SED Ambassador Alan Holmer Previews SED IV During

UNCLAS SECTION 01 OF 04 BEIJING 002076 STATE FOR EAP/CM and EB STATE PASS USTR FOR STRATFORD/WINELAND/READE/WINTERS NSC FOR SHRIER/TONG TREASURY FOR OASIA/ISA/DOHNER/HAARSAGER HHS FOR OGHA STEIGER SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EFIN ENV CH SUBJECT: SED Ambassador Alan Holmer Previews SED IV During May 22-23 Visit to Beijing (U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE ACCORDINGLY. NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS. ¶1. (SBU) Summary: Treasury Special Envoy for China and the Strategic Economic Dialogue (SED) Ambassador Alan Holmer discussed plans for the fourth round of the SED with Chinese officials during a May 22-23 visit to Beijing. In his discussion with NPC Vice Minister Wu Xiaoling, Holmer praised China's relief efforts following the May 12 earthquake in Sichuan Province, pressed for further financial sector liberalization, and encouraged greater exchange rate flexibility. General Administration of Quality, Supervision, Inspection and Quarantine (AQSIQ) Vice Minister Wei Chuanzhong sought Holmer's assistance in moving forward with two draft MOUs with the Department of Agriculture and the Department of Commerce. VM Wei also indicated that AQSIQ's relationships with the Department of Health and Human Services (HHS),the Consumer Product Safety Commission and the Environmental Protection Agency (EPA) have evolved over the past year and through signing of agreements at SED III have been productive and helped resolve problems. In a meeting with Ministry of Railways (MOR) Chief Economist Yu Bangli, Holmer and Department of Transportation Deputy Assistant Secretary for Transportation Policy Joel Szabat encouraged MOR to participate in the upcoming SED Transportation Dialogue. Ambassador Holmer also held meetings with a large group of American business representatives, leading Chinese academics, and Chinese and foreign media. End Summary. NPC VM Wu Xiaoling: Sichuan Earthquake and Inflation -------------- -------------- ¶2. (SBU) Treasury Special Envoy for China and the Strategic Economic Dialogue (SED) Ambassador Alan Holmer met May 22 with Wu Xiaoling, Vice Chair of the Financial and Economic Committee of the National People's Congress. Holmer praised the Chinese government's timely response and transparency following the devastating May 12 earthquake in Sichuan Province. Wu noted the Chinese government has became more mature in its response to crises, beginning with SARS in 2003, and continuing this year with the Chinese New Year snowstorms, and the Sichuan earthquake. According to Wu, the Chinese government has learned that transparency can improve public understanding of the challenges the government faces during crises. She contrasted the government's openness following the earthquake, which led to positive international press coverage, with the tight media restrictions following the March protests in Tibet and the negative press stories that ensued. [Note: Wu later in the meeting seemed to backtrack on this point by noting the restrictions on foreign journalists in Tibet were for the journalists' own safety. End note]. In response to Holmer's question on the impact of the Sichuan earthquake on China's economy, Wu noted that while the disaster has had a large impact on the local economy, Sichuan is not home to key industrial sectors so the earthquake will have only a limited effect on the Chinese economy as a whole. ¶3. (SBU) Wu said inflation remained the top economic concern of the Chinese government and predicted the continuation of China's tight monetary policy. Wu argued that U.S. policies were exacerbating Chinese inflation. First, an important factor for rising inflationary pressures in China is the higher price of imported commodities, such as oil. Since prices of oil and other commodities are settled in U.S. dollars, a weaker dollar tends to lead to higher commodity prices. Second, while the Federal Reserve's loosening of monetary policy and provision of large scale liquidity support is understandable given U.S. circumstances, the increase in global liquidity is flowing to other countries and contributing to global inflationary pressures. Given this, Wu said it is important for the U.S. government to take actions to achieve a greater degree of exchange rate BEIJING 00002076 002 OF 004 stability (she did not specify what policies). She suggested the SED focus on the impact of U.S. monetary policy on developing countries and how to increase coordination among financial regulators RMB Appreciation and IMF Report -------------- ¶4. (SBU) In response to Ambassador Holmer's inquiry on the role of RMB appreciation in reducing domestic inflation, Wu replied that RMB appreciation should help, however, there was a risk of over-shooting, which, coming at a time of weakening external demand, could harm excessively exporters in the coastal areas, leading to large job losses. Wu said the Chinese government remained focused on reforming exchange rate policy, but it is unrealistic to expect the RMB to continue its recent rapid appreciation. Wu said Congress and the Administration should be patient with the pace of RMB exchange rate reform. Holmer said the SED provided a forum for the frank exchange of views on sensitive topics such as exchange rates, and said he hoped China would move rapidly toward a more flexible exchange rate regime. ¶5. (SBU) Responding to FINATT's question on the Chinese reaction to the expected decision by the IMF to describe the RMB as "fundamentally misaligned," Wu complained the IMF looks excessively at foreign reserve holdings to judge whether a currency is misaligned. She said this approach ignores the importance of holding USD as the world's key reserve currency and may be based on faulty assumptions on how much foreign reserve is necessary to deal with external risks. Energy and Environment Cooperation -------------- ¶6. (SBU) Wu praised the SED's ten-year framework to deal with energy and environmental issues. She said it is important for the United States to ratify the Kyoto Protocol and provide strong leadership on a post-Kyoto accord. She also stressed the