VZCZCXRO0782
RR RUEHCN RUEHGH
DE RUEHGH #0195/01 1181137
ZNR UUUUU ZZH
R 281137Z APR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7889
INFO RUEHBJ/AMEMBASSY BEIJING 2745
RUEHCN/AMCONSUL CHENGDU 1952
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0408
RUEHHK/AMCONSUL HONG KONG 2120
RUEHML/AMEMBASSY MANILA 0070
RUEHUL/AMEMBASSY SEOUL 0433
RUEHGH/AMCONSUL SHANGHAI 8534
RUEHSH/AMCONSUL SHENYANG 1943
RUEHGP/AMEMBASSY SINGAPORE 0255
RUEHIN/AIT TAIPEI 1739
RUEHKO/AMEMBASSY TOKYO 0633

UNCLAS SECTION 01 OF 03 SHANGHAI 000195 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, DAS DAVIES 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI, SHRIER 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
STATE PASS CFTC FOR OIA/GORLICK 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN KPAO PGOV PREL SOCI
SUBJECT: (SBU) EAST CHINA ANXIOUS OVER CHINA'S DOLLAR HOLDINGS 
 
¶1.  (SBU) Summary.  East China reporters and academics 
interacting with visiting Dallas Federal Reserve Bank President 
Richard W. Fisher repeatedly raised the possibility of a link 
between current U.S. monetary and fiscal policy expansion and 
future U.S. inflation.  One of the most vocal academic critics 
implied that China is right to move away from U.S. 
dollar-denominated assets, since these are likely to decline in 
value.  The interlocutors were concerned whether the U.S. 
economy has hit bottom.  They also sought the visitors' 
perspective on China's first steps toward taking a more active 
role in the international financial system.  End summary. 
 
¶2.  (SBU) President Fisher, Vice President Mark A. Wynne, and 
Senior Research Economist Tao Wu, all from the Dallas Fed, held 
a press conference and then joined academics in a small 
roundtable discussion during their visit to Shanghai on April 
¶19.  Fifteen media outlets were represented, including 21st 
Century Business Herald , China Daily, Bloomberg, Dow Jones, 
China Market News, Shanghai Daily, International Finance News, 
Oriental Morning Post, Shanghai TV's Business Channel, China 
Business News, Shanghai Business News, Shanghai Morning Post, 
Shanghai Financial News, the Economic Observer, and Bund 
Pictorial.  Academics participating in the roundtable included 
Pan Yingli, Jiaotong University; Sun Lijian, Fudan University; 
Chang Chun, China Europe International Business School (CEIBS); 
Tian Boping, Jiangsu Academy of Social Sciences; Chen Baomin, 
Nanjing University; and Wang Zhikai, Zhejiang University. 
 
============================ 
Fears That U.S. Inflation Will Diminish the Dollar's Value 
============================ 
 
¶3.  (SBU) Reporters and academics interacting with President 
Fisher in Shanghai repeatedly raised the possibility of a link 
between current U.S. monetary and fiscal policy expansion and 
future U.S. inflation.  During the media roundtable, questions 
ranged from the Oriental Morning Post's "Will there be a dollar 
crisis?" to more specific ones, such as the 21st Century 
Business Herald's "Will the Fed's purchase of US$300 billion in 
U.S. Treasuries decrease the value of the dollar?" and Dow 
Jones' "Given that the United States does not want IMF 
oversight, what can the U.S. government do to reassure China 
over its concerns about the dollar?" 
 
