VZCZCXRO8777
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4198/01 3171139
ZNR UUUUU ZZH
P 121139Z NOV 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0829
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 004198 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM/PARK AND E/YON 
TREASURY FOR AHOLMER, TSMITH 
TREASURY FOR OASIA/DOHNER/WINSHIP 
TREASURY FOR IMFP/SOBEL/MOGHTADER 
NSC FOR SHRIER/LOI 
 
E.O. 12958: N/A 
TAGS: ECON EFIN CH
SUBJECT: AMBASSADOR HOLMERQS NOVEMBER 7 MEETINGS IN BEIJING 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION. 
 
¶1. (SBU) Summary.  In November 7 meetings in Beijing, 
Chairman Liu He of the Central Leading Group on Finance and 
Economics asked Ambassador Alan Holmer to convey ChinaQs 
support for the upcoming global financial summit and for 
measures taken individually and collectively by G-20 
members.  He reviewed some of ChinaQs policy responses to 
maintain growth, and detailed why the (RMB) exchange rate 
was a Qcomplicated issue.Q  China Construction Bank 
Chairman Guo Shuqing said China could be a source of equity 
to the under capitalized U.S. banking sector, although the 
U.S. QmentalityQ and political climate vis--vis Chinese 
investment needs to change for this to occur.  State Food 
and Drug Administration (SFDA) Commissioner Shao Mingli 
reviewed current bilateral pharmaceutical regulation and 
trade issues, while Standards Administration of China (SAC) 
Administrator Ji Shengkun discussed food and product safety 
concerns.  End Summary. 
 
Summit on Financial Markets and the World Economy 
--------------------------------------------- ---- 
 
¶2. (SBU) Regarding the November 14-15 summit in Washington, 
Chairman Liu He of the Central Leading Group on Finance and 
Economics asked Ambassador Holmer to pass the following 
message to senior USG officials: Chinese senior leaders 
support the global financial summit and will support 
measures taken individually and collectively by G-20 
members.  To contribute to global growth, China will take 
measures to maintain its own growth.  China does not want 
to see radical change to the international financial 
architecture; while important, such reform will take time 
and China does not want to see radical changes.  A more 
pressing need is to stabilize financial markets, which 
requires that leaders signal they will work together.  As 
global economic growth slows, the risk of protectionism 
rises. 
 
Chinese Economic Policies 
------------------------- 
 
¶3. (SBU) Chairman Liu reviewed some of ChinaQs current and 
planned policy initiatives.  He said the Economic Work 
Conference will focus on how to maintain growth in the 
short-term, while promoting medium-term structural reforms 
such as less-energy intensive growth and the development of 
higher value-added industries.  Liu agreed that these two 
objectives could at times conflict.  Following the 
investment boom of the last several years, Liu said 
economic policy makers increasingly are concerned about 
excess industrial capacity.  The upcoming fiscal stimulus 
will include both tax cuts and spending increases.  Liu 
opined that tax cuts, particularly for businesses, are 
usually the most efficient way to promote growth.  However, 
during sharp cyclical downturns, given businesses 
deteriorating outlook for future growth, he does not expect 
tax cuts to spur investment in additional productive 
capacity.  Economic policy officials prefer to keep the 
overall VAT tax rate steady and applicable to all goods, 
and then adjust the rebate as needed to support targeted 
sectors.  Increasing investment in railways will be an 
important element of fiscal stimulus, although there is 
concern about how efficiently the railway monopoly can 
spend additional resources.  Also, recent public reports of 
planned railway investments overstate likely spending, as 
the Ministry of Rails is using the press to push for a 
larger budgetary allocation.  Finally, with global oil 
prices falling, China will reform gasoline prices next year 
and bring domestic prices in line with international 
prices. 
 
Exchange Rate 
------------- 
 
¶4. (SBU) Chairman Liu called the Chinese RenminbiQs (RMB) 
exchange rate a Qcomplicated issue.Q  Officials in eastern 
provinces, SMEs and workers in the export sector are 
QangryQ with the central government for letting the RMB 
rise against the US dollar.  Even without further RMB 
appreciation, SMEs face higher labor costs and declining 
profits.  Liu stressed if the RMB strengthened further 
against the US dollar, there would be unrest in these 
 
BEIJING 00004198  002 OF 003 
 
 
sectors.  Liu foresaw continued conflict between political 
pressures in China (for exchange rate stability) and abroad 
(for continued RMB appreciation).  (Note: LiuQs remarks 
reinforce those from other interlocutors that the Chinese 
public tends to view the relative strength of the RMB 
almost entirely against the U.S. dollar, suggesting the 
Chinese government is likely to continue to tolerate 
further appreciation on a trade-weighted basis as long as 
appreciation is limited against the U.S. dollar.  End 
comment). 
 
U.S. Economy 
------------ 
 
¶5. (SBU) Chairman Liu believes the worst of the U.S. 
financial crisis is almost over.  Now a greater concern is 
the strength of the U.S. real economy and its impact on 
China. 
 
Climate Change 
-------------- 
 
¶6. (SBU) Chairman Liu said Europeans (including the Swedish 
Prime Minister and the UK Foreign Minister) told him they 
will push aggressively for a sharp reduction in global 
carbon emissions.  He also said those leaders have 
characterized ChinaQs stance on climate change as 
productive and the U.S. stance as unhelpful.  Liu said the 
U.S. and China should discuss, perhaps in the SED, how to 
respond to any EU proposal. 
 
