C O N F I D E N T I A L SECTION 01 OF 04 SHANGHAI 000769

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EEB
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LOI/READE
USDOC FOR 4420
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN
TREASURY FOR EXEC - TSMITH, OASIA/ISA -DOHNER/BAKER/CUSHMAN
TREASURY FOR AMB HOLMER/MEDEIROS/WRIGHT
TREASURY FOR SOBEL AND MOGHTADER
NSC FOR MCCORMICK AND TONG

E.O. 12958: DECL: 12/4/2032
TAGS: EFIN ECON PREL CH
SUBJECT: SHANGHAI ACADEMICS, BUSINESSMEN TO AMBASSADOR HOLMER: KEEP
SED STRATEGIC

REF: A. SHANGHAI 452


B. SHANGHAI 337

C. BEIJING 7133

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CLASSIFIED BY: Christopher Beede, Political/Economic Chief, U.S.
Consulate Shanghai, Department of State.
REASON: 1.4 (b), (d)



(U) Classified by Political/Economic Section Christopher Beede
for reasons 1.4 (b) and (d).


1. (C) Summary: Shanghai-based academics and businessmen
stressed the importance of having the Strategic Economic
Dialogue (SED) focus on long-term policy issues between the two
countries in order to insure its relevance and sustainability
beyond 2009 in meetings with Treasury Department SED Special
Envoy Ambassador Holmer. During his mid-November visit to
Shanghai, academics also noted that anti-globalization and
nationalistic forces in both countries threatened increased
United States-China interdependence. China's economy is "a
little overheated," but not dangerously so given the size of
China's economy and the capabilities of its policy-makers.
China's economy is increasingly in the private sector's hands.
This trend is being resisted by the "old-line" ministries and
encouraged by the newer regulatory commissions. As a result of
this trend, there are now a plurality of voices and interests
deciding China's economic future. Foreign capital is finding it
increasingly difficult, if not impossible, to enter China and
mergers and acquisitions deals are being blocked by the Ministry
of Commerce as China attempts to cope with its over-liquidity

problems. End summary.


2. (SBU) Strategic Economic Dialogue Special Envoy Ambassador
Alan Holmer discussed how to advance USG economic policy goals
in China with Shanghai-based academics and two groups of
international businessmen during his November 15-16 visit to
Shanghai. Additionally, Ambassador Holmer met with Citigroup
China CEO Richard Stanley, gave a speech on SED goals at an
American Chamber of Commerce event, and was interviewed by the
China Business Television Network. The Treasury Department's
delegation also included SED Senior Policy Advisor Daniel
Wright, Chris Winship and Embassy Beijing Finatt.


3. (SBU) On November 15, Ambassador Holmer joined the Consul
General at a dinner hosted by Shanghai Institute for
International Studies (SIIS) President Yang Jiemian. The
sustainability of the SED beyond the current U.S.
administration, overcoming resistance from anti-globalization,
anti-competition, and nationalistic groups, and maintaining the
strategic nature of the SED were concerns put forth by Chinese
participants.

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Maintaining the SED's Importance, Making It Sustainable
-------------- --------------


4. (C) SIIS Vice President Chen Dongxiao noted that the SED has
provided China and the United States with a valuable mechanism
for policy dialogue that has helped establish new habits of
cooperation between the two countries. Both the Chinese
Government and academics hope that the SED is sustainable beyond
Secretary Paulson's tenure at the Treasury Department. Chen

SIPDIS
also expressed concerns that the SED would be "downgraded" from
the strategic level and become "too occupied with post-WTO trade
issues and JCCT-like" deliverables. Despite this, Chen said
that the Chinese Government has agreed to strike a balance
between strategic and long-term issues and short-term agreements.


5. (C) Ambassador Holmer said that the reason the SED is being
held immediately after the JCCT is to allow the more
transactional issues to be decided in the JCCT context.
However, he noted, it appeared that the Chinese side is not
interested in addressing deliverables in either the JCCT or the
SED context. "While forming a long-term vision, we do need to
have sufficient benchmarks to make sure that the mechanism

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works." Deliverables "show progress towards an ultimate vision;
they are signposts along the road that demonstrate where we are
going," he said.


6. (C) Shanghai Academy of Social Sciences (SASS) Vice President
Huang Renwei said that Beijing supported the SED process, but
wondered whether or not it is as welcome in Washington. He
expressed concern about Congress's perception of the SED.
Ambassador Holmer responded that this further underscored the
necessity of the SED providing concrete examples of successful
cooperation. This would show the American people the benefits
of engagement with China.


7. (C) SASS's Huang said that the SED should be forward-looking,
focusing on issues that are three to five years ahead, or on
immediate critical issues such as global economic crises that
threaten both China and the United States. If the SED became a
mechanism to coordinate policy between the two countries, then
it would be sustainable into the future. However, focusing only
on short-term items would weaken the value of the SED as a
policy-making mechanism, he said.


8. (C) SIIS's Yang, noting that he had passed on a message from
Daniel Wright to Bejing officials (ref a), said that Beijing had
assured him that officials there want to make the SED into an
ongoing and sustainable policy dialogue mechanism. The message
from Beijing was: "The ball is on the U.S. side." Yang said
that unless the December 2007 SED is successful, he doubted
whether there would be a December 2008 SED.

-------------- --------------
Pre-Globalization Forces Threaten Deepening Interdependence
-------------- --------------


9. (C) SIIS's Chen observed that "pre-globalization" forces in
both China and the United States threaten to undermine the
deepening economic interdependence between the two sides. The
Chinese are interested in how the United States will deal with
these anti-globalization forces that will be looking for
scapegoats should the U.S. economy weaken. Both Chinese
academics and government officials will be closely watching the
rhetoric coming from the Presidential primary races of both
parties.


