TREASURY SECRETARY PAULSON DISCUSSES FINANCIAL SERVICES WITH CSRC CHAIRMAN SHANG

C O N F I D E N T I A L BEIJING 007474

SIPDIS

SIPDIS

STATE FOR EAP/CM: PSECOR, JYAMAMOO

E.O. 12958: DECL: 12/12/2017
TAGS: CH ECON EFIN
SUBJECT: TREASURY SECRETARY PAULSON DISCUSSES FINANCIAL SERVICES WITH CSRC CHAIRMAN SHANG

Classified By: Ambassador Clark T. Randt, Jr. for reasons 1.4 b/d.

Summary
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1. (C) Summary. Treasury Secretary Paulsn met with CSRC
Chairman Shang Fulin in conjunction with the SED in Beijing
on December 11. Shang briefed Paulson on recent progress in
raising the quota for foreign investors in Chinese capital
markets to USD 30 billion. He also emphasized plans to
resume licensing of foreign securities joint ventures and
expand the scope of foreign credit rating agencies'
activities. Paulson stressed that as he works to keep U.S.
markets open to Chinese investors, it is easier to do so if
China opens its financial services sector by raising equity
caps for foreign firms. End Summary.


CSRC to Raise QFII Investment Ceiling
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2. (C) Shang informed Paulson that on December 9, CSRC raised
the quota for foreign investors to invest in Chinese capital
markets through the Qualified Foreign Institutional Investor
(QFII) program. (Note: The ceiling will be raised to USD 30
billion from the current USD 10 billion.) Shang told Paulson
that CSRC is currently drafting regulations that will resume
licensing of foreign securities firms' joint ventures,
meeting SED II commitments. He also explained that, in the
past, NDRC held authority for approving corporate bond
issuances, but this authority has shifted to CSRC. Shang
explained that credit rating agencies - including foreign
joint ventures - have already been involved in rating
domestic bonds, and he supports a gradual increase in the
scope of credit rating agencies' activities in China.


Still Too Early to Raise Equity Caps
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3. (C) Paulson stressed that as he works to keep U.S. markets
open to Chinese investors, it is easier to do so if China
opens its financial services sector by raising equity caps
for foreign firms. Shang assured Paulson that China is open
to outside competition and noted, "big trees cannot grow in
greenhouses." He stated that foreign securities companies
have made significant progress in the Chinese market, and
added that Goldman Sachs/Gaohua, UBS, and CICC are among the
top firms in the domestic IPO market. Shang asserted,
however, that "gradual opening of the financial services
sector is in the best interest of the U.S. and China." Using
a basketball analogy, Shang said that domestic financial
services firms are like high school athletes, whereas
American firms are NBA players. Though he agrees that it
would be ideal to invite more NBA players to join the team,
detractors say the highly-skilled NBA players would relegate
the high school students to the bench. Shang stressed that,
similarly, China's financial services sector should be opened
gradually in order to enable domestic firms to build capacity.


4. (C) Paulson replied that foreign financial services firms
operating in China would hire Chinese staff, in turn
developing NBA-level Chinese players, creating more jobs, and
benefiting the entire country. The Chinese government would
also set the rules and determine when there was a foul, he
explained. Paulson told Shang he understood that it would
not be easy for Shang to pursue raising foreign equity caps
in light of internal political debates on this issue, but he
requested nonetheless that CSRC commit to concrete steps to
further open the financial services sector. Shang replied
that CSRC could, for example, make a general announcement to
gradually raise equity caps and expand securities joint
ventures.
RANDT