China Construction Bank 
----------------------- 
 
¶7. (SBU) Chairman Guo Shuqing of China Construction Bank 
(CCB) told Ambassador Holmer he welcomed the FedQs easing 
of monetary policy, although he worried about its long-term 
inflationary impact.  Guo also was concerned about rising 
concentration and market dominance by a few firms in 
certain U.S. dominated sectors (such as computer operating 
systems and Microsoft).  Regarding counter party risks, the 
CCB believed that even after TARP equity injections, U.S. 
banks remain under capitalized, particularly as U.S. 
housing prices are expected to fall further and mortgage 
defaults to rise.  Given the expected weakening in U.S 
economic growth, CCB was concerned whether $700 billion to 
inject equity and purchase impaired assets sufficient. 
 
¶8. (SBU) Guo said China, the Middle East, and other state- 
owned investors can be a source of equity to the under 
capitalized U.S. banking sector.  Both the China Investment 
Corporation (CIC) and ChinaQs State Administration of 
Foreign Exchange (SAFE) would be willing to take 10-15% 
stakes in U.S. financial institutions.  For this to occur, 
however, the U.S. QmentalityQ and political climate vis-- 
vis these kinds of investors needs to change.  The U.S. 
Government appears unwilling to let Chinese banks take 
large equity stakes in U.S. banks.  While noting that 
Chinese banks do not seek operational control of U.S. 
institutions, Guo doubted that the U.S. Congress or public 
would accept even a 10% stake by a Chinese bank in a large 
U.S. bank.  Even setting up a single U.S. branch Qtakes 
forever;Q CCB first sought a branch license in the mid- 
1990s. 
 
¶9. (SBU) Regarding Chinese banksQ reluctance to extend RMB 
credit to foreign banks, CCB had held what it thought were 
low risk bonds of several U.S. financial institutions that 
went bankrupt, including Lehman.  It therefore was not 
surprising that when risks in lending to U.S. financial 
institutions increased, banks reduced their exposure.  Guo 
thought lending constraints to foreign banks had now eased. 
 
¶10. (SBU) Guo said investment growth was falling 
significantly among CCBQs corporate clients, who suffer 
from excess capacity.  BanksQ lending to local governments 
also has been cut back, as the expected decline in property 
prices has reduced property developersQ demand to lease 
land; those leases had been an important source of 
collateral for bank lending.  Rather than pressing banks to 
support borrowers, as it had done in previous cyclical 
downturns, and which led to the accumulation of large non- 
performing loans, the Chinese government will provide tax 
breaks or subsidies directly to borrowers. 
 
BEIJING 00004198  003 OF 003 
 
 
 
¶11. (SBU) Finally, Guo claimed that Chinese macroeconomic 
imbalances are smaller than indicated by official data, 
which undercounts substantially the provision and 
consumption of services. 
 
State Food and Drug Administration 
---------------------------------- 
¶12. (SBU) State Food and Drug Administration (SFDA) 
Commissioner Shao Mingli told Ambassador Holmer that the 
SFDA already has posted on its website a list of drug 
companies that meet GMP standards and have manufacturing 
and export licenses, while a similar Chinese-language list 
of licensed exporters has been provided to the FDA but not 
posted online.  (Note:  Under the SFDA-HHS Memorandum of 
Agreement on drugs and medical devices, SFDA is required to 
post these lists online by June 2010.  End note.)  Shao 
emphasized that importing countries are responsible for 
regulating their own markets, so it might be more fruitful 
for the U.S. to issue a list of importers (or perhaps 
products) that must be registered with the FDA.  In 
response, Holmer observed that while a Chinese-language 
list is helpful, what U.S. companies need more is an 
English-language list of licensed exporters available 
online. 
 
¶13. (SBU) Asked whether the SFDA prohibits the export of 
drugs not registered with SFDA or not in conformity with 
GMP practices, Shao said export policy is not set by SFDA 
and related rules are established at AQSIQ.  He claimed it 
is not practical for SFDA to issue a positive list of 
"approved" companies to the AQSIQ, although that issue is 
under discussion with the FDA.  Holmer emphasized that 
finding an appropriate solution would be beneficial to all 
sides, and noted that the SED is a mechanism for inter- 
agency cooperation if necessary.  Regarding the existing 
supervisory loophole on production of active pharmaceutical 
ingredients (API) by unregistered companies, Shao said SFDA 
has banned purchase by drug manufacturers of API from any 
non-certified company, and also suggested that the FDA 
should ban importation of drugs or API from companies not 
certified, registered and licensed to produce API. 
Finally, Holmer raised U.S. concern about Chinese dietary 
supplements that have been found to contain active drugs, 
including Viagra or similar pharmaceuticals.  Shao said 
SFDA had already provided information to the FDA concerning 
this matter, and has banned the use of any medicine in 
foods and dietary supplements.  He said the SFDA has little 
information on companies making such products. 
 
Food and Product Safety 
----------------------- 
 
¶14. (SBU) In a meeting with Administrator Ji Shengkun of 
the Standards Administration of China (SAC), Ambassador 
Holmer asked whether previous responses to product and food 
safety problems could guide or inform policy-makers on how 
the U.S. and China can strengthen cooperation in the area 
of product safety.  Ji detailed China's unilateral 
responses to recent problems with melamine contamination in 
milk and milk formula.  He also described provisions of an 
improved food safety law as well as AQSIQ's new oversight 
and inspection responsibilities.  Ji's overall tone, 
however, was somewhat defensive and echoed official media 
statements suggesting that problems with China's product 
safety are largely fabricated by an overzealous media.  Ji 
did not offer any suggestions for stronger food and product 
safety cooperation between the US and China.