SHANGHAI OFFICIALS STRESS COOPERATION WITH U/S MCCORMICK

UNCLAS SECTION 01 OF 02 SHANGHAI 000458

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E.O. 12958: N/A
TAGS: CH ECON EFIN
SUBJECT: SHANGHAI OFFICIALS STRESS COOPERATION WITH U/S MCCORMICK


1. (SBU) Summary. Treasury U/S McCormick and delegation met
Shanghai Vice Mayor Tu Guangshao and Bank of Communications
Chairman Hu Huaibang on October 21 in Shanghai. Both contacts
emphasized that China is focused on assuring stable domestic
economic growth during the fallout of the global financial
crisis, and that this is not only good for China, but good for
the United States and good for the world economy. Accompanying
Vice Mayor Tu were Dr. Fang Xinghai of the Shanghai Financial
Services Office and Mr. Tian Chunhua of the Shanghai Finance
Bureau. U/S McCormick's delegation included Finatt Loevinger
and Shanghai CG Camp, among others. End summary.

McCormick: U.S. Responding to Financial Crisis


2. (SBU) U/S McCormick outlined for his counterparts four sets
of initiatives the U.S. Government has taken in recent weeks.
In response to these initiatives, said McCormick, the financial
markets have stabilized, although equity markets continue to be
volatile:

-- The Federal Reserve has injected much liquidity into market
and has followed up with measures to stimulate the commercial
paper market.

-- The SEC is addressing market manipulation concerns.

-- The FDIC has implemented additional guarantees for the
banking system, which should allay depositor concerns and unlock
the interbank lending market.

-- The U.S. banking sector is being recapitalized.


3. (SBU) It is not clear that Chinese investors and
institutions understand these constructive actions already
taken, said U/S McCormick. The U.S. actions should improve
credit markets and have prevented financial meltdown. Measures
of recent days have also reduced counterparty risk, so Chinese
banks' interbank lending to foreign banks should be less risky
than they feared earlier.


4. (SBU) McCormick noted that on the one hand, Chinese
authorities are well engaged, and have acted responsibly.
However, actions that are rational and prudent by individual
Chinese institutions and investors in sum can unsettle markets
and send a message very different from the one of support and
cooperation that the Chinese leadership wants to send, said
McCormick. Examples of these actions include: money market
mutual fund withdrawals, pulling back in lending of Treasury
securities in the US market and lending of RMB to foreign banks
in the Chinese market due to concerns about counterparty
exposure, and shifting to shorter maturities for holdings of
debt issued and guaranteed by Fannie and Freddie.

Vice Mayor Tu: China Wants Stable Economic Growth



5. (SBU) The Chinese Government sees that recovery of stability
in U.S. financial markets is important for the whole world,
including for China, said Tu. China will cooperate with the
United States and do its own job to assure financial stability
in China. Helping the U.S. financial markets is one of the
means of assuring financial stability in Shanghai. China is the
biggest investor in the U.S. financial markets, and the
relationship between the U.S. financial markets and the Chinese
economy is large. China hopes that U.S. measures will take
effect quickly.


6. (SBU) Tu said China and Shanghai are encouraging Shanghai
banks to lend to foreign banks -- this is important to
Shanghai's own financial stability. China will seek financial
market stability in the Shanghai stock market as well. Some

SHANGHAI 00000458 002 OF 002


Shanghai banks encountered minor liquidity problems with foreign
counterparties, so these banks understandably paid more
attention to risks, said Tu.


7. (SBU) While China recognizes the need to increase Chinese
domestic consumption, this is a difficult task, said Tu. Much
of China's economic growth has been linked to exports, but
economies in many destination markets for China's exports are
now slowing.

BoCom Chairman Praises U.S. Actions


8. (SBU) Bank of Commerce (BoCom) Chairman Hu Huaibang's
remarks at his meeting with U/S McCormick had a similar tone --
that stabilizing China's economic growth will help support the
U.S. economy. Key points:

-- Hu said he and his colleagues have the impression that "we
are on the correct track," especially when the United States and
other governments are coordinating their actions.

-- BoCom is positive on long-term U.S. growth prospects -- that
is why BoCom wants to open a branch in San Francisco.

-- As an example of how Chinese banks are playing an important
role in stabilizing the global market, Hu said that China
Investment Corporation (CIC) not only maintained its stake in
Morgan Stanley during that financial institution's troubles, but
had been considering increasing its stake. Hu transferred from
CIC, where he was chief supervisor, to BoCom in September, he
said.

Bio Note


9. (SBU) Tu served as Vice Chairman of the China Securities
Regulatory Commission prior to his selection as a Shanghai Vice
Mayor in December 2007. His portfolio includes banking and
personnel, and assisting in financial administration, taxation
and auditing. Tu speaks fluent, although accented, English, and
at times appeared to misunderstand technical financial terms
used by U/S McCormick. Tu seemed eager to engage on a personal
level, at one point joking with McCormick that a picture
accompanying a McCormick interview published in a Chinese
newspaper was too serious. Tu has a booming laugh that he
deployed several times during the half-hour meeting.


10. (U) Beijing Financial Attache David Loevinger has cleared on
this cable.
CAMP