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### Viewing cable 10BEIJING352, CHINA: S&ED II DATES AND TOPICS; RMB APPRECIATION; ECONOMIC

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
10BEIJING352 | 2010-02-10 09:09 | 2010-12-26 21:09 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Beijing

`

    VZCZCXRO0314
    PP RUEHCN RUEHGH
    DE RUEHBJ #0352/01 0410907
    ZNR UUUUU ZZH
    P 100907Z FEB 10
    FM AMEMBASSY BEIJING
    TO RUEHC/SECSTATE WASHDC PRIORITY 8056
    INFO RUEHOO/CHINA POSTS COLLECTIVE
    RUCPDOC/DEPT OF COMMERCE WASHDC
    RUEATRS/DEPT OF TREASURY WASHDC

` `

    UNCLAS SECTION 01 OF 02 BEIJING 000352

    SENSITIVE
    SIPDIS

    STATE PASS USTR
    TREASURY PASS LOEVINGER

    E.O. 12958: N/A
    TAGS: ECON EFIN EINV ETRD CH
    SUBJECT: CHINA: S&ED II DATES AND TOPICS; RMB APPRECIATION; ECONOMIC
    SITUATION

    This cable is Sensitive but Unclassified (SBU) and for official use
    only. Not for transmission outside USG channels.

    ¶1. (SBU) SUMMARY: During a January 25-28 visit to advance
    preparations for the U.S.-China Strategic and Economic Dialogue II
    (S&ED II), the U.S. Economic Track staff delegation met with key
    economic ministries, economists, and U.S. industry representatives.
    The delegation proposed to their Ministry of Foreign Affairs (MFA)
    and Ministry of Finance (MOF) interlocutors the week of May 10 for
    the Dialogue and agreed to exchange outcomes in early March. The
    group made progress on the public agenda, although the Chinese side
    noted that it would have difficulty openly including exchange rates
    and relative prices on the agenda, and resisted listing discussion
    of China's indigenous innovation policy. Officials were open to
    continuing private discussions about RMB appreciation, but
    reiterated China could not be seen as caving to foreign pressure on
    the currency issue. Turning to China's economic situation, contacts
    noted that economic overheating and real estate asset bubbles
    remained an area of concern for Beijing's economic policymakers.
    END SUMMARY.

    ¶2. (SBU) The delegation met: Ministry of Commerce (MOFCOM) American
    and Oceanic Affairs Director General (DG) He Ning; Ministry of
    Finance (MOF) External Economic Cooperation DG Zou Jaiyi; National
    Bureau of Statistics (NBS) DG Li Xiaochao; China Construction Bank
    (CCB) Chief Economist Erh-Cheng Hwa; National Development and Reform
    Commission (NDRC) Cong Liang; State Administration for Foreign
    Exchange (SAFE) Capital Controls Deputy DG Chu Yumei; UBS economist
    Wang Tao; Central Finance and Economic Leading Group (CFELG) Vice
    Minister Liu He; MOF Assistant Minister Zhu Guangyao; Chinese
    Academy of Social Sciences (CASS) Professors Huang Ping and Xiao
    Lian; Chinese Institute for Contemporary International Relations
    (CICIR) Professor Da Wei; China Center for Economic Research (CCER)
    Scholar Lu Feng; Development Research Center (DRC) Scholar Tang Min;
    Managing Director of Hill and Knowlton John Holden; Oshkosh Senior
    Director of Business Development Jennifer Thompson; Akin, Gump,
    Strauss, Hauer & Feld LLP Partner Spencer Griffith; and IBM Global
    Services Deputy Chief Representative She Duan Zhi.

    ¶3. (SBU) State Department Deputy Assistant Secretary for China and
    Mongolia David Shear and Treasury Department Executive Secretary and
    Senior Coordinator for China and the S&ED David Loevinger led the
    State-Treasury S&ED II planning trip to Beijing. The Economic Track
    delegation also included: Economic Minister Counselor William
    Weinstein; Treasury Attache David Dollar; Senior Advisor to the
    Treasury Under Secretary-designate for International Affairs Raji
    Jagadeesan; Director of Treasury's Office of East Asia Chris
    Winship; State Department Deputy Director, Office of Monetary
    Affairs David Meale; Assistant to the U.S.-China Strategic and
    Economic Dialogue Casey Owens; Deputy Financial Attache to China
    (incoming) Tim Dorsett; and Embassy EconOffs.