United States' energy- intensive lifestyle will need to change, and the U.S. should do more to reduce energy consumption to allow for the development of poorer countries. Wu said it was not realistic for the United States to ask China to reduce its greenhouse gas emissions while not committing to do the same thing. Ambassador Holmer noted the Administration is playing a leadership role in developing a post-Kyoto framework and looks forward to continue to work closely with China on this issue. AQSIQ Vice Minister Wei Chuanzhong -------------- ¶7. (SBU) In his May 23 meeting with General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) Vice Minister Wei Chuanzhong, Ambassador Holmer expressed condolences for the losses suffered during the Sichuan earthquake and reiterated the United States' offer of assistance. Vice Minister Wei thanked Holmer for his expressions of concern and noted AQSIQ has already sent 29 rescue teams, or more than 600 people, to participate in the relief effort. Food and Product Safety -------------- ¶8. (SBU) Ambassador Holmer and Vice Minister Wei reviewed the achievements of the previous rounds of the Strategic Economic Dialogue. At SED III, AQSIQ signed three agreements with U.S. agencies, including an MOU on food and feed safety with the Department of Health and Human Services (HHS),an MOU on trade in alcohol and tobacco with Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB), and an MOU on protection of human health and the environment with the Environmental Protection Agency (EPA). BEIJING 00002076 003 OF 004 Vice Minister Wei expressed his appreciation for previous cooperation with the EPA, the Consumer Product Safety Commission (CPSC) and HHS and said that these relationships have strengthened cooperative solutions and prevented problems. Ambassador Holmer agreed the two sides had made good progress on these issues. Looking Forward -------------- ¶9. (SBU) Vice Minister Wei raised the issue of three safety-related documents that both sides have been working on recently. The first is a Memorandum of Understanding concerning standards and conformity assessment; the document has been reviewed by AQSIQ and is currently under final review at the Department of Commerce. The signing deadline for this document was originally set for December 31, 2008, although AQSIQ would like to sign the document as soon as possible. The second document is a "progress report and work plan" related to the 2007 MOA between HHS and AQSIQ on Food and Feed Safety, which Minister Li Changjiang and HHS Secretary Leavitt would sign during SED IV. This document has been reviewed by AQSIQ and returned to the Food and Drug Administration (FDA) for consideration and comment. The third agreement is a draft MOU with the U.S. Department of Agriculture (USDA); Wei said AQSIQ is still awaiting comments from the U.S. side and asked Ambassador Holmer to urge USDA to respond quickly. [Note: AQSIQ and USDA technical level officials have been exchanging drafts and working toward agreement on several difficult issues in an effort to craft a MOU that can be signed at SED IV. End Note.] Ministry of Railways -------------- ¶10. (SBU) During a May 23 meeting with Ministry of Railways (MOR) Chief Economist Yu Bangli, SED Ambassador Holmer expressed his deepest condolences for the loss of life and devastation resulting from the earthquake in Sichuan Province. He also invited MOR to join the SED IV transportation forum, which is expected to focus on the areas on infrastructure, innovative finance, congestion and supply chain logistics. Yu said he personally agreed that a transportation forum would be useful and indicated that MOR would coordinate with the Ministry of Finance (MOF) and Ministry of Transportation (MOT). ¶11. (SBU) Department of Transportation Deputy Assistant Secretary for Transportation Policy Joel Szabat said the forum would focus on transportation challenges that affect trade and commerce between the United States and China. Szabat stressed that incorporating rail was vital to the Forum's success and noted that one of the biggest challenges facing both countries was connecting roads and railroads to ports and airports. Yu agreed that rail was important to such a forum and said most Chinese travel via rail. He remarked that 140 million Chinese traveled by rail during the Chinese Lunar New Year this past February. Yu also noted that there is a Medium and Long-Term Plan and an 11th Five Year Plan for intermodal railway development. ¶12. (SBU) MOR Deputy Director General Zhang Jianping said the Medium and Long-Term Plan covers 2003-2020 and was approved by the State Council in early 2004. According to Zhang, the plan initially called for China to have 100,000 kilometers of railway tracks by 2020. However, due to rapid economic development, Zhang said the plan was adjusted to establish a new goal of 120,000 kilometers of railway tracks by 2020. Public Diplomacy -------------- ¶13. (SBU) Ambassador Holmer conducted a breakfast briefing for approximately 75 American business representatives at an event co-hosted by AmCham, the U.S.-China Business BEIJING 00002076 004 OF 004 Council, and the U.S. Information Technology Office. In addition, Ambassador Holmer discussed U.S.-China economic relations with Professor Wang Jisi and Professor Wang Yong of Beijing University's Center for International and Strategic Studies and held a roundtable with Beijing University students. ¶14. (SBU) Ambassador Holmer participated in a webchat with China.org and conducted interviews with China Radio International (CRI),the 21st Century Business Herald (circ 480,000),and Dow Jones Newswire. The wire service article appeared the same day, while 21st Century Business Herald ran its article on May 23 noting the purpose of Ambassador Holmer's visit and his comments on U.S. assistance to China for the Sichuan earthquake. The webchat was available online from Monday, May 26, the same day CRI aired the radio interview. The press events allowed Ambassador Holmer to underscore the "win-win" framework of the SED and the importance of open markets to the global economy. ¶15. (U) Ambassdor Holmer's delegation cleared this cable. PICCUTA