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Viewing cable 06BEIJING13863, US-China Economic and Security Review Commission Discusses

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Reference ID Created Released Classification Origin
06BEIJING13863 2006-06-29 23:55 2011-08-23 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Beijing
VZCZCXRO5340
PP RUEHCN RUEHGH
DE RUEHBJ #3863/01 1802355
ZNR UUUUU ZZH
P 292355Z JUN 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0639
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 02 BEIJING 013863 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR DAS LEVINE AND ITA/MAC/AP/MCQUEENTREASURY FOR 
OASIA/ISA KOEPKE AND DOHNERSTATE PASS USCC 
STATE PASS CEA FOR BLOCKSTATE PASS FEDERAL RESERVE BOARD FOR 
JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN; NEW YORK 
FRB FOR DAGES/CLARKSTATE PASS USTR STRATFORD/WINTER/MCCARTIN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL CH
SUBJECT:  US-China Economic and Security Review Commission Discusses 
Exchange Rate with China's Foreign Exchange Regulator 
 
 
(U) This report is sensitive but unclassified.  Please 
handle accordingly. 
 
1.  (SBU) Summary:  On June 19, Wei Benhua, Deputy 
Administrator of China's State Administration of Foreign 
Exchange (SAFE), repeated to Chairman Larry Wortzel and 
Commissioner Patrick Mulloy of the U.S.-China Economic and 
Security Review Commission familiar arguments that China's 
currency now follows a managed float currency policy, that 
there is no consensus on whether China's currency is 
currently undervalued and that the U.S.-China deficit is not 
as large as the United States figures indicate.  Chairman 
Wortzel and Commissioner Mulloy emphasized that the growing 
imbalances are unsustainable and that the U.S. Congress is 
growing impatient with China's slow progress on exchange 
rate reform.  China's exchange rate policies are also 
leading to other distortions, including harming the ability 
of U.S. companies to export their goods from the United 
States to China.  FinAtt pointed out that a more flexible 
exchange rate is in China's own interest and can help China 
manage its own economy better.  End summary. 
 
Congress Concerned 
------------------ 
 
2.  (SBU) Chairman Wortzel opened the discussion by 
emphasizing that China's slow pace of exchange rate reform 
has become an important bilateral political problem.  While 
acknowledging that China has made progress, he urged China 
to allow its currency to have more flexibility to respond to 
market forces.  He noted that Congress remains very 
concerned about the issue and that Senators Schumer and 
Graham, who visited China in March and are the sponsors of 
trade legislation aimed at China, are again calling for 
action.  Commissioner Mulloy, commenting that he helped 
draft the legislation that requires Treasury to issue semi- 
annual reports to Congress on countries that manipulate 
their currencies, noted that the United States previously 
cited China in 1991.  Although the Administration failed to 
cite China in its latest report, Mulloy added that China's 
export-led growth is widely viewed as unsustainable because 
of the imbalances it is producing. 
 
Managed Float Policy 
-------------------- 
 
3.  (SBU) Responding, Wei maintained that China's currency 
is based on market supply and demand, but is adjusted in 
reference to a basket of currencies through a managed float 
arrangement.  As for whether China's currency is 
undervalued, Wei insisted that there is no consensus on this 
point.  When he served as China's Executive Director at the 
IMF (until 2003), Wei said he attended a number of meetings 
where this subject was debated but without reaching a 
conclusion.  Wei argued that there is also disagreement on 
the size of the U.S.-China deficit.  Although the United 
States calculated the deficit in 2005 to be over USD200 
billion, he said according to Chinese statistics, the 
deficit was only USD114 billion.  Moreover, nearly 60 
percent of the profits from China's exports go to foreign- 
invested enterprises.  Whatever the numbers, Wei said 
adjusting the exchange rate will do little to improve the 
trade deficit problem, although he asserted that relaxing 
U.S. restrictions on high-tech exports would make a big 
difference. 
 
Other Countries Will Follow 
--------------------------- 
 
4.  (SBU) Referring to Wei's last point, Chairman Wortzel 
countered that high-tech export controls only represent 1.5 
percent of the trade deficit, and as long as the currency is 
out of balance, this will have little consequence to the 
overall trade figures.  Commissioner Mulloy warned that no 
matter how the deficit is measured, it is large and growing 
and could poison the bilateral political relationship.  He 
pointed out that other Asian countries also have inflexible 
currency regimes and suggested that if China led the way, 
these other countries would follow suit.  Regarding the 
foreign-invested companies that benefit from exporting to 
the United States from China,  Mulloy noted that the 
interests of such U.S. companies are not necessarily aligned 
with U.S. national interests.  He added that by maintaining 
 
BEIJING 00013863  002 OF 002 
 
 
an undervalued currency, China discourages U.S. companies 
from exporting from the United States and instead encourages 
them to relocate operations to China.  He compared China's 
policy of using its dollar earnings to buttress government 
industries to that of GMAC offering loans to customers to 
buy GM cars.  As a result of China's undervalued currency, 
distortions are appearing in both the Chinese and in the 
U.S. economies. 
 
5.  (SBU) Although he disagreed with their views, Wei 
thanked the Chairman and Commissioner for their frankness in 
discussing the exchange rate issue.  Wei suggested that it 
is important to analyze the makeup of China's exports.  As 
China is still a developing country, Wei contended that most 
of China's exports are for low-value, labor-intensive goods. 
However, Mulloy pointed out that USD45 billion of the 
bilateral deficit is in high tech goods. 
 
In China's Own Interest 
----------------------- 
 
6.  (SBU) As the meeting came to a close, FinAtt noted that 
an op-ed piece by Treasury Under Secretary Tim Adams will 
soon appear in several Chinese newspapers.  In the article, 
U/S Adams will focus on how a more flexible exchange rate is 
in China's own interest.  Referring to Premier Wen Jiabao's 
recent statement of concern over overheating problems, 
FinAtt noted that a more flexible exchange rate will help 
China manage its economy more effectively. 
 
7.  (U)  This report was cleared by the delegation. 
 
Randt