C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 002333

SIPDIS

SIPDIS

DEPARTMENT PASS USTR FOR AUSTRS STRATFORD AND CUTLER
USTR ALSO FOR BEEMAN, NEUFFER
PARIS FOR USOECD
GENEVA PASS USTR
TREASURY FOR INTERNATIONAL AFFAIRS - DOHNER, TRAN, GREWE

E.O. 12958: DECL: 04/28/2016
TAGS: ECON ETRD EFIN ENRG APECO PREL CH JA
SUBJECT: EAP/DAS KEITH'S MEETING WITH METI OFFICIALS ON PRC
PRESIDENT HU JINTAO'S U.S. VISIT

TOKYO 00002333 001.2 OF 004


Classified By: Joe Donovan, Charge d'Affaires, a.i.
Reason: 1.4 (b,d).


1. (C) Summary: Questions from officials of Japan's
Ministry of Economy, Trade, and Industry (METI) focused on
China's promises regarding exchange rate reform and
intellectual property protection during an April 26
briefing on Chinese President Hu Jintao's recent U.S. visit
by EAP Deputy Assistant Secretary James Keith. The METI
officials also urged serious U.S. consideration of a
Chinese proposal for a high-level regional meeting of
leading energy consuming countries -- an arrangement they
felt would be more effective than the current APEC
framework of discussions on strategic energy issues. End
summary.


2. (SBU) Participants:

METI

Eiichi Hasegawa, Deputy Director General, Trade Policy
Bureau
Shigeaki Tanaka, Director, Northeast Asia Division,
Trade Policy Bureau
Keisuke Saito, Director, Industrial Revitalization
Division, Industrial Policy Bureau
Tetsuya Watanabe, Special Assistant to the Director
General
Ken Watanabe, Director for International Energy
Strategy, Agency for Natural Resources and Energy
Tomohiro Kaneko, Deputy Director, Americas Division,
Trade Policy Bureau

U.S.

Deputy Assistant Secretary James Keith
Economic Counselor Daniel Fantozzi
First Secretary Steven Hill
First Secretary Christopher Wurzel
Economic Assistant Ritsu Yamashiro


3. (C) DAS Keith opened with an overview of the
visit to the United States by Chinese President Hu

Jintao. He stressed that the visit had taken place in
a highly politicized environment in both the United
States and China and that economic and trade issues
had figured prominently among U.S. concerns. The
Chinese, Keith acknowledged, had chafed at U.S.
pressure on a number of economic issues but had shown
noticeably greater sophistication and understanding
than in the past in how they sought to engage the U.S.
side in management of domestic political dynamics
regarding the relationship with China. Keith also
emphasized that China's Eleventh Five-year Plan had
laid out a series of important and measurable economic
commitments and that, most importantly, the Chinese
people would be able gauge the leadership's success in
economic reform and development. He noted that
People's Bank of China Governor Zhou Xiaochuan had
made great progress in convincing Senators Schumer and
Graham that China was serious about long-term reform
of its exchange rate regime during their visit to
China earlier in the year. The reiteration of this
commitment by President Hu and other statements by Hu
confirming China's determination to address issues
such as intellectual property rights protection to
some extent had mitigated criticism in the United
States of China on economic issues and led to a
refocusing by some on non-economic differences such as
regional security and human rights.

--------------
Why Not A State Visit?
--------------

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4. (C) Trade Policy Deputy Director General
Hasegawa's first question following DAS Keith's
briefing centered on the reasons behind the decision
not to accord the Chinese President a full state
visit. DAS Keith noted that this question had figured
prominently during the preparations in 2005 when Hu's
visit had originally been scheduled for the fall of
that year. Keith recalled President Bush's preference
for a more substantive, informal exchange with the
Chinese leader in which more time could be devoted to
discussion and to establishing a personal rapport.
The Chinese had insisted on a ceremonial state visit.
Subsequently, the Chinese had come to accept that
pressing their desire for a state visit further would
not be beneficial, just as the U.S. Administration had
acknowledged Hu's political need for a formal
reception.

--------------
Exchange Rate Reform
--------------


5. (C) Hasegawa then asked what elements of China's
plan for financial reform had been most convincing to
members of Congress to the extent that they backed
away from their proposed legislation that would impose
tariffs on Chinese goods in retaliation for alleged
currency manipulation. Keith stressed that People's
Bank of China Governor Zhou had persuaded Senators
Schumer and Graham that China, through the five-point
plan presented by Zhou, was committed to structural
reforms that would move China toward a market-driven
exchange rate mechanism. Although there is an
acknowledgement in Congress and the Administration
that changes to the exchange rate regime were not the
only test of China's efforts to address its huge trade
imbalances, the exchange rate issue had taken on
symbolic significance with respect to Chinese
commitment to address those imbalances, Keith added.


