CHINA/CFIUS: TREASURY DAS DALY, CHINESE OFFICIALS DISCUSS

UNCLAS SECTION 01 OF 02 BEIJING 006070 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/CM PSECOR AND EEB/OMA TREASURY FOR OASIA DALY/DOHNER/HAARSAGER/CUSHMAN USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN USTR FOR STRATFORD/WINTER/ALTBACH/MCCARTIN/KEMP E.O. 12958: N/A TAGS: ECON PGOV EINV ETRD EFIN CH SUBJECT: CHINA/CFIUS: TREASURY DAS DALY, CHINESE OFFICIALS DISCUSS MERGERS AND ACQUISITIONS ISSUES BEIJING 00006070 001.2 OF 002 -------------- SUMMARY -------------- ¶1. (SBU) Treasury Department Deputy Assistant Secretary (DAS) Nova Daly held discussions with Chinese Government officials and business leaders relating to bilateral investment issues on September 10, ¶2007. During the meetings DAS Daly provided an introduction to the new Committee for Financial Investment in the United States (CFIUS) law while also emphasizing the need for bilateral cooperation to guard against the rise of trade and investment protectionism. In response to DAS Daly's remarks, National Development and Reform Commission (NDRC) officials noted their desire for more direct Chinese investment in the United States. The officials also outlined China's emerging foreign direct investment (FDI) procedures. Ministry of Commerce (MOFCOM) officials stated that Chinese enterprises are poised to begin investment in the United States, but need more information to enable them to do so. Chinese national oil company and Chinese Investment Corporation (CIC) officials echoed others' calls for more CFIUS details. CIC officials also provided details surrounding the formation of their organization. End Summary. -------------- -------------- NDRC HYPES INVESTMENT ABROAD, EXPLAINS FDI REVIEW -------------- -------------- ¶2. (SBU) NDRC Department of Foreign Capital Utilization Deputy General Li Guohui told DAS Daly that Beijing is encouraging Chinese enterprises to invest in the United States. The enterprises are interested in using the investment to gain greater access to United States technology and managerial expertise. Li stated that Chinese enterprises find it difficult to acquire technology in the United States because of restrictive export laws. Beijing hopes that the new CFIUS law will enable Chinese enterprises to become more active in the United States market. Recent investments by China overseas, including that in the United Kingdom's Barclay's Bank, have been met by some negative reactions, said Li. Beijing believes critics should not only recognize the benefits of foreign investment in China, but Chinese investment abroad as well. ¶3. (SBU) Deputy General Li stated that China is open to investment from every country. FDI is regulated by China's foreign investment catalogue which is updated every two years. Li stated that each sector of China's economy is characterized in the FDI catalogue as either: encouraged, restricted, or closed. China's economy has increasingly opened to foreign investment during the past twenty five years. Beijing opened areas such as soft drink production to FDI during the early stages of economic reform. (Comment: It is interesting that Li chose this example, since carbonated soft drinks are rather anomalously included in the restricted category in the current version of the investment catalogue. End Comment.) More recently, after its accession to the World Trade Organization (WTO), China opened up the service sector to FDI. Li said that other sectors, including the financial sector, will open more gradually. These sectors will open as the legal framework necessary to protect foreign investors is created, according to Li. ¶4. (SBU) Deputy General Li stated that in addition to the guidance provided in the FDI catalogue, Beijing has established separate committees for review of proposed FDI in the manufacturing and financial sectors. The committees are so far operating on an ad hoc basis, but China's State Council plans to issue instructions soon formalizing the committees' structure. Li suggested that the State Council will create a supervisory body under which the committees will reside. The State Council in the future may also establish review committees for other sectors if needed. Li said that the manufacturing committee is comprised of MOFCOM, NDRC, and the Ministry of Finance (MOF) with NDRC serving as the committee chair. The financial committee is made up of the NDRC, People's Bank of China (PBOC),MOF, and the China Security Regulatory Commission (CSRC) with PBOC serving as the chair. The State-owned Assets Supervision and Administration Commission (SASAC) also plays an important role in the committees. Li noted that cases are referred to the committees by MOFCOM after it does an initial review of the proposed transaction, but indicated that the State Council has the power to directly refer a case to a committee as well. -------------- MOFCOM BETTERING BILATERAL INVESTMENT TIES -------------- ¶5. (SBU) MOFCOM Department of Foreign Economic Cooperation Director General (DG) Wu Xilin stated that Chinese enterprises are now positioned to begin investing abroad. They will do so in adherence BEIJING 00006070 002.2 OF 002 to the laws and regulations of the countries in which they are doing business. Wu noted that this is why Beijing hopes some ambiguities in the new CFIUS law, such as the definition of critical infrastructure, can be clarified. MOFCOM would like to provide as much information as it can to China's enterprises as they go abroad. MOFCOM also is strengthening its ties to the United States Department of Commerce and other agencies to better facilitate bilateral trade and investment. Wu stated that MOFCOM Assistant Minister Chen Jian will lead a trade and investment delegation to the United States in late September. The delegation plans to meet with Commerce Department officials during a stop in Washington. (Note: DG Wu stated that the delegation will depart China for Canada on September 16. They will arrive in the United States after three days of meetings in Canada. End Note.) -------------- CNOOC SEEKS MORE CIFIUS PROCESS DETAILS -------------- ¶6. (SBU) China National Overseas Oil Company (CNOOC) Vice President Zhu Mingcai told DAS Daly that is important for Chinese enterprises to clearly understand the CIFIUS process before investing in the United States. Beijing felt that there was political prejudice against CNOOC during the company's aborted attempt to purchase Unocal in 2005. Other CNOOC officials told DAS Daly that the CIFIUS process appears to discriminate against state-owned companies like CNOOC because it requires disclosure of transaction details before a deal is finalized. The Treasury Department should publicize details surrounding CIFIUS to enable Chinese enterprises to gain a better understanding of the process, according to Zhu and other CNOOC officials. (Note: CNOOC officials asked several questions during the meeting relating to CIFIUS' jurisdiction over a particular transaction type. Specifically, the officials sought determine whether a state-owned company would be subjected to CIFIUS review if attempting to purchase an United States-based holding company whose assets were entirely located abroad. End Note.) -------------- SAFE CEO LAYS OUT CIC DETAILS -------------- ¶7. (SBU) Xie Ping, CEO of Central SAFE Investments (Huijin) told DAS Daly that CIC may provide financing for Chinese companies via purchases of stock or bonds in foreign, but not domestic, markets (H shares). An announcement on personnel for CIC will be made by the end of September. Currently, there is a seven-member preparatory working group that includes Lou Jiwei, Gao Xiqing, Zhang Hongli (MOF),Xie Ping, Su Ning (PBOC) and Jessie Wang. Xie called reports claiming that the management team had been selected premature, and noted that personnel changes may still take place. Huijin will be the primary source of staffing for CIC, but additional outside fund managers and experts will be brought aboard. CIC has requested the State Council allow CIC staff to earn market-determined salaries augmented by performance incentives rather than civil services salaries, according to Xie. ¶8. (SBU) Xie suggested that the Treasury Department engage in more Chinese media outreach to explain the CFIUS program and new investment law. Many private Chinese companies have the funds and desire to invest in the United States, but are afraid that United States security concerns will prevent them from doing so. Xie mentioned that the Industrial and Commercial Bank of China (ICBC), of which Huijin holds a controlling interest, was 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 their perception that political vitriol would surround any Chinese purchase of a stake in an United States financial institution, according to Xie. -------------- CLEARANCE -------------- ¶9. (U) DAS Daly did not have an opportunity to clear this cable. Randt