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### Viewing cable 08BEIJING3662, Beijing Welcomes Coordination in Financial

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08BEIJING3662 | 2008-09-23 05:05 | 2010-12-26 21:09 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Beijing

`

    VZCZCXRO9029
    PP RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
    DE RUEHBJ #3662/01 2670552
    ZNR UUUUU ZZH
    P 230552Z SEP 08
    FM AMEMBASSY BEIJING
    TO RUEHC/SECSTATE WASHDC PRIORITY 0054
    INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
    RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
    RUCPDOC/USDOC WASHINGTON DC PRIORITY
    RHEHNSC/NSC WASHDC PRIORITY
    RUCNASE/ASEAN MEMBER COLLECTIVE

` `

    UNCLAS SECTION 01 OF 05 BEIJING 003662

    SENSITIVE
    SIPDIS

    SAN FRANCISCO FRB FOR CURRAN/GLICK; NEW YORK FRB FOR
    CLARK/CRYSTAL/DAWSON
    STATE PASS CFTC FOR OIA/GORLICK
    CEA FOR BLOCK
    USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND OCEA/MCQUEEN
    TREASURY FOR AMB.HOLMER, WRIGHT AND TSMITH
    TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN
    TREASURY FOR IMFP - SOBEL/MOGHTADER
    NSC FOR LOI
    STATE FOR EAP/CM AND EEB/OMA

    E.O. 12958: N/A
    EFIN, ECON, EINV, PGOV, CH
    SUBJECT: Beijing Welcomes Coordination in Financial
    Crisis; Concerns about Growth Going Forward

    REF: A. Hong Kong 1747 and previous, B. E-mail
    Shanghai Financial Update, Friday, September 19, 2008
    ¶C. e-mail Shanghai Update 9-18-2008: Local Reaction to
    the U.S. Financial Crisis D. Shanghai 402 and previous
    ¶E. Beijing 3501

    ¶1. Summary. Chinese Government officials praised U.S.
    Government willingness to brief them regularly on
    developments in the financial sector, particularly
    given their exposure to GSE debt. Although the direct
    exposure of Chinese firms to other troubled financial
    institutions is limited, most Beijing officials and
    academics expressed concern about the adverse impact
    on U.S. domestic demand and global market sentiment.
    Several officials noted China's desire to deploy its
    foreign assets in a way that promotes financial
    stability, but foreign exchange managers remain
    cautious about risky investments and uncertain as to
    whether they can overcome U.S. regulatory barriers and
    perceived U.S. political resistance to greater Chinese
    investment in U.S. financial institutions. The crisis
    has driven home the fact that China is now integrated
    into the world economy, leading to some comments in
    the popular media that it should seek to insulate
    itself. Others have blamed the United States for
    exporting the cost of recovery to the world, or even
    causing the crisis itself. These views, however, have
    been characterized as "extreme" and have not been
    espoused by mainstream media, officials or academics.
    End Summary.

    Officials Welcome Explanations
    ------------------------------

    ¶2. (SBU) Chinese Central Government officials
    expressed appreciation for USG efforts to explain the
    details of plans to handle troubled American financial
    institutions. They have been particularly interested
    in Fannie Mae and Freddie Mac (see ref E). (Note: The
    State Administration for Foreign Exchange holds about
    half a trillion dollars of Fannie Mae and Freddie Mac
    debt. A combined Treasury/Morgan Stanley team briefed
    officials from the State Administration of Foreign
    Exchange (SAFE), China Investment Corporation (CIC),
    the People's Bank of China (PBOC), Ministry of Finance
    (MOF), China Banking and Regulatory Commission (CBRC),
    Industrial and Commercial Bank of China (ICBC) and the
    Agricultural Bank of China (ABC) on the situation
    surrounding Fannie Mae and Freddie Mac. Treasury
    Under Secretary McCormick has called counterparts at
    the SAFE, PBOC, CBRC and MOF. Embassy officials have
    also discussed the bailout with academics at the
    Chinese Academy of Social Sciences (CASS) and the
    National Development Reform Commission (NDRC). End
    note.)