6. (C) Hasegawa expressed a "personal view" that
China would need to liberalize its exchange rate
regime eventually simply because of the interest rate
costs involved in maintaining such large foreign
currency reserves. That said, Hasegawa noted, even a
limited appreciation in the value of the Chinese
currency would entail a tremendous shift in China's
global purchasing power. With the equivalent of about
USD 4.0 trillion in Chinese currency held in China's
domestic banking system, a ten percent appreciation of
the currency would raise China's purchasing power by
USD 400 billion -- a sum, Hasegawa said, equivalent to
the total assets of the Toyota Motor Corporation.
Hasegawa indicated that, because of this
consideration, he advised Japanese businesses to
analyze carefully the many implications, both good and
bad, of a possible revaluation of the Chinese
currency. Hasegawa also asked whether the Treasury
Department would determine China had been manipulating
its currency in the semi-annual report, which had been
due for release on April 15. Keith said he was unsure
of what the Treasury Department's determination would
be.

---
IPR
---


7. (C) Turning to the question of intellectual
property rights (IPR), Hasegawa noted that China has
made progress in strengthening IPR protection but that
violations had grown commensurately. The problem,
Hasegawa stressed, was not China's legislation itself

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-- which he compared favorably with Japan's own -- but
with enforcement. He said he was not optimistic that
the assurances given by the Chinese President on IPR
would be enforced and asked that Japan and the United
States continue to cooperate closely in monitoring
China's progress in this area. Keith said the United
States shared Japanese concerns about the enforcement
of IPR protection in China and noted that the United
States was still collecting data in the expectation of
eventually filing a case against China on IPR at the
World Trade Organization. Similarly, the United
States had filed its case against China on possible
illegal imposition of a domestic content quota on auto
parts as a way to demonstrate U.S. determination to
use the tools at its disposal to ensure fair access to
the Chinese market. Asked by Watanabe (who handles
WTO dispute settlement in the METI Trade Policy
Bureau) whether the United States had brought the auto
parts case for political reasons, DAS Keith stressed
that the decision to bring the case had been based on
the substance of China's behavior; the timing of
submission to the WTO, however, had been politically
advantageous.


8. (C) As for the Chinese side, Keith added, the
fact that the very able Vice Premier Wu Yi had
responsibility for IPR was a good sign that China was
taking its promise to energize its IPR enforcement
apparatus seriously. Hasegawa asked wryly what DAS
Keith thought of the quality of China's judiciary.
Keith noted that the United States had many exchanges
in the area of rule of law with the Chinese,
particularly on legal education, but acknowledged
readily that China still lacked key elements in its
legal system, most notably an independent judiciary.
Nevertheless, Keith indicated, the Chinese have
realized that the lack of effective legal protection
for intellectual property was both hurting their chief
advocate in the United States -- American business --
and forming an obstacle to the realization of China's
economic development goals.

--------------
Energy Dialogue
--------------


9. (C) Noting that China had become a bigger energy
importer than Japan, Hasegawa recounted that METI Vice
Minister Kusaka's initiative to launch a regional
dialogue on common economic interests, including
energy, over 18 months ago had received a fairly cold
response from the United States. Subsequently, a U.S.
State Department official toward the end of 2005 had
suggested a similar five-country dialogue on energy to
include Japan, the United States, China, South Korea,
and Russia. The Chinese had then in March this year
put forward a proposal for a one-time meeting
including the United States and major Asian energy
consumers (China, Japan, India, South Korea).
Hasegawa found it positive that China included the
U.S. and suggested that the United States and Japan
should respond favorably to the Chinese proposal but
that they should recommend that the meeting not be an
isolated event but should be held on a regular basis.
He recommended a ministerial-level meeting to launch
this process and indicated his view that this type of
coordination among these major global energy consumers
would send a good message to the marketplace.
Hasegawa said his impression of the initial U.S.
response to this initiative had been cool. DAS Keith
replied that the United States was inclined to respond
favorably to the Chinese proposal but stressed that
much remained to be determined as to how to realize
this type of multilateral exchange.

TOKYO 00002333 004.2 OF 004




10. (C) Hasegawa acknowledged that there had been
some progress on energy policy coordination through
the Energy Ministers' meeting of the Asian Pacific
Economic Cooperation forum (APEC). According to
Hasegawa, APEC had the disadvantage of including too
many participants. In particular, Taiwan was an APEC
member, and it was necessary to uphold the principle
of its equal participation in APEC events. In
addition, although APEC had produced some very
comprehensive statements on energy policy, it had no
effective mechanism to ensure implementation of those
agreed positions. If practical results were to be
achieved, Hasegawa stressed, it could only be done in
a small group of key countries in East Asia along with
India. Energy was too strategic a topic to be
effectively discussed in any forum that had more than
ten members, Hasegawa said. Keith responded by noting
that energy issues were a part of Deputy Secretary
Zoellick's bilateral strategic dialogue with the
Chinese and that Zoellick would be consulting with
China's National Development and Reform Commission,
the originator of the Chinese proposal for a regional
meeting, during his next trip to China.


11. (U) DAS Keith cleared this message.
DONOVAN