 
Ministry of Finance 
------------------- 
 
¶7. (SBU) Minister of Finance Xie Xuren told U/S 
McCormick that China viewed a sound U.S. economy as 
in the best interest of the world economy, and that 
both President Hu Jintao and Premier Wen Jiabao 
placed great importance on international cooperation 
to resolve the financial crisis.  For the upcoming 
SED, Xie said he hoped the December session would 
include discussions on the lessons of the financial 
crisis and how to limit financial turmoil in the 
future.  He suggested that China and the U.S. should 
discuss how to increase market liquidity and 
confidence along with financial supervision and how 
 
BEIJING 00004074  003.2 OF 004 
 
 
to balance best financial innovation with financial 
regulation. 
 
China Banking Regulatory Commission 
----------------------------------- 
 
¶8. (SBU) CBRC Chairman Liu Mingkang responded favorably to 
recent USG actions.  He also expressed interest in 
continuing close cooperation with the U.S., and emphasized 
the need for global coordination.  Looking ahead, Liu 
commented that hedge funds and private equity may by "the 
next shoes to drop" and said China would take further 
stimulatory measures to guard against economic risks.  Liu 
noted the need to delegate more loan decision-making 
authority to local bank managers, and to provide more 
financing to small and medium enterprises.  Liu also 
advocated support for housing markets through more 
favorable loan terms (Comment: the government recently 
reduced down payments for first time buyers of small 
apartments).  He said the decline in global energy prices 
would give China an opportunity to lift price controls. 
Finally, Liu asked for the Chinese government to be 
informed before U.S. strategic investors dump their shares 
in Chinese banks, when the lock-up period ends. 
 
China Securities Regulatory Commission 
-------------------------------------- 
¶9. (SBU) CSRC Vice Chairman Yao Gang said the CSRC is 
working with the New York Stock Exchange to resolve legal 
issues and enable foreign firms to issue depository 
receipts in Chinese markets.  For credit rating agencies, 
Yao said CSRC would accept license applications from joint 
venture companies after the SEC issues revised regulations 
covering their operations as agreed to at SED IV.  Finally, 
Yao confirmed that the CSRC report on foreign involvement 
in China's capital markets would be completed by the end of 
the year. 
China International Capital Corporation 
--------------------------------------- 
 
¶10. (SBU) CICC CEO Levin Zhu observed that China's "over- 
built" export sector would be severely impacted by any 
recession in the U.S.  CIIC Chief Economist Ha Jiming said 
China's unemployment rate, currently about six percent, 
would rise over the next two years and reduce consumption 
growth.  He believed China's economy would "slow 
significantly."  Export growth would fall due to three 
factors: the exchange rate, declining external demand, and 
the credit crunch; regarding the latter, Ha said the PBOC 
was instructing Chinese banks to lend to exporters, but the 
banks were increasingly unwilling to do so given concerns 
about exporters' prospects.  As a result, he believed real 
GDP growth would decline to about seven percent in 2009, 
absent any significant policy adjustments.  Ha also 
believed the government's ability to respond with a 
stimulus package, which CEO Zhu opined was probable, would 
be limited due to sharply decelerating revenue growth.  The 
"good news," said Ha, was that the government has the 
capacity to undertake fiscal stimulus without raising 
concerns about fiscal sustainability as public debt is very 
low as a percent of GDP. 
 
¶11. (SBU) Ha believed there would be "lots of political 
pressure" if the RMB continued to appreciate against the 
USD, while the USD appreciated against the Euro and the 
currencies of China's other major trading partners; 
furthermore, the EU was not taking pre-emptive actions and 
faced a much larger housing bubble than the U.S.  As a 
result, he viewed the euro as "shaky."  Overall, Ha 
concluded that the financial crisis would cause China to 
become more cautious regarding financial sector reform. 
 
China Investment Corporation 
---------------------------- 
 
¶12. (SBU) China Investment Corporation (CIC) General 
Manager Gao Xiqing said CIC had been preparing daily 
reports to the State Council, along with other Chinese 
agencies on its exposure to potential losses on overseas 
investments.  Gao stressed that it would be problematic if 
it was viewed in China that the USG offered preferential 
treatment to certain countries and/or companies, such as 
Japan and Mitsubishi's investment in Morgan Stanley.  U/S 
McCormick assured Gao that the guidelines applied to CIC 
and China would be consistent with those for other 
 
BEIJING 00004074  004.2 OF 004 
 
 
investors, and noted that the U.S. Treasury's equity 
injection in Morgan Stanley had protected CIC's stake by 
having an equal, and not senior, claim.  McCormick urged 
CIC to consider and consult with the USG on potential 
investments in the U.S. financial sector.  Gao indicated 
that CIC now was comfortable with the situation of its U.S. 
money market investments, and said they currently did not 
own any Fannie Mae/Freddie Mac debt but were considering 
purchases.  CIC, while more confident now, still retained 
concerns about continuation of the USG's new policies and 
programs under the next administration.  CIC also was 
concerned about the impact of the financial crisis on the 
real economy, which they believe will slow further and 
cause a "bumpy ride" for stock markets.  They also 
questioned the inflationary impact of issuance of large 
volumes of treasuries.  Finally, Gao noted that one reason 
CIC tries to avoid CFIUS is that the CIC board of directors 
(vice ministers of various government agencies) have 
concerns about having to report personal information to 
CFIUS. 
 
Comment 
------- 
 
¶13. (SBU) All of U/S McCormick's counterparts appeared to 
appreciate his willingness to come to Beijing in the midst 
of a financial crisis.  Securities regulators subsequently 
told FINATT that the State Council financial crisis working 
group under Vice Premier Wang Qishan subsequently met to 
discuss McCormick's visit.  The overarching message from 
his interlocutors is that the Chinese government wants to 
play a constructive role (and at the very least does not 
want to do anything destabilizing) as financial and 
economic weakness in the U.S. have financial, economic and 
political costs in China and to its leaders.  Technocrats 
stressed the importance of explaining the policy 
implications of USG actions to assuage senior leaders' and 
State Councilors' concerns about the durability of U.S. 
policy responses into the new administration.  This 
highlights the importance of not only engaging with Vice 
Premier Wang, but also other economic ministries such as 
Finance, which report to other Vice Premiers.  On the SED, 
the relevant Chinese agencies reconfirmed the usefulness of 
the SED, and also their strong interest in and support for 
a successful SED session in December. 
 
PICCUTA