Identifier
Created
Classification
Origin
07BEIJING263
2007-01-11 12:57:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:
SED SESSION THREE: SUSTAINING ECONOMIC DEVELOPMENT
VZCZCXRO5794 OO RUEHCN RUEHGH RUEHVC DE RUEHBJ #0263/01 0111257 ZNY EEEEE ZZH O 111257Z JAN 07 FM AMEMBASSY BEIJING TO RUEHC/SECSTATE WASHDC IMMEDIATE 3727 RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE RUCPDOC/USDOC WASHDC IMMEDIATE RUEHC/DEPT OF LABOR WASHDC IMMEDIATE RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE RUEAUSA/DEPT OF HHS WASHINGTON DC IMMEDIATE RUEAEPA/HQ EPA WASHDC IMMEDIATE RHEHNSC/NSC WASHDC IMMEDIATE INFO RUEHOO/CHINA POSTS COLLECTIVE
UNCLAS E F T O SECTION 01 OF 04 BEIJING 000263
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 ETRD PREL SENV ENRG CH
SUBJECT: SED SESSION THREE: SUSTAINING ECONOMIC DEVELOPMENT
REF: A. BEIJING 259
B. BEIJING 262
UNCLAS E F T O SECTION 01 OF 04 BEIJING 000263
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 ETRD PREL SENV ENRG CH
SUBJECT: SED SESSION THREE: SUSTAINING ECONOMIC DEVELOPMENT
REF: A. BEIJING 259
B. BEIJING 262
1. (SBU) Summary: In the December 14 Strategic Economic
Dialogue (SED) session on sustaining economic development,
Federal Reserve Chairman Bernanke discussed how a flexible
exchange rate will help balance China's economy. National
Development and Reform Commission (NDRC) Chairman Ma Kai
raised the structural challenges that China faces and
countered that relaxing United States export controls would
help reduce China's trade surplus with the United States.
Commerce Secretary Gutierrez added that China could both
increase consumption and reduce its trade surplus by
increasing market access for foreign services. People's Bank
of China (PBOC) Governor Zhou Xiaochuan said that China's
financial reforms will proceed gradually to ensure steady
growth and financial stability. Health and Human Services
Secretary Leavitt discussed the efficiencies of setting
SIPDIS
common standards. Minister of Labor and Social Security Tian
Chengping and Labor Secretary Chao both expressed support for
greater cooperation on pension reform. End Summary.
Chairman Bernanke on Balancing China's Economy
--------------
2. (SBU) Federal Reserve Chairan Benjamin Bernanke explained
the risks of Chna's imbalanced growth to the participants in
the third session of the Strategic Economic Dialogue (SED).
He noted that investment and net exports are too high and
consumption is too low. Capital misallocation runs the risk
of creating new non-performing loans (NPLs) and weakening
financial institutions. Chairman Bernanke encouraged China
to increase public spending on pensions and healthcare and
expand individuals' access to private insurance to reduce
precautionary savings and raise consumption. An appreciation
of the renminbi (RMB) will change relative prices, reducing
incentives to invest in the export sector.
3. (SBU) Chairman Bernanke noted that limited RMB flexibility
inhibits the central bank's ability to adjust interest rates
to maintain price stability. Due to China's high savings
rate, the central bank has been able to mop up liquidity
without a large increase in interest rates, but this will
become increasingly difficult as the stock of sterilization
bonds continue to grow. Moreover, with a rigid exchange
rate, as China liberalizes its capital account, the
effectiveness of monetary policy will be hampered.
China's Economy Like Japan's in the Seventies
--------------
4. (SBU) In response to observations by Treasury Secretary
Henry Paulson on the lessons for China from Japan's
experience, Chairman Bernanke noted that erratic monetary
policy and an unwillingness to deal resolutely with NPLs in
the financial sector, not the yen's appreciation following
the Plaza Accord in the mid-1980s, had contributed to Japan's
stagnation in the 1990s. An even better lesson can be drawn
from Japan's experience in the early 1970s. During that
time, Japan's excessive focus on exchange rate stability led
to rapid money supply growth, followed by inflation,
excessive investment and ultimately recession.
