Secretary Geithner's June 1 Meeting with Vice

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TAGS: ECON EFIN PREL CH
SUBJECT: Secretary Geithner's June 1 Meeting with Vice
Premier Wang Qishan in Beijing

Summary
--------------

1. (SBU) In a June 1 meeting in Beijing, Vice Premier
Wang Qishan told Treasury Secretary Geithner that
discussion in the Economic Track of the late July
Strategic and Economic Dialogue (S&ED) should be
strategic, include bilateral and global issues, and
neither duplicate nor replace discussions in other fora.
On North Korea, Wang said the U.S. and China pursue the
same general policy direction toward North Korea. He
appreciated the U.S. position on the RMB but added that
the economic environment remains unstable. Wang said U.S.
and Chinese responses to the global financial crisis are
more similar than those of other countries. He believes
the S&ED also provides a venue to discuss implementation
of G-20 commitments and to coordinate positions for the
next G-20 meeting in September, for which China sees
three major issues: restore global economic growth,
encourage international financial institution reform, and
establish a framework for future economic growth.


2. (SBU) Summary, continued. Secretary Geithner told
Vice Premier Wang that the economic track of the first
S&ED should be comprehensive and strategic in nature,
while also generating concrete results on financial,
economic, and broader international issues. He urged
China to work closely and cooperatively with the U.S. in
responding to recent DPRK actions, and also hoped the two
countries could work cooperatively to limit Iran's
capacity to advance its nuclear program. He noted
appreciation for China's actions to boost economic growth.
Geithner briefed Wang on the U.S. economic and financial
situation, explaining the USG is very committed to reduce
its fiscal deficit over time. He noted U.S. support for
IFI reform and a greater role for China. Geithner said
the USG at this time is not contemplating a new set of
initiatives and reforms for the next G-20 summit, as the
world needs a period of calm and stability on the
financial front to allow time for recovery. He also
emphasized the need for China to continue to rebalance
the economy (including through greater renminbi (RMB)
flexibility),advance financial sector reform, and permit
prices to play a greater role in allocation of
resources. End Summary.

Private Meeting: S&ED, North Korea, Economy
--------------

3. (SBU) In a 20-minute one-on-one meeting with VP Wang
on June 1, Secretary Geithner said he wants the S&ED to
be results-oriented, with cabinet-level attendees
including senior financial regulators and development of
meaningful outcomes prior to the first session. Wang
responded that discussion in the Economic Track should be
strategic and neither duplicate nor replace discussions
in other fora. He stressed the importance of the
Presidents' special representatives for the S&ED's
Economic Track having a strong channel of communication.


4. (SBU) On North Korea, Geithner noted that Treasury
Under Secretary Levey would accompany State Deputy
Secretary Steinberg to Beijing later that week and urged
China to work closely and cooperatively with the United
States in responding to recent DPRK action, including
through developing effective financial sanctions. Wang
said the United States and China pursued generally the
same policy direction toward North Korea, with
differences mainly over the intensity of particular
actions. Wang suggested that other channels take the
lead on this issue. Geithner also hoped the United
States and China could work cooperatively to limit Iran's
capacity to advance its nuclear program.


5. (SBU) Geithner noted his appreciation for actions
China has taken to date to boost growth. He said he
would support China's exchange policy in public
statements, as publicly emphasizing U.S.-China
cooperation is critical to shoring up investor confidence.
However, in private China should understand clearly that
the RMB needs to resume its appreciation versus the U.S.
dollar. Wang said he appreciated the U.S. position on
the RMB, but stressed that China's exchange rate policy
has an important impact on economic stability and that
the economic environment remains unstable, with analysts
continuing to disagree over the near term outlook. He

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said his article in the Economist magazine prior to the
London G-20 Summit has stated clearly China's policy on
its exchange rate and reserve management policies.


6. (SBU) On economic reform, Wang said the Chinese
government wants to move faster, but has a responsibility
to its 1.3 billion people. In the financial sector, he
argued that China has been able to implement reforms in
just a few years that took the United States much longer
to implement. Geithner noted the U.S. Congress is close
to passing approval of a U.S. contribution to the New
Arrangements to Borrow and urged China to make an NAB
contribution.

