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UNCLAS SECTION 01 OF 02 BEIJING 000352 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR 
TREASURY PASS LOEVINGER 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV ETRD CH
SUBJECT: CHINA: S&ED II DATES AND TOPICS; RMB APPRECIATION; ECONOMIC 
SITUATION 
 
This cable is Sensitive but Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) SUMMARY: During a January 25-28 visit to advance 
preparations for the U.S.-China Strategic and Economic Dialogue II 
(S&ED II), the U.S. Economic Track staff delegation met with key 
economic ministries, economists, and U.S. industry representatives. 
The delegation proposed to their Ministry of Foreign Affairs (MFA) 
and Ministry of Finance (MOF) interlocutors the week of May 10 for 
the Dialogue and agreed to exchange outcomes in early March.  The 
group made progress on the public agenda, although the Chinese side 
noted that it would have difficulty openly including exchange rates 
and relative prices on the agenda, and resisted listing discussion 
of China's indigenous innovation policy.  Officials were open to 
continuing private discussions about RMB appreciation, but 
reiterated China could not be seen as caving to foreign pressure on 
the currency issue.  Turning to China's economic situation, contacts 
noted that economic overheating and real estate asset bubbles 
remained an area of concern for Beijing's economic policymakers. 
END SUMMARY. 
 
¶2. (SBU) The delegation met: Ministry of Commerce (MOFCOM) American 
and Oceanic Affairs Director General (DG) He Ning; Ministry of 
Finance (MOF) External Economic Cooperation DG Zou Jaiyi; National 
Bureau of Statistics (NBS) DG Li Xiaochao; China Construction Bank 
(CCB) Chief Economist Erh-Cheng Hwa; National Development and Reform 
Commission (NDRC) Cong Liang; State Administration for Foreign 
Exchange (SAFE) Capital Controls Deputy DG Chu Yumei; UBS economist 
Wang Tao; Central Finance and Economic Leading Group (CFELG) Vice 
Minister Liu He; MOF Assistant Minister Zhu Guangyao; Chinese 
Academy of Social Sciences (CASS) Professors Huang Ping and Xiao 
Lian; Chinese Institute for Contemporary International Relations 
(CICIR) Professor Da Wei; China Center for Economic Research (CCER) 
Scholar Lu Feng; Development Research Center (DRC) Scholar Tang Min; 
Managing Director of Hill and Knowlton John Holden; Oshkosh Senior 
Director of Business Development Jennifer Thompson; Akin, Gump, 
Strauss, Hauer & Feld LLP Partner Spencer Griffith; and IBM Global 
Services Deputy Chief Representative She Duan Zhi. 
 
¶3. (SBU) State Department Deputy Assistant Secretary for China and 
Mongolia David Shear and Treasury Department Executive Secretary and 
Senior Coordinator for China and the S&ED David Loevinger led the 
State-Treasury S&ED II planning trip to Beijing.  The Economic Track 
delegation also included: Economic Minister Counselor William 
Weinstein; Treasury Attache David Dollar; Senior Advisor to the 
Treasury Under Secretary-designate for International Affairs Raji 
Jagadeesan; Director of Treasury's Office of East Asia Chris 
Winship; State Department Deputy Director, Office of Monetary 
Affairs David Meale; Assistant to the U.S.-China Strategic and 
Economic Dialogue Casey Owens; Deputy Financial Attache to China 
(incoming) Tim Dorsett; and Embassy EconOffs. 
 
S&ED Planning 
-------------- 
 
¶4. (SBU) On preparations for the Economic Track of the S&ED, neither 
MFA nor MOF officials replied to the U.S. proposal to hold the 
Dialogue during the week of May 10, and reiterated China's 
preference for late May.  In a meeting with MOF Assistant Minister 
Zhu Guangyao, the two sides agreed to exchange proposed Economic 
Track outcomes in early March.  Searching for mutually acceptable 
phrasing for the public agenda, MOF DG Zou Jiayi, observing that the 
two sides were "quite close" on most points, said the most difficult 
area for MOF was exchange rates and relative prices.  She preferred 
not to use exchange rates in the document, as that would attract too 
much focus, but said the term relative prices was too narrow.  Zou 
also mentioned that the Ministry of Science and Technology (MOST) 
did not want to discuss the indigenous innovation issue at the S&ED, 
but hoped to be able to discuss it bilaterally prior to the S&ED; 
Zou agreed to convey USG views back to MOST. 
 