NDRC: Rapid Investment Growth is Part of Industrialization,
but Investment Slowing Down
--------------
5. (SBU) Chairman of the National Development and Reform
Commission (NDRC) Ma Kai said rapid investment growth is
inevitable and rational for China, which is currently
BEIJING 00000263 002 OF 004
undergoing urbanization and industrialization. Wary of
excess investment, the Chinese Government will work to
moderate its growth and raise returns on investment by
improving the allocation of investment. For example, China
will promote investment in sectors that conserve energy and
raise energy efficiency.
Chinese Government Measures to Raise Consumption
--------------
6. (SBU) To promote consumption, Chairman Ma said the
government is trying to raise incomes of farmers and
low-income urban dwellers as well as promote services (which
are less investment intensive). Ma acknowledged that
insufficient access to health insurance also led to high
precautionary savings. Widening income inequality also
contributes to high savings. The government has introduced
the following measures to raise rural and low-income urban
dwellers' incomes: 1) abolishing rural taxes, 2) providing
subsidies to farmers, 3) providing subsistence housing for
low-income urban dwellers, 4) introducing a minimum wage in
rural areas, 5) improving medical and social security
benefits, and 6) raising government expenditures on cultural
activities, such as tourism.
7. (SBU) China does not pursue a trade surplus, Chairman Ma
added, and only in the recent two years has China experienced
surpluses that are large relative to its economy. China's
trade with the United States is mutually beneficial and
complementary. Ma hoped that the United States would relax
controls on high-tech exports to reduce the trade imbalance.
PBOC: Financial Reforms Will Proceed Gradually to Ensure
Steady Growth
--------------
8. (SBU) Zhou Xiaochuan, Governor of People's Bank of China
(PBOC),said that the Chinese Government places priority on
economic stability and steady growth. The PBOC has made
better use of indirect monetary policy instruments and more
market based interest rates and the RMB has appreciated
around six percent against the USD since July 2005. He
highlighted other structural adjustments, such as growth in
consumer credit, mortgages and auto loans. Governor Zhou
said that China will deregulate financial markets gradually
to maintain economic and financial stability.
Gutierrez: Further Discussion on High-Tech Exports in JCCT
--------------
9. (SBU) Commerce Secretary Carlos Gutierrez said that the
United States' goal to reduce its trade deficit is to export
more, not import less. Secretary Gutierrez noted that the
United States and China had widely different assessments of
the impact of high technology export controls on trade
imbalances and suggested they discuss this in the High-Tech
Working Group under the Joint Commission on Commerce and
Trade. He added that China could both raise consumption and
reduce its trade surplus through greater market access for
foreig services. Assistant Secretary of State Daniel
Sullivan added that another issue that prevents American
companies from exporting high-tech equipment is China's
inadequate IPR protection.
MOH: China to Strengthen Health Services
--------------
10. (SBU) Minister of Health Gao Qiang said the Chinese
Government's major goal is to strengthen health services by:
1) closing the health services gap among regions (and
BEIJING 00000263 003 OF 004
particularly between rural and urban areas),2) improving the
quality of health services, 3) establishing different medical
insurance schemes for different areas, 4) improving the
financial health and supervision of hospitals, 5) providing
safe and inexpensive medicines, and 6) diversifying health
care services by encouraging investment in medical
institutions.
Secretary Leavitt: Technical Standards Can Be Trade Barriers
SIPDIS
--------------
11. (SBU) Health and Human Services Secretary Michael Leavitt
said he had just toured parts of rural China and recognized
China's varying levels of health services. Secretary Leavitt
noted that varying technical standards for medical coding,
software, and the environment could be significant barriers
to trade and to the efficient provision of health care. He
commended examples of price transparency at Chinese hospitals
he had recently visited.
MOLSS: Expanding the Coverage of Pension and Health Insurance
Schemes
-------------- --------------
12. (SBU) Minister of Labor and Social Security Tian
Chengping said the government is expanding the coverage of
pensions to reduce household savings. Although China started
late in developing its pension scheme, pension coverage for
workers has been growing. In urban areas, the Chinese
Government plans to cover an additional 10 million people per
year starting in 2006 so that 50 million more will be covered
by 2010. Students, unemployed, and retired elderly people
currently have no health insurance coverage, but China plans
to launch pilot projects in 2007 so that all residents in
selected urban areas will have access to health insurance.
