VZCZCXRO7325
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1695/01 1730911
ZNR UUUUU ZZH
O 220911Z JUN 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4700
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 BEIJING 001695 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR 
 
(C O R R E C T E D  C O P Y - PARA NUMBERING) 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON CH
SUBJECT: CONGRESSMEN KIRK AND LARSEN MEETINGS WITH CHINA'S CENTRAL 
BANK AND BANKING REGULATORY COMMISSION 
 
REF: (A) Beijing 1473; (B) Beijing 1500; (C) Beijing 1518; (D) 
Beijing 1523; (E) Beijing 1675 
 
BEIJING 00001695  001.2 OF 002 
 
 
(U) This cable is Sensitive but Unclassified (SBU) and for official 
use only.  Not for transmission outside USG channels. 
 
¶1. (SBU) SUMMARY.  Congressmen Mark Kirk and Rick Larsen held 
meetings with People's Bank of China (PBOC) Governor Zhou Xiaochuan 
and China Banking Regulatory Commission (CBRC) Chairman Liu Mingkang 
during their visit to Beijing as co-chairs of the U.S.-China Working 
Group of the U.S. Congress.  Governor Zhou urged the U.S. to 
increase savings, claiming that China had increased domestic 
consumption and improved its risk management practices in the wake 
of the global financial crisis (GFC).  CBRC Chairman Liu said the 
U.S. should require banks to divest toxic assets before injecting 
liquidity.  Liu emphasized the need to retain higher capital 
adequacy and provision coverage ratios.  He stated that the CBRC 
plays a more active role in oversight of lending practices and 
bankers' incentive packages than U.S. and E.U. regulators.  END 
SUMMARY 
 
Zhou U.S. Economy Still Strong, Needs to Save 
--------------------------------------------- 
 
¶2. (SBU) In a June 1 meeting with Congressmen Mark Kirk and Rick 
Larsen, PBOC Governor Zhou acknowledged that "we know the U.S. 
economy is still very strong" and has recovered from previous crises 
in the past.  He felt U.S. consumers and policy makers should 
increase savings, and indicated that China looks positively upon 
President Obama's promise to cut the fiscal deficit in half over the 
next four years, while stating this is "easier said than done." 
 
Turning to Chinese Domestic Consumption for Growth 
--------------------------------------------- ----- 
 
¶3. (SBU) Zhou stated that the GFC's had a less serious initial 
impact on China, but consumer confidence took a hit and the Chinese 
economy contracted between October 2008 and February 2009, before 
starting to pick up in March.  Over the past year, China's GDP 
growth rate has declined sharply, from roughly 10 percent to roughly 
6 percent, due in part to a decline in exports to the United States 
and Europe, as well as to other parts of Asia and emerging markets. 
Zhou said China must resume a high growth rate to provide jobs. 
 
¶4. (SBU) He said China is working to encourage domestic consumption 
and reduce its dependence on exports while also expanding social 
programs such as social security and health care reform.  Zhou said 
domestic banks need to carefully balance providing loans to expand 
consumption and avoiding future defaults.  He remarked that banks 
often face difficulties obtaining relevant information in a timely 
manner to make accurate risk determinations.  The central government 
is looking carefully at how local banks are managing risk as the 
stimulus packages are doled out. 
 
GFC Slows ForEx Rate Reform 
--------------------------- 
 
¶5. (SBU) Responding to a question, Zhou said he expects the crisis 
to slow the process of RMB reform as public opinion in favor of a 
move to a free-floating currency has waned.  Zhou thought China 
would need perhaps 10-15 years to reach a consensus in favor of 
fully floating the RMB.  Zhou claimed that several ASEAN and 
south-Asian countries now face a shortage of U.S. dollars for trade, 
and thus see the RMB as an alternative settlement currency. 
 
Inflated Greenback or Inflated Fears? 
------------------------------------- 
 
¶6. (SBU) If the GFC constrains U.S. consumer confidence, Zhou 
acknowledged that it would be difficult to see inflation rising. 
Liquidity injections and a growing money supply, however, could 
eventually cause inflation.  Zhou stated that he does not believe 
inflation fears will lead China to purchase short-term rather than 
long-term Treasuries. (Note: According to the latest U.S. government 
data, recorded overall Chinese purchases of Treasuries did shift to 
short-maturity bills.  The data, however, is incomplete in that it 
does not include purchases through third-party brokers.  End note.) 
 
¶7. (SBU) Zhou suggested that although rating agencies should be 
strengthened, financial institutions should also conduct internal 
evaluations.  Ultimately, he stated, the rating agency and the 
financial institution should jointly evaluate risk. 
 
CBRC's Liu: Remove Toxic Assets, Then Add Liquidity 
--------------------------------------------- ------ 
 
¶8. (SBU) Congressmen Kirk and Larsen also met CBRC Chairman Liu 
 
BEIJING 00001695  002.2 OF 002 
 
 
Mingkang on June 1.  Liu criticized the U.S. Public-Private 
Investment Program (PPIP) and Troubled Asset Relief Program (TARP), 
arguing that the government should first ensure that banks divest 
themselves of toxic assets and then inject liquidity.  He said banks 
would not function properly and would be reluctant to lend money if 
they were still holding toxic assets.  He suggested the United 
States establish an asset management company like the Resolution 
Trust Corporation (RTC) that would charge banks a two percent fee to 
buy their toxic assets. 
 
Liu Suggests Lowering Risk with Higher Ratios 
--------------------------------------------- 
 
¶9. (SBU) To rein in risk, Liu argued for the United States to 
reinstate the demarcation line between banks and capital markets and 
to require banks to maintain appropriate capital adequacy, loan 
provision, loan-to-value (LTV) and loan-to-deposit (LTD) ratios.  He 
said an 8-10 percent capital adequacy ratio was not enough to absorb 
risk, pointing out that CBRC now required banks to maintain a 
capital adequacy ratio above 12 percent.  CBRC had also required 
Chinese banks to improve their provision coverage ratio from 130 
percent to 150 percent by the end of 2009.  Banks that cannot meet 
this requirement were not allowed to expand their businesses. 
Regarding the establishment of a new international regulator, Liu 
said regulatory decisions should be made through existing structures 
such as the Basel Committee on Banking Supervision, Financial 
Stability Board (FSB) and the IMF. 
 
CBRC's Active Role Contrasts with U.S., E.U. Approach 
--------------------------------------------- -------- 
 
¶10. (SBU) Liu said 80 percent of China's economic stimulus funding 
was from bank loans, stressing CBRC's focus on ensuring the quality 
of banks' lending.  He said CBRC had ordered country-wide bank 
inspections in April and had found that 20 percent of the 5 trillion 
RMB already loaned out had not gone into the real economy but rather 
been re-deposited in banks.  This 20 percent loan deviation rate 
"will be corrected quickly and those who play this game will be 
punished," Liu said.  Liu contrasted CBRC's role with that of bank 
regulators in the United States and Europe, commenting that CBRC 
plays an active role in regulating the incentive packages of 
bankers.  He said CBRC used "common sense tests" to evaluate the 
reasonableness and consistency of banker's incentive packages and 
required a "prompt and full correction" if CBRC found something 
wrong. 
 
¶11. (U) Representatives Kirk and Larsen did not have the opportunity 
to clear this message before departing. 
 
PICCUTA