    ¶3. (SBU) While noting that China's direct exposure to
    other troubled private institutions is limited (see
    ref B and C), Chinese officials have praised the USG's
    willingness to keep the Chinese Government constantly
    apprised of current actions. Vice Premier Wang Qishan
    told Secretary Paulson in a phone conversation that
    China appreciates and supports all of the measures the
    U.S. Government has taken, and also Under Secretary
    McCormick's efforts to reach out to CIC, PBOC and SAFE.
    Prominent NDRC economist Xia Bin noted that, because
    of ties built during the Strategic Economic Dialogue
    (SED), U.S. and Chinese officials are now able to pick
    up the phone and talk to each other in order to
    coordinate responses to economic crises.

    China Response
    --------------

    ¶4. (SBU) The Chinese official media reported that
    President Hu Jintao expressed hope that U.S.

    BEIJING 00003662 002 OF 005

    Government efforts would succeed in stabilizing the
    U.S. financial system, which he said would be in the
    interests of both the United States and China. In a
    private conversation with Treasury Secretary Paulson,
    Vice Premier Wang stated very clearly that China will
    do whatever it can to help, but this must be done on
    the basis of the "win-win" principle and be mutually
    beneficial. MOF officials similarly told Embassy
    officials that they stand ready to assist if necessary,
    asking if there was anything they should do.

    ¶5. (SBU) Chinese academics echoed this response. A
    CASS economist in the Economic Research office had a
    very positive view of the USG's response to the
    financial crisis. Although U.S. measures to "rescue"
    the financial markets were certainly motivated by U.S.
    self-interest, he said China and other countries
    should nevertheless cooperate with the United States,
    as this is a situation that will impact everyone given
    the extent of globalization. The USG acted
    "responsibly" by signaling to the international
    community that the United States will use all of its
    assets to reduce the current market difficulties, he
    emphasized.

    Should China "Buy American"
    ---------------------------

    ¶6. (SBU) A few observers have noted that China, both
    through official and commercial financial institutions,
    has the foreign assets to rescue troubled U.S.
    financial firms. China Securities Regulatory
    Commission (CSRC) International Affairs Director
    General Tong Daochi asked whether the United States
    would be receptive towards Chinese firms taking large
    stakes in U.S. financial firms, both from a regulatory
    and more importantly political perspective. China
    Export-Import Bank Chairman Li Ruogu also commented to
    an Embassy official that U.S. efforts to stabilize
    financial markets should be done in cooperation with
    China and utilize China's large reserves of capital.

    ¶7. (SBU) CIC Deputy General Manager Jessie Wang,
    however, said that given losses on high profile
    investments in the U.S. financial sector to date (e.g.
    Blackstone), China's State Council is being more
    cautious about letting Chinese firms invest abroad in
    the financial sector. Chinese firms are cautious,
    despite low prices, because they see U.S. investors,
    who have a greater understanding of risks, hesitating.

    Concern Over Broader Impact
    ---------------------------

    ¶8. (SBU) Although Chinese officials point out that
    Chinese firms have little direct exposure to U.S.
    financial institutions beyond the GSEs, many note that
    continued financial stress will adversely impact U.S.
    domestic demand and result in lower growth for China.
    CSRC's Tong said the Chinese side is concerned about
    the impact on the real economy and demand for Chinese
    exports. There is also an additional psychological
    impact, as a weak U.S. economy and financial markets
    could depress Chinese investor sentiment.

    ¶9. (SBU) A CASS industrial economist said the US
    financial bailout is definitely affecting Chinese
    industrial sectors which have higher ratios of export
    dependency. He noted, however, that the media has
    exaggerated the U.S. financial bailout's impact on
    China. He said that industrial production was already
    slowing for a variety of reasons independent of
    overseas demand.