10. (C) SASS Institute of World Economy Deputy Director Xu
Mingqi said that both the United States and China have
influential interest groups that have a nationalistic and
protectionist outlook. In China, these groups are led by big
and influential companies that are facing unwanted competition
from abroad. The Chinese Government attempts to placate these
groups by using economic policy to address their economic
interests. However, as an economist, Xu knows that the economic
results of protectionism are "bad" and he stressed that Chinese
officials need to study economics.

-------------- --------------
Benefits of Globalization Spread Widely, Pain Felt Narrowly
-------------- --------------


11. (C) SIIS Institute of World Economy Research Assistant Zha
Xiaogang asserted that protectionist sentiment is stronger in
the United States -- especially during a presidential campaign
-- than in China. The benefits of globalization, in the form of
cheaper trade goods, are spread widely and broadly across
society. The downside of globalization, however, in the form of
lost jobs is focused narrowly. The United States Government
needs to address those who are losing out to trade.


12. (C) Protectionism is different than nationalism, said Zha.
China tends to more nationalism than the United States. Though
China is working very hard to legalize many economic rules and
practices, China still needs to avoid the extremes of blaming
every setback on economic nationalism.

--------------
Can U.S. Make Promises Beyond 2009?

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--------------


13. (SBU) At a lunch hosted by the Consul General on November
16, Ambassador Holmer met with Chinavest President Robert
Theleen, Standard Chartered Senior Economist Stephen Green,
Shanghai Municipal Financial Services Office (SHFSO) Director
Fang Xinghai, eTang CEO Tang Haisong, Shenyin and Wanguo
Securities Company Chairman Ding Guorong and Pudong Government
Research Vice Director Zhang Yong.


14. (C) SHFSO's Fang said that the Chinese leadership is keenly
aware of the United States political calendar and its affects on
commitments that Secretary Paulson and others are able to make
during the upcoming SED meetings in December. Chinese
negotiators "will know that the other side does not have the
ability to make commitments beyond 2009." There is no mystery,
on the other hand, who will be in charge in China, Fang added.
The Chinese leadership is "always able to make decisions in the
interests of the country as a whole and is not dependent on
special interests."

--------------
Old China vs. Regulatory China
--------------


15. (C) Chinavest's Theleen has observed a "tectonic shift" in
Chinese Government in the past decade, accelerated since China's
2001 entry into the World Trade Organization. Economically and
politically, there is no longer a single voice in Beijing that
is making policy. The Chinese Government is "getting smarter."
But, the Chinese Government has split into two camps:
"Regulatory China" and "Old China." The traditional ministries
represent interests and micro-management governing techniques of
Old China, while the historically younger Commissions represent
the future of Regulatory China. The technocrats who make up
Regulatory China are more modern and rule-of-law oriented than
those in the Old China camp.


16. (C) The conflict between the two camps is most obvious in
the fault line that has developed around the question of "Who
owns the Chinese economy?" In the post-WTO era, that question
is largely being answered by taking the economy out of the hands
of the government and through privatization, putting the economy
into the hands of the Chinese people. Theleen added that when
he meets privately with Chinese officials representing
Regulatory China, he is told that Secretary Paulson and the SED
process are not pushing hard enough to advance the reforms that
these officials believe China needs.

--------------
China is a Little Overheated, But No Worries
--------------


17. (C) SHFSO's Fang said that the United States should not be
concerned about a little overheating in China since China, as a
continental economy, is more than capable of absorbing the heat
currently being produced. While there is inflation in food and
consumer prices, "we are not so overheated that we are in danger
of collapse," he said. Standard Chartered's Green agreed, but
said that there is always the danger that the Chinese Government
might overreact given the already distorted system caused by its
restrictive capital controls and over-liquidity problems.


18. (C) Fang responded to Green's concerns, noting that when the
market is "imperfect as China's is" there is always room for
government policies to adjust the economy. "It is too early to
prejudge the government's actions on the economy. They have
been managing the economy for the last twenty years. They have
a lot more information about what is actually happening in the
economy and they know what they are doing," he said.

-------------- --------------
Mergers and Acquisitions: Difficult -- If Not Impossible
-------------- --------------


19. (C) Several interlocutors discussed the problem that foreign

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companies are having getting approval by the Chinese Government
for large-sized mergers and acquisitions. Since the new M&A
rule was released in September 2006 (Ref B), no deal has made it
through the new process, noted Chinavest's Theleen. In fact,
Theleen knew of more than 35 large industrial projects,
involving significant amounts of technology transfer along with
the investment that are pending at the Ministry of Commerce
(MOFCOM) and there is starting to be a "panic" about the
inability of capital to flow through legitimate channels into
China. Theleen noted the danger that this problem had to enter
the U.S. political process as large multi-national companies
began complaining about the barriers China is raising to their
investments.


20. (C) eTang's Tang said that friends at MOFCOM told him that
the China Securities Regulatory Commission had focused attention
on China's stock market bubble and that the government is taking
the steps it needed to increase the supply of good companies
listing on Chinese bourses, rather than allowing them to list
overseas. The newly-released catalogue of investment (Ref C)
demonstrated that while China is interested in guarding it
economic and national security, it is still open for business --
especially in the areas of life sciences and the environment.


21. (U) Ambassador Holmer's delegation did not have opportunity
to clear this report.
JARRETT