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### Viewing cable 07BEIJING263, SED SESSION THREE: SUSTAINING ECONOMIC DEVELOPMENT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07BEIJING263 | 2007-01-11 12:57 | 2011-08-23 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Beijing

`

    VZCZCXRO5794
    OO RUEHCN RUEHGH RUEHVC
    DE RUEHBJ #0263/01 0111257
    ZNY EEEEE ZZH
    O 111257Z JAN 07
    FM AMEMBASSY BEIJING
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3727
    RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
    RUCPDOC/USDOC WASHDC IMMEDIATE
    RUEHC/DEPT OF LABOR WASHDC IMMEDIATE
    RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
    RUEAUSA/DEPT OF HHS WASHINGTON DC IMMEDIATE
    RUEAEPA/HQ EPA WASHDC IMMEDIATE
    RHEHNSC/NSC WASHDC IMMEDIATE
    INFO RUEHOO/CHINA POSTS COLLECTIVE

` `

    UNCLAS E F T O SECTION 01 OF 04 BEIJING 000263

    SIPDIS

    SENSITIVE
    SIPDIS

    STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT
    STATE PASS CEQ CONNAUGHTON
    STATE PASS CEA FOR BLOCK, SLAUGHTER
    STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO
    STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
    FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES
    NSC FOR RHUNTER/JSCHRIER/KTONG
    TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN
    TREASURY FOR TAIYA SMITH
    DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT
    EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL
    HHS FOR STEIGER, ELVANDER AND BHAT
    LABOR FOR ILAB

    E.O. 12958: N/A
    TAGS: ECON EFIN ETRD PREL SENV ENRG CH
    SUBJECT: SED SESSION THREE:  SUSTAINING ECONOMIC DEVELOPMENT

    REF: A. BEIJING 259

         ¶B. BEIJING 262

    ¶1. (SBU) Summary:  In the December 14 Strategic Economic
    Dialogue (SED) session on sustaining economic development,
    Federal Reserve Chairman Bernanke discussed how a flexible
    exchange rate will help balance China's economy.  National
    Development and Reform Commission (NDRC) Chairman Ma Kai
    raised the structural challenges that China faces and
    countered that relaxing United States export controls would
    help reduce China's trade surplus with the United States.
    Commerce Secretary Gutierrez added that China could both
    increase consumption and reduce its trade surplus by
    increasing market access for foreign services.  People's Bank
    of China (PBOC) Governor Zhou Xiaochuan said that China's
    financial reforms will proceed gradually to ensure steady
    growth and financial stability.  Health and Human Services
    Secretary Leavitt discussed the efficiencies of setting

    SIPDIS
    common standards.  Minister of Labor and Social Security Tian
    Chengping and Labor Secretary Chao both expressed support for
    greater cooperation on pension reform.  End Summary.

    Chairman Bernanke on Balancing China's Economy
    ----------------------

    ¶2. (SBU) Federal Reserve Chairan Benjamin Bernanke explained
    the risks of Chna's imbalanced growth to the participants in
    the third session of the Strategic Economic Dialogue (SED).
    He noted that investment and net exports are too high and
    consumption is too low.  Capital misallocation runs the risk
    of creating new non-performing loans (NPLs) and weakening
    financial institutions.  Chairman Bernanke encouraged China
    to increase public spending on pensions and healthcare and
    expand individuals' access to private insurance to reduce
    precautionary savings and raise consumption.  An appreciation
    of the renminbi (RMB) will change relative prices, reducing
    incentives to invest in the export sector.

    ¶3. (SBU) Chairman Bernanke noted that limited RMB flexibility
    inhibits the central bank's ability to adjust interest rates
    to maintain price stability.  Due to China's high savings
    rate, the central bank has been able to mop up liquidity
    without a large increase in interest rates, but this will
    become increasingly difficult as the stock of sterilization
    bonds continue to grow.  Moreover, with a rigid exchange
    rate, as China liberalizes its capital account, the
    effectiveness of monetary policy will be hampered.

