CONCERNS ABOUT U.S. INVESTMENT CLIMATE FROM SOVEREIGN

UNCLAS SECTION 01 OF 02 BEIJING 006006 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM AND EB/OMA TREASURY FOR OASIA--DOHNER USDOC FOR 4420 E.O. 12958: N/A TAGS: ECON EFIN PGOV ETRD EINV CH SUBJECT: CONCERNS ABOUT U.S. INVESTMENT CLIMATE FROM SOVEREIGN WEALTH FUND OFFICIALS BEIJING 00006006 001.2 OF 002 SUMMARY -------------- ¶1. (SBU) In meetings held September 10 and 11, top officials involved in the formation and investment decisions of the Chinese Investment Corporation (CIC, the new sovereign wealth fund) warned of a growing perception in China that the U.S. is decreasingly open to trade and investment. One of the two officials opined that this trend is shaping the views of an emerging generation of Chinese business and government leaders. The other recommended more USG outreach with the Chinese media to explain how potential investments are evaluated in the U.S. These meetings also yielded insights into progress in setting up and staffing the CIC. END SUMMARY MEETINGS -------------- ¶2. (U) On September 10, Treasury Deputy Assistant Secretary Nova Daily, accompanied by Finatt, met the Chief Executive Officer of the State Administration of Foreign Exchange (SAFE) Central Investments, known as Huijin. On September 11, Financial Services Roundtable Chairman Don Evans, accompanied by Finatt, met with Gao Xiqing, Vice Chairman of the National Social Security Fund and recently named Chief Investment Officer (CIO) of the China Investment Corporation (CIC). CONCERNS ABOUT U.S. ATTITUDES TOWARDS INVESTMENT -------------- --- ¶3. (SBU) CIC's Gao said rising doubts about American openness to Chinese investment make it more difficult to defend U.S. policies and promote Chinese investment in the U.S. Chinese officials see the U.S. as decreasingly open to Chinese investment, and some feel they should focus respond by focusing outward investments on other countries. Gao said that increased political opposition to Chinese investment in the U.S. undermines reformers who are trying to promote engagement. This perception is also adversely shaping views of the U.S. by China's younger generation of business and government leaders. The U.S. is missing an opportunity to win the hearts and minds of this generation that is otherwise less ideological than its predecessors, said Gao. ¶4. (SBU) Gao noted that sovereign wealth funds (SWFs) have existed for 25 years, yet negative attention them in the U.S. seems to have emerged only with China signaling its intention to create the CIC. He said that the Federal Reserve's unwillingness to approve licenses for Chinese banks is increasingly untenable given China's financial reforms of the last several years. Chinese officials find it difficult to see this as justified by prudential needs, and there is a growing view that the only viable explanation is protectionism. PUSH FOR OUTREACH -------------- ¶5. (SBU) In response to DAS Daly outlining the CFIUS program and recent investment legislation, Huijin's Xie suggested that Treasury engage in more outreach in the Chinese media to explain the process. He commented that many private Chinese companies have the funds and desire to invest in the U.S. but are afraid that security concerns will prevent them from doing so. Xie was confident that companies that overcome these concerns and actually pursue investment opportunities in the U.S. can avoid political minefields through the hiring of top tier American law firms. ¶6. (SBU) Xie said that the Industrial and Commercial Bank of China (ICBC),of which Huijin holds a controlling interest, had been approached by an American bank seeking funding, via a sale of equity, to counter liquidity problems it faced in the sub-prime mortgage market. ICBC turned down the offer due to concerns about the politics surrounding any Chinese purchase of stakes in American financial institutions. CIC OPERATIONS AND STAFFING -------------- ¶7. (U) Xie offered several details about CIC operations and staffing: -- CIC may provide financing for Chinese companies via purchases of stocks or bonds in foreign, but not domestic, markets (with BEIJING 00006006 002.2 OF 002 "foreign" defined as including Hong Kong issud H shares). -- An announcement on personnel or CIC will be made by the end of this month. Currently, there is a seven-member preparatory working group that includes the following (all CIC titles that follow are added by post based on media reports and not yet officially announced): CIC President Lou Jiwei, CIC Chief Investment Officer Gao Xiqing, CIC Deputy General Manager Zhang Hongli, Deputy General Manager Xie Ping, PBOC Deputy Governor (any future CIC title unclear) Su Ning, and Huijin's Vice Chairman (any future CIC title unclear) Jessie Wang. Xie called reports that a CIC management team had already been selected "premature," asserting that changes in the line-up may still take place. -- Huijin will be the primary source of staffing for CIC, but there will be outside fund managers and other experts as well. CIC is currently in discussions with the State Council to allow a market-determined salary for staff, with incentives for performance, rather than using civil service salaries. COMMENT -------------- ¶8. (SBU) Gao Xiqing's comments about views of investment in the U.S. are particularly noteworthy. He attended Duke University and is clearly among the more pro-West and pro-reform economic officials in China. Xie Ping's high degree of confidence in the use of lawyers to help Chinese companies avoid political minefields when investing in the U.S. implies an excessively narrow focus on legal aspects, and insufficient attention to managing public perceptions and politics. RANDT