Identifier
Created
Classification
Origin
07BEIJING259
2007-01-11 12:20:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:  

STRATEGIC ECONOMIC DIALOGUE (SED) OPENING SESSION

Tags:  ECON EFIN WTRO PREL SENV ENRG CH 
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TO RUEHC/SECSTATE WASHDC IMMEDIATE 3717
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RUEHC/DEPT OF LABOR WASHDC IMMEDIATE
RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUEAUSA/DEPT OF HHS WASHINGTON DC IMMEDIATE
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INFO RUEHOO/CHINA POSTS COLLECTIVE
UNCLAS E F T O SECTION 01 OF 05 BEIJING 000259 

SIPDIS

SENSITIVE
SIPDIS

STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT
STATE PASS CEQ CONNAUGHTON
STATE PASS CEA FOR BLOCK, SLAUGHTER
STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES
NSC FOR RHUNTER/JSCHRIER/KTONG
TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN
TREASURY FOR TAIYA SMITH
DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL
HHS FOR STEIGER, ELVANDER AND BHAT
LABOR FOR ILAB

E.O. 12958: N/A
TAGS: ECON EFIN WTRO PREL SENV ENRG CH
SUBJECT: STRATEGIC ECONOMIC DIALOGUE (SED) OPENING SESSION
ON CHINA'S DEVELOPMENT STRATEGY

UNCLAS E F T O SECTION 01 OF 05 BEIJING 000259

SIPDIS

SENSITIVE
SIPDIS

STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT
STATE PASS CEQ CONNAUGHTON
STATE PASS CEA FOR BLOCK, SLAUGHTER
STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES
NSC FOR RHUNTER/JSCHRIER/KTONG
TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN
TREASURY FOR TAIYA SMITH
DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL
HHS FOR STEIGER, ELVANDER AND BHAT
LABOR FOR ILAB

E.O. 12958: N/A
TAGS: ECON EFIN WTRO PREL SENV ENRG CH
SUBJECT: STRATEGIC ECONOMIC DIALOGUE (SED) OPENING SESSION
ON CHINA'S DEVELOPMENT STRATEGY


1. (SBU) Summary: During the December 14 opening of the
Strategic Economic Dialogue (SED),Vice Premier Wu Yi and
National Development and Reform Chairman Ma Kai,s
presentations on China,s development road and strategy broke
little new ground and drew largely from 11th Five-Year Plan
documents. Vice Premier Wu discussed 1) cultural and
historical factors underpinning China,s development
strategy, 2) China,s status as a poor country facing
development challenges and 3) China,s development goals.
Chairman Ma followed up with a discussion of China,s
development strategy. The large amount of time allocated to
Ma during the SED sessions, far greater than other ministers,
appeared designed to signal his enhanced role in economic
policy making. In their interventions, Chinese officials
stressed the priority placed on more balanced development,
particularly between rural, urban, western and coastal
regions.


2. (SBU) USTR Schwab, emphasizing the importance of markets,
argued for a limited role of government in the economy. Her
remarks noting China,s backtracking on reforms and
incomplete transition to a market economy and rule of law
sparked defensive responses from Vice Premier Wu, Chairman Ma
and others. End summary.

Opening Statements
--------------


3. (SBU) At the December 14-15, 2006 first meeting of the
SED, Treasury Secretary Paulson and Vice Premier Wu Yi led
discussions of long-range, cross-cutting strategic economic
issues affecting the United States and China. Secretary

Paulson, six other Cabinet members, the Federal Reserve
Chairman, and senior officials from State, Transportation,
the Council of Economic Advisors and the U.S. ExIm Chairman
exchanged views with the Vice Premier and twenty Ministers or
Vice Ministerial-rank officials. Vice Premier Wu Yi opened
this unprecedented gathering of so many of the two sides'
leading policymakers by emphasizing the following points:

o The SED will help increase bilateral trust and cooperation
and facilitate constructive relations.

o The SED should focus on macro-level long-term and
strategic issues.

o The SED will not replace existing bilateral dialogues but
can be used to address issues of immediate importance.

o China hopes the SED will help the United States grasp a
more holistic view of China's development plans and
challenges.

o The SED should be based on mutual respect, cooperation and
equality.


4. (SBU) Secretary of the Treasury Henry Paulson agreed the
SED should address long-term issues and pressing short-term
problems. He noted the United States intended to focus on:

o Achieving sustainable growth without large imbalances.

o The importance of open markets, rule-of-law, property
rights and transparency.

o Energy and the environment.