    Reform Threatened?
    ------------------

    BEIJING 00003662 003 OF 005

    ¶10. (SBU) Many officials have noted that the global
    economic situation may reduce support for continued
    market reform, particularly in the financial sector.
    Next month's Third Plenum of the Communist Party's
    17th Central Committee is expected to address major
    macroeconomic issues such as rebalancing the economy
    away from an excessive reliance on exports and towards
    increasing rural incomes. A CASS foreign policy
    academic noted that the Government's ability to do so
    will be hindered, however, if the current crisis
    dramatically impacts Chinese exports now.

    ¶11. (SBU) The academic said that the West has been
    pressing for further reform and opening of the PRC's
    financial markets. But the current crisis has sparked
    a significant debate within China, with some arguing
    that the ongoing financial troubles demonstrate that
    China should not integrate with or open further to the
    international financial system. Others, however, are
    arguing that China, like its national basketball team,
    has no choice but to open itself further to
    international competition, particularly if it is to
    remain competitive globally.

    ¶12. (SBU) Regarding specific reforms, China will
    certainly proceed cautiously in the next few months
    with financial deregulation. CSRC Assistant Chairman
    Jiang Yang announced last week that China will proceed
    "safely" with futures market innovations, and they
    will be more cautious regarding arrangements for stock
    index futures. Many officials are still supporting
    innovation. PBOC Survey and Statistics Department
    Director General Zhang Tao told reporters that his
    lesson from the U.S. crisis was that market
    supervisors did not monitor markets. He proposed that
    China improve its financial supervision, but should
    not abandon developing a mortgage-backed securities
    market.

    More Active Government Role in Markets Considered
    --------------------------------------------- ----

    ¶13. (SBU) The CASS foreign policy scholar noted that,
    in recent years the Chinese Government has been
    reluctant to intervene aggressively in China's stock
    and real estate markets. After witnessing the USG's
    massive intervention in these same sectors, however,
    some Chinese officials and scholars are reconsidering
    the role Beijing should play.

    ¶14. (SBU) Some observers have countered the call for a
    more activist Chinese Government approach to markets.
    Hu Shili, Editor of the respected economic weekly
    Caijing, published an editorial stating that "the U.S.
    bailout has nothing in common with a wished-for
    shoring up of the Chinese property market... There are
    no signs that property market risks are spreading to
    other institutions." CSRC's Tong said the recent
    moves by the Federal Reserve and Treasury gave CSRC
    cover to intervene in the market as part of global
    actions without increasing expectations for future
    intervention (see refs A and B).

    China Tied In
    -------------

    ¶15. (SBU) America's financial woes have driven home to
    many Chinese academics and officials exactly how
    involved China is in the global economy. The CASS
    foreign policy scholar, who admintted he is not
    normally involved in economic issues noted that, after
    30 years of reform, China's integration into the world
    economy means that China undoubtedly will be affected
    by the current U.S. financial crisis.

    BEIJING 00003662 004.2 OF 005

    ¶16. (SBU) A CASS international economist, however, was
    not daunted by that integration, and was highly
    confident in China's ability to confront this crisis.
    "Nothing is impossible in China," he said, noting that
    the PRC Party-State is, after all, the system that
    threw tremendous resources at confronting the massive
    snowstorms and the Sichuan earthquake earlier this
    year, not to mention pulling off a spectacular
    Olympics. The Chinese system can handle the shocks
    produced by this crisis, he averred.

    A New Model
    -----------

    ¶17. (SBU) Some popular media and blogs have called for
    China to try to extricate itself from this dependence
    on foreign markets. The official People's Daily, in
    an overseas edition editorial by Shi Jianxun, states
    that the "sub-prime crisis has exposed immense gaps in
    the United States' financial oversight and
    supervision... the world urgently needs to create a
    diversified currency and financial system and fair and
    just financial order that is not dependent on the
    United States."