U.S. Economy and the Global Crisis
--------------

7. (SBU) In their expanded meeting, which included
Minister of Finance Xie Xuren, People's Bank of China
Governor Zhou Xiaochuan, Vice Foreign Minister He Yafei
and other senior officials, Geithner briefed Wang on the
U.S. economic and financial situation. The USG is very
committed to laying out a path to bring the fiscal
deficit down over time, and the Federal Reserve, FDIC and
Treasury all will unwind their extraordinary
interventions as confidence in the system increases. The
healthcare reform plan proposed by President Obama aims
to decrease the rate of growth in health care costs; the
plan will be implemented in a deficit-neutral manner, and
over the longer term savings generated by the plan will
help reduce fiscal deficits.


8. (SBU) Wang said U.S. and Chinese responses to the
global financial crisis are more similar than those of
other countries in terms of fiscal, monetary, and
industrial policy, as well as actions to address social
security and unemployment. Responses by European
governments were less uniform. The Chinese financial
sector is at a different state of development and has not
been directly impacted by the crisis. China, however,
remains highly dependent on U.S. and global demand, so it
is not immune.

Strategic and Economic Dialogue
--------------

9. (SBU) Geithner observed that the USG wants to build a
relationship with China, similar to those with the G-5
and G-7 countries since the late 1970s, that would ensure
bilateral communication on economic developments to
forestall any "surprises." To that end, the S&ED
economic track should be comprehensive and strategic in
nature, while also generating concrete results on
financial, economic, and broader international issues.


10. (SBU) Wang replied that, given USG institutional
arrangements, the economic track will not include climate
and energy issues. Outcomes should deepen mutual
understanding and cooperation on major economic and
financial issues and ensure that both economies maintain
growth.


11. (SBU) For the Economic Track, Geithner and Wang
agreed there should both be a joint outcomes document and
a public joint fact sheet released at end of the S&ED
meetings. Wang said the outcomes of the first economic
dialogue should focus on deepening mutual trust and
reflect cooperation in fighting the global financial
crisis.

G-20 Summit and Coordination
--------------

12. (SBU) Wang said the S&ED also provides a venue to
discuss implementation of results from the two previous
G-20 meetings and to coordinate positions for the next G-
20 meeting in September. Emphasizing the importance of
3Rbf0M4a7I}W*jVQ%ndon Summit, and to increase the IFI quotas
of developing countries; and third, establish a framework
for future economic growth.


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13. (SBU) Geithner said the U.S. supports IFI reform and
a greater role for China. He agreed on the need to
address the specific needs of the poorest developing
nations, and provided an update on the status of
legislation working its way through the House and Senate
to provide additional funding to the IMF, including
through the New Arrangements to Borrow.


14. (SBU) Wang said China committed in principle at
London to funding the New Arrangements to Borrow (NAB) at
the IMF. China has chosen to buy IMF bonds, and in the
future will release information on their purchases
through the State Administration of Foreign Exchange
(SAFE). In response, Geithner emphasized the need for a
multilateral approach such as the NAB to ensure
sufficient permanent resources for the IMF, and said he
hopes China can consider this modality.


15. (SBU) Wang said China places great importance on the
third G-20 summit scheduled for September. Geithner
replied the USG at this time is not contemplating a new
set of initiatives and reforms, as we want to keep
expectations and efforts focused on near-term reforms.


16. (SBU) Geithner observed that all parties now agree
that the world needs a period of calm and stability on
the financial front to allow time for recovery, that the
USG will contribute to this, and that we welcome Chinese
statements and actions that contribute to this process.
He emphasized the need for continuing China efforts to
rebalance the economy (including through greater renminbi
(RMB) flexibility over time),advance financial sector
reform, and allow prices to play a greater role in
allocation of resources. Finally, Geithner said the USG
recognizes that this increased RMB flexibility will
require more time. In response, Wang agreed on the
importance of stability. He reassured Secretary Geithner
that Chinese officials will not take unhelpful actions;
if a need for such action arises, the Chinese Government
first will communicate with the USG.


17. (SBU) Comment: Wang repeated the line of other
senior Chinese economic officials that China can not be
assured of its recovery until the U.S. economy recovers.
On China's exchange rate policy, Wang reiterated what we
have heard from some other interlocutors: the Chinese
view stability of the RMB vis--vis the U.S. dollar as an
important nominal anchor at a time of exceptional global
financial and economic volatility. This implies that
when China is more confident that financial conditions
and demand in its major trading partners have stabilized
and begun to recover, it is likely to allow for greater
bilateral exchange rate flexibility. This approach also
attempts to put the burden back on China's trading
partners to stabilize their economies before pressing
China for greater exchange rate flexibility. Both sides
appeared to agree that, while financial sentiment remains
fragile, it is best to limit public expressions of
concerns about financial assets or policies.
PICCUTA