Vice Premier Wu Yi: China's Development Road
--------------

BEIJING 00000259 002 OF 005




5. (SBU) Vice Premier Wu noted that the choice of "China's
Development Road" as the SED theme was motivated by a
perception that the United States neither fully understands
China's development strategy nor appreciates the challenges
it faces. China's development, she said, should be viewed as
an opportunity, not a threat. Her presentation touched on
themes consistent with priorities laid out in China's 11th
Five-Year Plan. A summary of the Vice Premier's presentation
follows:

o Peaceful development: China's development strategy is
driven by 1) a culture that values harmony and has a long
history of diplomacy (e.g., the Silk Road, Zheng He's sea
voyages) and 2) a painful, humiliating history of war and
foreign domination that underpins China's quest for peace and
stability (e.g., the Opium War, First Sino-Japan War, the War
of Japanese Aggression (i.e., WWII)).

o Economic development challenges: China remains a
developing country facing high income inequality, unbalanced
development, rural poverty and weak public services
(particularly for rural residents). In the coming two
decades 300 million rural migrants will move to urban areas.

o Development goals: Expand China's &well-off8 society to
over one billion people by 2020 and become a medium developed
country by 2050.

o Development conditions: China can sustain high economic
growth for the next 15 years, has huge market demand, high
household savings and abundant labor.

o Development model: 1) Move away from a resource and
capital intensive, high polluting model towards a high
productivity, resource and environmentally friendly model, 2)
encouragedomestic demand through rural reform and expand
social services to reduce precautionary savings, 3) nurture
independent innovation, 4) balance regional development, 5)
strive for energy self-sufficiency by increasing conservation
and 6) improve the environment by reducing energy
consumption, increasing efficiency and lowering waste and
emissions.

o Economic reform: China is a market economy (over 95
percent of retail commodities are market-priced and the
non-state owned sector now accounts for over 60 percent of
value added) and public ownership is the &mainstay8 of the
economic system. China is working to: 1) increase the role
of the market in determining resource allocation, factor
pricing and enterprise competitiveness, 2) improve
macro-economic controls, 3) perfect its legal framework, 4)
intensify IPR protection and 5) support and expand the
multilateral trading system.

o Political reform: China endeavors to 1) promote rule of
law, 2) make government more responsive and 3) protect human
rights based on international conventions.

Secretary Paulson Responds

SIPDIS
--------------


6. (SBU) Secretary Paulson noted the major question
confronting China is the pace of reform. China's size and
global integration, he continued, makes it harder to manage
reform with a mix of market and administrative approaches.
The greatest risk, he opined, may be in not moving quickly
enough. While China is a developing country, he said, its
economic size and integration magnifies the impact of China's

BEIJING 00000259 003 OF 005


policies on the global economy. As China develops, he
predicted, its global partners will become increasingly
impatient.


7. (SBU) Secretary Paulson stressed that China must rely more
on markets to determine prices and allocate resources and
rely more on competition to build strong companies. In
particular, China's service sector would benefit from greater
liberalization. This, he said, would help China build
dynamic capital markets. Failure to do so, he warned, will
increase costs as Japan experienced in the 1990s. He agreed
with Vice Premier Wu that market-based pricing can help China
achieve its environmental goals.

NDRC Chairman Ma Kai: China's Economic Development Strategy
--------------

8. (SBU) NDRC Chairman Ma's presentation covered six core
areas of China's development strategy and was essentially an
outline of China's 11th Five-Year Plan:


I. Boost domestic demand through: 1) strengthening
household consumption, 2) revitalizing the industrial sector
by increasing corporate investment, and 3) accelerating
urbanization.

II. Adjust China's economic structure by: 1) upgrading
agriculture, 2) promoting innovation to move up the value
chain, and 3) developing the services sector.

III. Conserve resources/protect the environment by: 1)
reducing energy consumption and pollution, 2) increasing
forest coverage, 3) promoting services and high tech, and 4)
improving the legal framework and increasing budgetary
resources to enforce environmental laws.

IV. Promote more balanced development by: 1) promoting
urbanization, 2) improving rural infrastructure and services
and increasing fiscal outlays to rural areas, and 3)
promoting regional development campaigns like &Promote the
West8, &Revitalize the Northeast8 and &Rise of the
Central Region.8


V. Promote innovation and education by: 1) extending the
coverage of compulsory education, 2) providing vocational
training, and 3) increasing R&D funding.

VI. Continue reform by: 1) liberalizing trade and services,
2) encouraging private sector development, 3) promoting
administrative reform, 4) accelerating financial sector
reform, 5) liberalizing administered prices, particularly of
resource-based products, 6) improving the exchange rate
mechanism and striving for basic import/export balance, 7)
attracting higher quality foreign investment, and 8)
encouraging Chinese enterprise investment and cooperation
abroad.

China's Economic Development Strategy ) United States
Perspectives
--------------


9. (SBU) USTR Susan Schwab's presentation focused on three
areas:

I) the role of government and markets: Governments create
the environment for innovation but shouldn't control
outcomes. Flaws emerge when governments intervene.

II) Three development models: 1) a widely rejected central
planning model, 2) a transparent free market model, and 3)

BEIJING 00000259 004 OF 005


the &East Asian8 model characterized by selective
government intervention, which misallocates resources,
insulates market participants from market forces and
contributes to corruption and trade friction.