Secretary Chao: Greater Cooperation on Pension Reform
SIPDIS
-------------- --------------
13. (SBU) Labor Secretary Elaine Chao said that strengthening
the social safety net will lead to more balanced growth.
Secretary Chao stressed the important roles of both public
SIPDIS
and private pensions. She noted the importance for both
countries to cooperate on this issue.
Participants List
--------------
14. (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
15. (U) Chinese Delegation:
BEIJING 00000263 004 OF 004
--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
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 ETRD PREL SENV ENRG CH
SUBJECT: SED SESSION THREE: SUSTAINING ECONOMIC DEVELOPMENT
REF: A. BEIJING 259
B. BEIJING 262
1. (SBU) Summary: In the December 14 Strategic Economic
Dialogue (SED) session on sustaining economic development,
Federal Reserve Chairman Bernanke discussed how a flexible
exchange rate will help balance China's economy. National
Development and Reform Commission (NDRC) Chairman Ma Kai
raised the structural challenges that China faces and
countered that relaxing United States export controls would
help reduce China's trade surplus with the United States.
Commerce Secretary Gutierrez added that China could both
increase consumption and reduce its trade surplus by
increasing market access for foreign services. People's Bank
of China (PBOC) Governor Zhou Xiaochuan said that China's
financial reforms will proceed gradually to ensure steady
growth and financial stability. Health and Human Services
Secretary Leavitt discussed the efficiencies of setting
SIPDIS
common standards. Minister of Labor and Social Security Tian
Chengping and Labor Secretary Chao both expressed support for
greater cooperation on pension reform. End Summary.
Chairman Bernanke on Balancing China's Economy
--------------
2. (SBU) Federal Reserve Chairan Benjamin Bernanke explained
the risks of Chna's imbalanced growth to the participants in
the third session of the Strategic Economic Dialogue (SED).
He noted that investment and net exports are too high and
consumption is too low. Capital misallocation runs the risk
of creating new non-performing loans (NPLs) and weakening
financial institutions. Chairman Bernanke encouraged China
to increase public spending on pensions and healthcare and
expand individuals' access to private insurance to reduce
precautionary savings and raise consumption. An appreciation
of the renminbi (RMB) will change relative prices, reducing
incentives to invest in the export sector.
3. (SBU) Chairman Bernanke noted that limited RMB flexibility
inhibits the central bank's ability to adjust interest rates
to maintain price stability. Due to China's high savings
rate, the central bank has been able to mop up liquidity
without a large increase in interest rates, but this will
become increasingly difficult as the stock of sterilization
bonds continue to grow. Moreover, with a rigid exchange
rate, as China liberalizes its capital account, the
effectiveness of monetary policy will be hampered.
China's Economy Like Japan's in the Seventies
--------------
4. (SBU) In response to observations by Treasury Secretary
Henry Paulson on the lessons for China from Japan's
experience, Chairman Bernanke noted that erratic monetary
policy and an unwillingness to deal resolutely with NPLs in
the financial sector, not the yen's appreciation following
the Plaza Accord in the mid-1980s, had contributed to Japan's
stagnation in the 1990s. An even better lesson can be drawn
from Japan's experience in the early 1970s. During that
time, Japan's excessive focus on exchange rate stability led
to rapid money supply growth, followed by inflation,
excessive investment and ultimately recession.
NDRC: Rapid Investment Growth is Part of Industrialization,
but Investment Slowing Down
--------------
5. (SBU) Chairman of the National Development and Reform
Commission (NDRC) Ma Kai said rapid investment growth is
inevitable and rational for China, which is currently
BEIJING 00000263 002 OF 004
undergoing urbanization and industrialization. Wary of
excess investment, the Chinese Government will work to
moderate its growth and raise returns on investment by
improving the allocation of investment. For example, China
will promote investment in sectors that conserve energy and
raise energy efficiency.