¶4.  (SBU) The academics revealed a strongly held presumption 
that there is a direct relationship between today's U.S. market 
stabilization measures and future inflation.  Zhejiang 
University's Wang asserted that U.S. inflation will eventually 
reduce the value of China's dollar-denominated assets. 
Jiaotong's Pan was the most vocal critic.  At one point, 
President Fisher prefaced his response to another academic--who 
asked whether the U.S. would guarantee returns on U.S. 
Treasuries--with the statement that the value of Treasuries is 
set by markets, so no one could provide a guarantee.  President 
Fisher went on to explain that the Fed governors were viscerally 
opposed to allowing an inflation spiral that would erode the 
value of Treasuries, but Pan seemed to hear only the first 
remark.  She snorted and said aloud, "I knew that there could be 
no guarantee."  Pan later chuckled when President Fisher 
mentioned that China had slowed its purchases of Treasuries in 
the first two months, implying that China is right to reject an 
asset that would decline in value.  (Note:  Pan is reputed by 
our contacts to have had significant input into People's Bank of 
China Governor Zhou Xiaochuan's recent proposal to find a 
substitute for the U.S. dollar in the international monetary 
system.  End note.) 
 
¶5.  (SBU) Pan questioned President Fisher further on future Fed 
management of the money supply.  We expect that inflation will 
rise, she said, so what plans does the Fed have to soak up the 
excess liquidity?  Pan commented that it is sometimes difficult 
 
SHANGHAI 00000195  002 OF 003 
 
 
to see inflation coming in the globalized economy, since 
inflation can be imported from trading partners.  She posited 
the following scenario: Several countries with reserve 
currencies expand their money supplies and boost their imports. 
As a result of the higher demand, an inflation cycle starts in 
the exporting countries.  Since this inflation does not show up 
in the domestic indicators of the importing countries, the money 
supplies there are not reined in.  Eventually, the inflation 
does show up domestically, but by then it is too late to stop. 
 
============================ 
"Have We Seen the Bottom?" 
============================ 
 
¶6.  (SBU) The reporters and academics were also focused on when 
the U.S. economy would begin to recover.  Jiaotong's Pan simply 
asked, "Has the United States hit bottom?  How much farther will 
the U.S. housing market fall?"  CEIBS's Chang asked about the 
U.S. Treasury's plans to dispose of "toxic" assets, while noting 
that even without details of the Public Private Investment 
Program, the stock market was already rising.  Was this a false 
dawn? Chang wondered. 
 
============================ 
Seeking Perspective on China's Role 
============================ 
 
¶7.  (SBU) Another common thread in the reporter's questions was 
to seek the U.S. perspective on China's more visible role in the 
international financial system.  Two reporters asked for 
President Fisher's view on internationalization of the renminbi. 
 Did President Fisher approve of the Chinese Government's 
recently announced move to allow the renminbi to be used for 
settlement of some trade contracts?  Would this have an impact 
on the U.S. dollar?  queried a China Business News reporter, 
echoed later by a China Daily reporter.  The China Daily 
reporter also asked for President Fisher's views on China's 
domestic economy:  "Why is China able to have such a high 
economic growth rate?" 
 
============================ 
Comment 
============================ 
 
¶8.  (SBU) Those meeting with President Fisher appeared to 
appreciate the clear anti-inflation, strong dollar message that 
he delivered.  However, not all appeared to be 
convinced--Jiaotong's Pan, for instance, continued her 
criticisms of U.S. monetary policy in talks with other academics 
as the group departed.  Both the reporters and the academics 
sometimes appeared to underestimate the independence of the Fed 
in setting monetary policy.  The questions also demonstrated 
what President Fisher called the "burden" of being the world's 
largest economy:  in the same forum, one person might imply that 
the United States should grow faster, while another would 
express concerns about possible inflation.  In a more nuanced 
mode, both Pan and CEIBS's Chang asserted that former Treasury 
Secretary Paulson and then New York Fed President Geithner 
standing together as financial stabilization measures were 
announced created the image that the Fed was doing the bidding 
of political authorities. 
 
¶9.  (SBU) It may be that Chinese misperceptions of the Fed's 
role have been fed by the 2007 book "Currency Wars" (Huobi 
Zhanzheng), a popular work still prominently displayed on many 
local bookstore shelves that borrows liberally from conspiracy 
theories that the Fed does the bidding of its member banks, and 
is not to be trusted as an independent monetary authority. 
 
 
 
 
SHANGHAI 00000195  003 OF 003 
 
 
¶10. (U) The Dallas Fed delegation has cleared on this cable. 
CAMP