    China's Economy Like Japan's in the Seventies
    ------------------------

    ¶4. (SBU) In response to observations by Treasury Secretary
    Henry Paulson on the lessons for China from Japan's
    experience, Chairman Bernanke noted that erratic monetary
    policy and an unwillingness to deal resolutely with NPLs in
    the financial sector, not the yen's appreciation following
    the Plaza Accord in the mid-1980s, had contributed to Japan's
    stagnation in the 1990s.  An even better lesson can be drawn
    from Japan's experience in the early 1970s.  During that
    time, Japan's excessive focus on exchange rate stability led
    to rapid money supply growth, followed by inflation,
    excessive investment and ultimately recession.

    NDRC: Rapid Investment Growth is Part of Industrialization,
    but Investment Slowing Down
    -----------------------

    ¶5. (SBU) Chairman of the National Development and Reform
    Commission (NDRC) Ma Kai said rapid investment growth is
    inevitable and rational for China, which is currently

    BEIJING 00000263  002 OF 004

    undergoing urbanization and industrialization.  Wary of
    excess investment, the Chinese Government will work to
    moderate its growth and raise returns on investment by
    improving the allocation of investment.  For example, China
    will promote investment in sectors that conserve energy and
    raise energy efficiency.

    Chinese Government Measures to Raise Consumption
    ---------------------------

    ¶6. (SBU) To promote consumption, Chairman Ma said the
    government is trying to raise incomes of farmers and
    low-income urban dwellers as well as promote services (which
    are less investment intensive). Ma acknowledged that
    insufficient access to health insurance also led to high
    precautionary savings.  Widening income inequality also
    contributes to high savings.  The government has introduced
    the following measures to raise rural and low-income urban
    dwellers' incomes:  1) abolishing rural taxes, 2) providing
    subsidies to farmers, 3) providing subsistence housing for
    low-income urban dwellers, 4) introducing a minimum wage in
    rural areas, 5) improving medical and social security
    benefits, and 6) raising government expenditures on cultural
    activities, such as tourism.

    ¶7. (SBU) China does not pursue a trade surplus, Chairman Ma
    added, and only in the recent two years has China experienced
    surpluses that are large relative to its economy.  China's
    trade with the United States is mutually beneficial and
    complementary.  Ma hoped that the United States would relax
    controls on high-tech exports to reduce the trade imbalance.

    PBOC: Financial Reforms Will Proceed Gradually to Ensure
    Steady Growth
    --------------------------

    ¶8. (SBU) Zhou Xiaochuan, Governor of People's Bank of China
    (PBOC), said that the Chinese Government places priority on
    economic stability and steady growth.  The PBOC has made
    better use of indirect monetary policy instruments and more
    market based interest rates and the RMB has appreciated
    around six percent against the USD since July 2005.  He
    highlighted other structural adjustments, such as growth in
    consumer credit, mortgages and auto loans.  Governor Zhou
    said that China will deregulate financial markets gradually
    to maintain economic and financial stability.

    Gutierrez: Further Discussion on High-Tech Exports in JCCT
    ---------------------------

    ¶9.  (SBU) Commerce Secretary Carlos Gutierrez said that the
    United States' goal to reduce its trade deficit is to export
    more, not import less.  Secretary Gutierrez noted that the
    United States and China had widely different assessments of
    the impact of high technology export controls on trade
    imbalances and suggested they discuss this in the High-Tech
    Working Group under the Joint Commission on Commerce and
    Trade.  He added that China could both raise consumption and
    reduce its trade surplus through greater market access for
    foreig services.  Assistant Secretary of State Daniel
    Sullivan added that another issue that prevents American
    companies from exporting high-tech equipment is China's
    inadequate IPR protection.

    MOH: China to Strengthen Health Services
    ---------------------------

    ¶10.  (SBU) Minister of Health Gao Qiang said the Chinese
    Government's major goal is to strengthen health services by:
    1) closing the health services gap among regions (and

    BEIJING 00000263  003 OF 004

    particularly between rural and urban areas), 2) improving the
    quality of health services, 3) establishing different medical
    insurance schemes for different areas, 4) improving the
    financial health and supervision of hospitals, 5) providing
    safe and inexpensive medicines, and 6) diversifying health
    care services by encouraging investment in medical
    institutions.