Chinese Government Measures to Raise Consumption
--------------
6. (SBU) To promote consumption, Chairman Ma said the
government is trying to raise incomes of farmers and
low-income urban dwellers as well as promote services (which
are less investment intensive). Ma acknowledged that
insufficient access to health insurance also led to high
precautionary savings. Widening income inequality also
contributes to high savings. The government has introduced
the following measures to raise rural and low-income urban
dwellers' incomes: 1) abolishing rural taxes, 2) providing
subsidies to farmers, 3) providing subsistence housing for
low-income urban dwellers, 4) introducing a minimum wage in
rural areas, 5) improving medical and social security
benefits, and 6) raising government expenditures on cultural
activities, such as tourism.
7. (SBU) China does not pursue a trade surplus, Chairman Ma
added, and only in the recent two years has China experienced
surpluses that are large relative to its economy. China's
trade with the United States is mutually beneficial and
complementary. Ma hoped that the United States would relax
controls on high-tech exports to reduce the trade imbalance.
PBOC: Financial Reforms Will Proceed Gradually to Ensure
Steady Growth
--------------
8. (SBU) Zhou Xiaochuan, Governor of People's Bank of China
(PBOC),said that the Chinese Government places priority on
economic stability and steady growth. The PBOC has made
better use of indirect monetary policy instruments and more
market based interest rates and the RMB has appreciated
around six percent against the USD since July 2005. He
highlighted other structural adjustments, such as growth in
consumer credit, mortgages and auto loans. Governor Zhou
said that China will deregulate financial markets gradually
to maintain economic and financial stability.
Gutierrez: Further Discussion on High-Tech Exports in JCCT
--------------
9. (SBU) Commerce Secretary Carlos Gutierrez said that the
United States' goal to reduce its trade deficit is to export
more, not import less. Secretary Gutierrez noted that the
United States and China had widely different assessments of
the impact of high technology export controls on trade
imbalances and suggested they discuss this in the High-Tech
Working Group under the Joint Commission on Commerce and
Trade. He added that China could both raise consumption and
reduce its trade surplus through greater market access for
foreig services. Assistant Secretary of State Daniel
Sullivan added that another issue that prevents American
companies from exporting high-tech equipment is China's
inadequate IPR protection.
MOH: China to Strengthen Health Services
--------------
10. (SBU) Minister of Health Gao Qiang said the Chinese
Government's major goal is to strengthen health services by:
1) closing the health services gap among regions (and
BEIJING 00000263 003 OF 004
particularly between rural and urban areas),2) improving the
quality of health services, 3) establishing different medical
insurance schemes for different areas, 4) improving the
financial health and supervision of hospitals, 5) providing
safe and inexpensive medicines, and 6) diversifying health
care services by encouraging investment in medical
institutions.
Secretary Leavitt: Technical Standards Can Be Trade Barriers
SIPDIS
--------------
11. (SBU) Health and Human Services Secretary Michael Leavitt
said he had just toured parts of rural China and recognized
China's varying levels of health services. Secretary Leavitt
noted that varying technical standards for medical coding,
software, and the environment could be significant barriers
to trade and to the efficient provision of health care. He
commended examples of price transparency at Chinese hospitals
he had recently visited.
MOLSS: Expanding the Coverage of Pension and Health Insurance
Schemes
-------------- --------------
12. (SBU) Minister of Labor and Social Security Tian
Chengping said the government is expanding the coverage of
pensions to reduce household savings. Although China started
late in developing its pension scheme, pension coverage for
workers has been growing. In urban areas, the Chinese
Government plans to cover an additional 10 million people per
year starting in 2006 so that 50 million more will be covered
by 2010. Students, unemployed, and retired elderly people
currently have no health insurance coverage, but China plans
to launch pilot projects in 2007 so that all residents in
selected urban areas will have access to health insurance.
Secretary Chao: Greater Cooperation on Pension Reform
SIPDIS
-------------- --------------
13. (SBU) Labor Secretary Elaine Chao said that strengthening
the social safety net will lead to more balanced growth.
Secretary Chao stressed the important roles of both public
SIPDIS
and private pensions. She noted the importance for both
countries to cooperate on this issue.
Participants List
--------------
14. (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
15. (U) Chinese Delegation:
BEIJING 00000263 004 OF 004
--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