    S&ED Planning
    --------------

    ¶4. (SBU) On preparations for the Economic Track of the S&ED, neither
    MFA nor MOF officials replied to the U.S. proposal to hold the
    Dialogue during the week of May 10, and reiterated China's
    preference for late May. In a meeting with MOF Assistant Minister
    Zhu Guangyao, the two sides agreed to exchange proposed Economic
    Track outcomes in early March. Searching for mutually acceptable
    phrasing for the public agenda, MOF DG Zou Jiayi, observing that the
    two sides were "quite close" on most points, said the most difficult
    area for MOF was exchange rates and relative prices. She preferred
    not to use exchange rates in the document, as that would attract too
    much focus, but said the term relative prices was too narrow. Zou
    also mentioned that the Ministry of Science and Technology (MOST)
    did not want to discuss the indigenous innovation issue at the S&ED,
    but hoped to be able to discuss it bilaterally prior to the S&ED;
    Zou agreed to convey USG views back to MOST.

    Exchange Rates/RMB Appreciation a "Political Issue"
    --------------------------------------------- ----

    ¶5. (SBU) Officials demonstrated little outward receptivity to the
    message of RMB appreciation. MOFCOM DG He Ning rejected U.S. calls
    for RMB appreciation, claiming that political pressure from the
    economic situation in the United States and other countries should
    not be shifted onto China in the form of a call for RMB
    appreciation. He pointed out that in 2009 Chinese exports to the
    United States had dropped 12 or 13 percent, vice an only four
    percent drop in imports from the United States, without any change
    in the exchange rate. State Council Economic and Financial Leading
    Group Vice Minister Liu He noted the currency issue was no longer an
    economic issue, but more of a "political issue for both sides." Liu
    explained that exports, while slower, had still helped China

    BEIJING 00000352 002 OF 002

    successfully create new jobs this year, keep the unemployment
    rate--and thus the political system--fairly stable.

    ¶6. (SBU) Assistant Finance Minister Zhu Guangyao agreed that both
    China and the United States faced political constraints and
    pressures with regard to the exchange rate, and urged Washington and
    Beijing to maintain open communication to manage this issue and keep
    it out of the public eye as long as possible. Zhu also pointed out
    that China was worried about inflows of hot money, stemming at least
    in part from low U.S. interest rates.

    ¶7. (SBU) On the other hand, private economists agreed that Chinese
    officials likely favored a return to gradual appreciation of the
    RMB, despite the possibility of attracting speculative capital
    inflows. UBS economist Wang Tao, for example, expected a move
    mid-year, with a near-term goal of five percent appreciation by
    year-end 2010. China Construction Bank Vice President/Chief
    Economist Hwa Erh-cheng agreed that the exchange rate was a
    "challenge" for the People's Bank of China (PBOC), and even though
    the PBOC might be forced to allow appreciation, it would only be
    incremental because the international environment remained fragile
    and the export recovery was not strong. Predicting that the RMB
    would rise about three percent in 2010 and five percent in 2011, Hwa
    concluded that it was unlikely to be a "one-shot" change (e.g. a
    jump appreciation). China knows it needs to increase domestic
    demand and consumption to stabilize growth and adjust economic
    structure in 2010, so the exchange rate issue must eventually be
    "part of the equation." However, Hwa asserted that the Chinese
    Government "will not be influenced by a Dialogue."

    Rising Housing Prices/ Overheating
    ---------------------------------

    ¶8. (SBU) On an overheating economy, Vice Minister Liu He pointed to
    asset bubbles as a potential problem for China's recovery and noted
    that people are withdrawing money from banks to invest in assets.
    Liu did not yet see the problem as serious. As a reaction to the
    trend, the China Banking and Regulatory Commission (CBRC) has
    instituted requirements to deter speculation, and the State Council
    has ordered measures to tighten credit and mandated monitoring of
    state-owned enterprise (SOE) investment in real estate. NBS DG Li
    Xiaochao noted that the real estate sector is important to the
    economy because it boosts both consumption and investment; however,
    housing prices jumped 7.8 percent in December, which was a worrisome
    sign of over-investment and speculation in real estate. On
    inflation, Li claimed that, although 2009 saw negative inflation,
    November and December numbers turned positive. Bad weather in
    December and January, together with the government's proactive
    fiscal policy, had generated inflationary pressure.

    ¶9. (SBU) CCB Vice President/Chief Economist Hwa Erh-cheng said the
    Chinese Government is actively trying to cool the real estate
    market. Because private companies have been blocked from investing
    in the service sectors, more investment has flowed to real estate,
    increasing housing prices by as much as 50 percent in coastal
    cities. Further adding to the problem, SOEs have out-bid private
    companies, pushing up land prices. To deter speculation, Hwa said,
    the CBRC has required banks to disburse loans to real estate
    suppliers rather than buyers. The market has started to believe
    that the government will continue to tighten monetary conditions to
    control overheating.

    ¶10. (U) The delegation cleared this cable.

    HUNTSMAN

`