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DE RUEHBJ #3662/01 2670552
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P 230552Z SEP 08
FM AMEMBASSY BEIJING
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UNCLAS SECTION 01 OF 05 BEIJING 003662

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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