Exchange Rates/RMB Appreciation a "Political Issue" 
--------------------------------------------- ---- 
 
¶5. (SBU) Officials demonstrated little outward receptivity to the 
message of RMB appreciation.  MOFCOM DG He Ning rejected U.S. calls 
for RMB appreciation, claiming that political pressure from the 
economic situation in the United States and other countries should 
not be shifted onto China in the form of a call for RMB 
appreciation.  He pointed out that in 2009 Chinese exports to the 
United States had dropped 12 or 13 percent, vice an only four 
percent drop in imports from the United States, without any change 
in the exchange rate.  State Council Economic and Financial Leading 
Group Vice Minister Liu He noted the currency issue was no longer an 
economic issue, but more of a "political issue for both sides."  Liu 
explained that exports, while slower, had still helped China 
 
BEIJING 00000352  002 OF 002 
 
 
successfully create new jobs this year, keep the unemployment 
rate--and thus the political system--fairly stable. 
 
¶6. (SBU) Assistant Finance Minister Zhu Guangyao agreed that both 
China and the United States faced political constraints and 
pressures with regard to the exchange rate, and urged Washington and 
Beijing to maintain open communication to manage this issue and keep 
it out of the public eye as long as possible.  Zhu also pointed out 
that China was worried about inflows of hot money, stemming at least 
in part from low U.S. interest rates. 
 
¶7. (SBU) On the other hand, private economists agreed that Chinese 
officials likely favored a return to gradual appreciation of the 
RMB, despite the possibility of attracting  speculative capital 
inflows.  UBS economist Wang Tao, for example, expected a move 
mid-year, with a near-term goal of five percent appreciation by 
year-end 2010.  China Construction Bank Vice President/Chief 
Economist Hwa Erh-cheng agreed that the exchange rate was a 
"challenge" for the People's Bank of China (PBOC), and even though 
the PBOC might be forced to allow appreciation, it would only be 
incremental because the international environment remained fragile 
and the export recovery was not strong.  Predicting that the RMB 
would rise about three percent in 2010 and five percent in 2011, Hwa 
concluded that it was unlikely to be a "one-shot" change (e.g. a 
jump appreciation).  China knows it needs to increase domestic 
demand and consumption to stabilize growth and adjust economic 
structure in 2010, so the exchange rate issue must eventually be 
"part of the equation."  However, Hwa asserted that the Chinese 
Government "will not be influenced by a Dialogue." 
 
Rising Housing Prices/ Overheating 
--------------------------------- 
 
¶8. (SBU) On an overheating economy, Vice Minister Liu He pointed to 
asset bubbles as a potential problem for China's recovery and noted 
that people are withdrawing money from banks to invest in assets. 
Liu did not yet see the problem as serious.  As a reaction to the 
trend, the China Banking and Regulatory Commission (CBRC) has 
instituted requirements to deter speculation, and the State Council 
has ordered measures to tighten credit and mandated monitoring of 
state-owned enterprise (SOE) investment in real estate.  NBS DG Li 
Xiaochao noted that the real estate sector is important to the 
economy because it boosts both consumption and investment; however, 
housing prices jumped 7.8 percent in December, which was a worrisome 
sign of over-investment and speculation in real estate.  On 
inflation, Li claimed that, although 2009 saw negative inflation, 
November and December numbers turned positive.  Bad weather in 
December and January, together with the government's proactive 
fiscal policy, had generated inflationary pressure. 
 
¶9. (SBU) CCB Vice President/Chief Economist Hwa Erh-cheng said the 
Chinese Government is actively trying to cool the real estate 
market.  Because private companies have been blocked from investing 
in the service sectors, more investment has flowed to real estate, 
increasing housing prices by as much as 50 percent in coastal 
cities.  Further adding to the problem, SOEs have out-bid private 
companies, pushing up land prices.  To deter speculation, Hwa said, 
the CBRC has required banks to disburse loans to real estate 
suppliers rather than buyers.  The market has started to believe 
that the government will continue to tighten monetary conditions to 
control overheating. 
 
¶10. (U) The delegation cleared this cable. 
 
HUNTSMAN