SECRETARY PAULSON DISCUSSES CHINA AND SOUTHEAST

C O N F I D E N T I A L SECTION 01 OF 03 SINGAPORE 003124

SIPDIS

SIPDIS

STATE PASS TREASURY FOR SECRETARY PAULSON

E.O. 12958: DECL: 09/26/2016
TAGS: EFIN ECON ETRD EINV PREL IMF IBRD ETTC SN
SUBJECT: SECRETARY PAULSON DISCUSSES CHINA AND SOUTHEAST
ASIA WITH SINGAPORE'S SENIOR LEADERS

Classified By: Economic and Political Chief Ike Reed.
Reasons 1.4 (b) (d)


1. (C) Summary: Singapore's senior leaders urged the United
States to stay engaged in Southeast Asia, particularly in
terms of strategic/military and trade issues, during meetings
with Secretary Paulson on September 18. On China, Prime
Minister Lee Hsien Loong told the Secretary that the U.S.
Government (USG) needed to engage state-owned enterprise and
political leaders, and not just technocrats like People's
Bank of China Governor Zhou. Senior Minister Goh Chok Tong
offered to reinforce with Chinese officials the need to work
with us on the currency issue. He agreed that the Chinese
should be willing to allow some additional appreciation of
the Yuan. PM Lee claimed that previously stalled
Singapore-China Free Trade Agreement (FTA) discussions were
back on track. Both PM Lee and SM Goh expressed optimism
about Vietnam's prospects, although SM Goh warned that
failure by the private sector to generate adequate employment
could derail reform efforts. Citing Indonesia as key to
Southeast Asia's stability and economic growth prospects, SM
Goh cautioned the USG not to embrace the GOI too publicly,
which could generate political difficulties for moderate and
secular officials. Both PM Lee and SM Goh raised Singapore's
desire to conclude a tax treaty with us. End Summary.


2. (U) During his participation in the G7 and
Singapore-hosted IMF/World Bank meetings, Secretary Paulson
on September 18 met separately with Singapore Prime Minister
LEE Hsien Loong, Senior Minister GOH Chok Tong (both meetings
reported here),and Minister Mentor LEE Kuan Yew.

Southeast Asia Focus: Strategic/Military
--------------


3. (SBU) Asked what could be working better in our bilateral
relationship, PM Lee highlighted three issues. He said that
it was important for the United States to appreciate its
strategic role in the region. He noted that the United
States and Singapore shared a very broad perspective,
particularly on terrorism matters. PM Lee, like SM Goh,
stressed that no other country (e.g. Japan) could play the
same military/strategic role and that the United States
provided much needed stability and predictability.

Trade
--------------


4. (SBU) PM Lee commented that the U.S.-Singapore FTA had
worked well and resulted in other countries negotiating FTAs
of their own. He asserted that Malaysia, Thailand, and South
Korea would not have started their respective FTA
negotiations had Singapore not done so initially. He
cautioned that concluding FTAs with these countries would not
be as easy as with Singapore because of agricultural and
preferential procurement issues.

Tax Treaty
--------------


5. (C) PM Lee underscored Singapore's desire to conclude a
bilateral tax agreement with the United States. He noted
that a team would meet in Washington this November to discuss
at least two technical issues that needed to be addressed
before negotiations could be considered. Acknowledging the
importance of information exchange to the United States, PM
Lee said that Singapore did not have a problem sharing
information with the USG; however, if Singapore agreed to do
so in a treaty, it would receive similar requests from
others, including the EU, Japan and neighboring states.
Nonetheless, Singapore was willing to agree to this
requirement as part of a package that finalized the deal, he
explained. (Comment: it was not clear whether PM Lee was
suggesting Singapore would agree to information exchange as a
provision of the tax treaty or as a side arrangement. End
comment.)


6. (C) On the issue of coverage, PM Lee said he understood
that the United States wanted a tax treaty that would apply
to both U.S. and Singaporean firms. For the treaty to be
valuable to Singapore, however, it also needed to cover
foreign firms (that comprise a large part of the local

SINGAPORE 00003124 002 OF 003


economy) that were legitimately based in Singapore, he said.
PM Lee suggested that there should be ways to ensure these
firms were operating legitimately and not using Singapore
solely to take advantage of a treaty. SM Goh encouraged
Secretary Paulson not to consider the tax treaty agreement in

SIPDIS
isolation, but rather in light of Singapore,s special role
in the region. He argued that Singapore should get better
treatment than other countries because it was "small, fragile
and vulnerable." He asserted that the United States should
want to "help keep Singapore open," given worrisome trends in
some of its neighboring countries. Secretary Paulson was
non-committal, but agreed to look into PM Lee's and SM Goh's
requests.