    Secretary Leavitt: Technical Standards Can Be Trade Barriers

    SIPDIS
    ----------------------

    ¶11. (SBU) Health and Human Services Secretary Michael Leavitt
    said he had just toured parts of rural China and recognized
    China's varying levels of health services.  Secretary Leavitt
    noted that varying technical standards for medical coding,
    software, and the environment could be significant barriers
    to trade and to the efficient provision of health care.  He
    commended examples of price transparency at Chinese hospitals
    he had recently visited.

    MOLSS: Expanding the Coverage of Pension and Health Insurance
    Schemes
    --------------------------------------------- ------

    ¶12. (SBU) Minister of Labor and Social Security Tian
    Chengping said the government is expanding the coverage of
    pensions to reduce household savings.  Although China started
    late in developing its pension scheme, pension coverage for
    workers has been growing.  In urban areas, the Chinese
    Government plans to cover an additional 10 million people per
    year starting in 2006 so that 50 million more will be covered
    by 2010.  Students, unemployed, and retired elderly people
    currently have no health insurance coverage, but China plans
    to launch pilot projects in 2007 so that all residents in
    selected urban areas will have access to health insurance.

    Secretary Chao: Greater Cooperation on Pension Reform

    SIPDIS
    --------------------------------------------- --------

    ¶13. (SBU) Labor Secretary Elaine Chao said that strengthening
    the social safety net will lead to more balanced growth.
    Secretary Chao stressed the important roles of both public

    SIPDIS
    and private pensions.  She noted the importance for both
    countries to cooperate on this issue.

    Participants List
    -----------------

    ¶14. (U) United States Delegation:

    --Henry Paulson, Secretary of Treasury
    --Clark T. Randt, Jr., United States Ambassador to China
    --Michael Leavitt, Secretary of Health and Human Services
    --Samuel Bodman, Secretary of Energy
    --Carlos Gutierrez, Secretary of Commerce
    --Elaine Chao, Secretary of Labor
    --Susan Schwab, United States Trade Representative
    --Stephen Johnson, Administrator of the Environmental
      Protection Agency
    --Benjamin Bernanke, Chairman of the Federal Reserve
    --James Lambright, Chairman and President of Ex-Im Bank
    --Daniel Sullivan, Assistant Secretary, Department of State
    --Andrew Steinberg, Assistant Secretary, Department of
    Transportation
    --Matthew Slaughter, Member of the Council of Economic
    Advisors

    ¶15. (U) Chinese Delegation:

    BEIJING 00000263  004 OF 004

    --Wu Yi, Vice Premier
    --Jin Renqing, Minister of Finance
    --Ma Kai, Chairman of National Development and Reform
      Commission
    --Xu Guanhua, Minister of Science and Technology
    --Tian Chengping, Minister of Labor and Social Security
    --Liu Zhijun, Minister of Railways
    --Li Shenglin, Minister of Communications
    --Wang Xudong, Minister of Information and Industry
    --Bo Xilai, Minister of Commerce
    --Gao Qiang, Minster of Health
    --Zhou Xiaochuan, Governor of People's Bank of China
    --Li Changjiang, Administrator of General Administration of
      Quality Supervision, Inspection, and Quarantine
    --Zhou Shengxian, Administrator of State Environmental
      Protection Administration
    --Zhou Wenxhong, Chinese Ambassador to the United States
    --Xu Shaoshi, Deputy Secretary-General, State Council
    --Yang Jiechi, Senior Vice Minister, Ministry of Foreign
    Affairs
    --Zhang Xiaoqiang, Vice Chairman, National Development and
    Reform Commission
    --Li Yong, Vice Minister, Ministry of Finance
    --Yi Xiaozhun, Vice Minister, Ministry of Commerce
    --Hu Xiaolian, Vice Governor, People's Bank of China
    --Li Ruogu, Chairman of China Export-Import Bank
    SEDNEY

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