    U.S. Image
    ----------

    ¶18. (SBU) Although most Chinese reporting on the
    crisis has been fairly straightforward, some media
    reports blamed the United States for making mistakes
    and then forcing the rest of the world to bear the
    costs. For example, the official Communist Party
    international news publication Global Times (widely
    recognized for its nationalist views) on September 17
    reported that "the whole world is bearing the price of
    the U.S. financial crisis... U.S. national egotism,
    which uses the U.S. dollar's hegemonic position to
    exploit the world, is the primary cause of the
    crisis."

    ¶19. (SBU) Most media and academic experts dismissed
    this rhetoric. The September 22 edition of the
    International Herald Leader commented, "The U.S.
    economic position is unchallengeable.... U.S.
    vitality is experiencing some challenges. Whether or
    not the U.S. will fall depends on how effectively it
    adjusts its hegemonic mold, acclimating to the world."
    The CASS foreign policy academic did not think the
    crisis would harm the image of the United States in
    the region. He had no sense that people were
    questioning the U.S.'s leadership role or its
    trustworthiness. He had heard no one comparing the
    current crisis to the 1998 Asian financial crisis,
    arguing that the parallel people here are drawing is
    to 1929 -- and the obvious desire to avoid that
    outcome -- not 1998.

    ¶20. (SBU) The CASS international economist noted that
    there were some academics arguing that the United
    States was itself behind the current crisis and is now
    attempting to force the burden caused by it on the
    rest of the world. However, he characterized these
    views as "extreme" and said they were held only by a
    minority of "leftists."

    ¶21. (SBU) Chinese business has certainly lost some
    confidence in U.S. financial institutions, with one
    investor stating that U.S. financial operators had
    failed to accurately assess risk. An American working
    in Beijing at a major firm handling overseas IPOs,
    however, still thought that once stability returns to
    the markets, the U.S. exchanges will be the premier
    place for Chinese companies to list.

    Comment

    BEIJING 00003662 005 OF 005

    -------

    ¶22. (SBU) Most Chinese officials, academics, and the
    official media have publicly and privately supported
    the U.S. approach to restoring confidence in U.S.
    financial markets. They have been especially thankful
    for timely and frequent personal briefings on U.S.
    government actions. Chinese officials' statements
    have been extremely disciplined, sticking to a few
    safe talking points generally endorsing moves that
    will enhance stability and letting PBOC Governor Zhou
    take the lead. Several financial officials
    acknowledge that China's official reserves are too
    large to meaningfully reallocate assets without
    adversely impacting the value of its investments. For
    the time being, Beijing appears unlikely to make any
    dramatic decisions regarding their approach to the
    United States.

    ¶23. (SBU) Over time, as markets stabilize, the events
    of the last month may strengthen the hand of opinion
    leaders advocating a more diversified and independent
    approach to international economic and financial
    engagement that involves a larger role for China. A
    Japanese central banker recently said that Chinese
    officials have approached him about etablishing a
    "yuan-yen" basis for trading in Asia. MOF officials
    have stressed how existing international financial
    institutions, such as the IMF, appear to be
    increasingly irrelevant in dealing with global
    economic problems.

    ¶24. (SBU) The downturn in the U.S. economy is likely
    to spur efforts by Chinese firms to continue to
    diversify their exports markets. Moreover, as Chinese
    firms become increasingly export oriented and
    established in overseas markets, China's economic and
    financial integration with, and its vulnerability to
    changes in, the global economy will continue to
    increase, irrespective of government policies. And
    despite the public rhetoric about the need to reduce
    their dependence on the U.S. financial system and
    policies, Chinese authorities do not yet appear
    prepared to adopt the main reforms needed to achieve
    this, namely de-linking the RMB from the U.S. dollar,
    which would allow China to have a more independent
    monetary policy, and allowing unhindered capital flows,
    so the RMB can be used as the basis for international
    trade and financial transactions.

    Randt

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