China
--------------


7. (C) PM Lee advised Secretary Paulson that it would be
good for the United States to engage China at a senior level
and to think beyond the next party Congress. This meant
state-owned enterprise leaders and other political leaders,
not just technocrats such as PBOC Governor Zhou, he said.
Secretary Paulson concurred that in order to get change, he

SIPDIS
would have to get the Chinese political leadership to agree.
Secretary Paulson noted that he would be meeting with Premier

SIPDIS
Wen Jiabao and President Hu Jintao in Beijing after leaving
Singapore. PM Lee commented that, while China's leaders were
not "as good as" predecessors such as Premier Zhu Rongi, they
did enjoy broader support and could get things done.
Secretary Paulson observed that it now took more time in

SIPDIS
China to achieve consensus, but that older leaders could
still wield influence.


8. (C) In response to SM Goh's offer to help reinforce any
messages, Secretary Paulson said that the currency issue had
become a symbol and a flash point in the U.S.-China
relationship. SM Goh advised that, so long as the United
States did not pressure the Chinese, they would listen. SM
Goh said the Chinese remained concerned about the effect a
revaluation of the Yuan would have on state-owned enterprises
and employment, but agreed with Secretary Paulson that the
Chinese should be willing to "float a bit more." SM Goh
commended Secretary Paulson for not "bashing the Chinese,"
observing that this approach would help speed change; the
Chinese were "not rigid" and "want to learn." SM Goh said
that he would ensure that the GOS passed a message of support
to the Chinese government.

Singapore-China FTA
--------------


9. (SBU) PM Lee noted that Singapore had been trying to
negotiate a free trade agreement with China, but that his
trip to Taiwan just a few months before he became prime
minister in August 2004 had, among other things, delayed this
process after China ceased talks to show its displeasure. PM
Lee asserted that these discussions were now back on track.

Vietnam
--------------


10. (C) Secretary Paulson observed that the mood in Vietnam
was "receptive" to economic reform. The country was "going
with the current" but not fast enough due to its sluggish
bureaucracy, corruption, and inconsistent laws and courts.
Secretary Paulson told SM Goh he was not as optimistic about

SIPDIS
Vietnamese economic prospects after it entered the WTO.
Although Vietnam's leaders were knowledgeable and said the
right things, they needed to keep pushing reform, he said;
the university system also needed help. PM Lee responded
that Vietnam used to be worse; it was still harder than China
to do business, but cheaper. Vietnam's leaders were focused
and recognized the need to catch up, he said. PM Lee
emphasized that Singapore was "bullish" on Vietnam, citing
its investment in an industrial park there 10 years ago. SM
Goh said that Vietnam was too often overlooked and the United
States should be encouraging economic growth. SM Goh
cautioned, however, that Vietnam's reforms could falter
unless the private sector generated a sufficient number of
jobs. Secretary Paulson agreed that Vietnam had improved
since his last visit in 1994, but that it would still be some
time before the economy took off. He expressed concern that

SINGAPORE 00003124 003 OF 003


many business students with whom he met during the APEC
Finance Ministers' meeting in September believed life would
"instantly change" after WTO entry.

Indonesia
--------------


11. (C) SM Goh encouraged Secretary Paulson to become more
involved in Southeast Asia. He urged the United States to
pay particular attention to Indonesia since its failure to
grow would prove "troublesome" for the region as a whole.
Secretary Paulson reiterated our strong commitment to ASEAN

SIPDIS
and the region, noting that this was one of the main reasons
he attended APEC and met Indonesian Minister of Finance Sri
Mulyani. SM Goh praised the Indonesian government,s
moderate public statements to date, but cautioned Secretary
Paulson to not embrace the GOI too publicly since this might
create domestic political problems for Indonesia's more
moderate and secular officials.


12. (U) Secretary Paulson's staff cleared this message.
HERBOLD