III) China's incomplete transition: Key sectors are not
guided by market signals, the rule of law is underdeveloped,
market access barriers persist and reform is backsliding. An
example is overcapacity in the steel industry.


10. (SBU) USTR Schwab noted China's incomplete transition
threatens its development and bilateral relations, as well as
the stability of the global economy.


11. (SBU) Secretary of Energy Samuel Bondman echoed User's
comments on China's incomplete transition. He further noted
the importance of environmental and IPR protection. The
Department of Energy, he added, stands ready to explore ways
to aid China's economic transition.


12. (SBU) Secretary of Commerce Carlos Gutierrez noted that
China's progress in the past 28 years is unprecedented. The
free market model discussed by USTR Schwab, he continued, is
the one the United States eventually reached.


13. (SBU) Matthew Slaughter, Member of the Council of
Economic Advisors, noted that United States economic growth
is built on entrepreneurship and the success and failure of
private firms. This facilitates innovation. A flexible
labor market and deep capital markets are additional key
factors.

Chinese Response
--------------


14. (SBU) Vice Premier Wu asked USTR Schwab for evidence that
China was backsliding on reform. USTR Schwab cited China's
promulgation of merger and acquisition rules, regulations
limiting foreign distribution of economic news, postal reform
that threatens foreign market access and potentially
restrictive government procurement regulations. China,
Schwab said, appears to be picking winners and losers, a
strategy proven to be ineffective in other countries.


15. (SBU) NDRC Chairman Ma said it was difficult to agree
with USTR Schwab's comments. He reiterated China's intent to
promote the private sector. China, he stated, will allow the
market to play a basic role guided by government
macro-control. This approach is distinct from either a fully
planned or a laissez-faire model. The challenge, he opined,
is striking the balance between the role of the market and
macro-control. Ma challenged USTR Schwab's comments on
China's steel industry, saying market forces determine what
and how Chinese enterprises produce, where they invest and
whether banks lend to them. Except for a very few items, he
said, pricing is free from government influence. Ma admitted
there is excess investment, but the government has taken
steps to correct this by tightening monetary policy,
adjusting land management policies and reducing the VAT
rebate for steel exports.


16. (SBU) NDRC Vice-Chairman Zhang Xiaoqing questioned USTR
Schwab's comments on China's postal reform. China, he said,
is moving to separate the government from service provision
and towards a market-based system. In the next 1-2 months,
he predicted, China will establish a postal system governed
by modern corporate principles. Perhaps, he suggested, the
USG is unhappy with certain aspects of postal reform.
Nonetheless, it should not deny that the overall direction is

BEIJING 00000259 005 OF 005


positive. Minister of Information Industries Wang Xudong
added that China's reform in this sector is proceeding at an
appropriate pace.

Participants List
--------------


17. (U) United States Delegation:

--Henry Paulson, Secretary of Treasury
--Clark T. Randt, Jr., United States Ambassador to China
--Michael Leavitt, Secretary of Health and Human Services
--Samuel Bodman, Secretary of Energy
--Carlos Gutierrez, Secretary of Commerce
--Elaine Chao, Secretary of Labor
--Susan Schwab, United States Trade Representative
--Stephen Johnson, Administrator of the Environmental
Protection Agency
--Benjamin Bernanke, Chairman of the Federal Reserve
--James Lambright, Chairman and President of Ex-Im Bank
--Daniel Sullivan, Assistant Secretary, Department of State
--Andrew Steinberg, Assistant Secretary, Department of
Transportation
--Matthew Slaughter, Member of the Council of Economic
Advisors


18. (U) Chinese Delegation:

--Wu Yi, Vice Premier
--Jin Renqing, Minister of Finance
--Ma Kai, Chairman of National Development and Reform
Commission
--Xu Guanhua, Minister of Science and Technology
--Tian Chengping, Minister of Labor and Social Security
--Liu Zhijun, Minister of Railways
--Li Shenglin, Minister of Communications
--Wang Xudong, Minister of Information and Industry
--Bo Xilai, Minister of Commerce
--Gao Qiang, Minster of Health
--Zhou Xiaochuan, Governor of People's Bank of China
--Li Changjiang Administrator of General Administration of
Quality Supervision, Inspection, and Quarantine
--Zhou Shengxian, Administrator of State Environmental
Protection Administration
--Zhou Wenxhong, Chinese Ambassador to the United States
--Xu Shaoshi, Deputy Secretary-General, State Council
--Yang Jiechi, Senior Vice Minister, Ministry of Foreign
Affairs
--Zhang Xiaoqiang, Vice Chairman, National Development and
Reform Commission
--Li Yong, Vice Minister, Ministry of Finance
--Yi Xiaozhun, Vice Minister, Ministry of Commerce
--Hu Xiaolian, Vice Governor, People's Bank of China
--Li Ruogu, Chairman of China Export-Import Bank
SEDNEY