June 18, 2008
HP-1048

Transcript of U.S. Delegation Press
Conference at the Fourth Meeting of the U.S.
China Strategic Economic Dialogue

SECRETARY PAULSON: Before taking your questions, let me just thank my cabinet colleagues again. This is always a busy time of year, and it seems busier than normal right now, and they've put a lot of work in getting ready for this, and spent a day-and-a-half in these meetings, made major contributions, and I'm very grateful for their involvement. And I think it pays real dividends because one of the real advantages of this dialogue is when, rather than making the case on currency to the central bank governor, or making the case on the environment to the environmental minister, the fact that we make the case on a broad range of issues to the whole economic leadership, and when that is siloed it is huge. And these discussions go better and better every time.

Well, let me go right now to your questions.

Yes, in the front.

Q: Thank you. I just – before the SED, Treasury Department revised a regulation of CFIUS. The proposed CFIUS will give – the proposed regulation will give CFIUS more room to interpret the regulation of foreign investors. So China is – you know, is a little bit concerned about, you know, the protectionists, you know, in the United States as United States is asking more openness of, you know, Chinese financial market. What is your comment on that?

SECRETARY PAULSON: Well, I would say this: first of all, we have traditionally had a market as open as any market in the world. CFIUS is an exception. Our market is open and the exception is CFIUS reviews investments where there is a national security concern, to protect the national security, and this national security control.

In China, you need pre-approval, and so it's a different system. We're in different stages of development. And there is no doubt that we would have more investment from China, but Chinese investors are – no investor wants to come in and be embarrassed, and to be turned away. So we have – the CFIUS – new CFIUS regulations we have follow the law. I'm very pleased with the law, and I think it really clarifies things in a very positive way.

We've gone out very transparently for comment, and are taking comment from everyone before finalizing the regulations. So we had a – I think we had a very good meeting on investment. We – all of us emphasized how that the highest vote of confidence anybody can pay to our economy is to make a direct investment. We benefit from it. And so we had a good conversation about investment, and we talked about – sovereign wealth funds, and again explained we're open to the investment – very open. And we talked about the best practices, and why we thought that was a great effort by the IMF, which would be important to keeping markets open in various places around that world that maybe aren't quite as comfortable with investment as we are, and so in any event we had a good discussion on investment.

Yes?

Q: My question is everybody is very – pay a lot of attention to the election and once, you know, U.S. is probably going to lead by a government who is a Democrat president. It's possible. But if so, do you think he is going to still continue the SED, and will you personally lobby to continue?

SECRETARY PAULSON: Well, I would say this: First of all, I'm not going to speculate on any outcome – on the election. I'm just simply saying what I say to my Chinese counterparts: Americans are results-oriented people, and I think that we understand how important this economic relationship between our two countries is. And if anything we try to do – and most of the major economic issues around the country and many other issues around the world are easier done if you have bilateral cooperation with China, multilateral support. We have a strong interest in China's economy doing well; they have a strong interest in our economy doing well, and if this relationship – this SED – produces tangible results that we wouldn't have otherwise achieved, then I am an optimist that it will continue. And again, I also say to people that imitation is the highest form of flattery, and I see many other nations wanting to emulate the SED that we have with China.

SECRETARY PAULSON: Yes, let me go to that gentleman.

Q: Thanks. We've asked China several times to lift its energy price controls. China's officials yesterday in Annapolis said they would not do that, or least indicated it was nothing in the foreseeable future.

Given the state of energy markets today and how much energy China consumes, how much of an impact is that having now or likely to have in the near future? In other words, is it affecting U.S. prices?

SECRETARY PAULSON: Yeah, I would say this: First of all, in terms of the energy markets, there is no doubt in my mind that China understands the importance of markets, and they are working toward markets where there are not subsidies or administrative controls. They understand the importance of transparency, and they are working – and we have good discussions about that.

So where there are differences, they are differences about the pace of change. And it is – just as we have significant economic and political issues in this country when the price of gasoline goes up that we even have – well, anyway, I think it would be difficult for them, and we understand it's difficult for them to do that right now, and we're encouraging them to make progress.

Now in terms of the impact on global oil prices, there are a lot of considerations. But what I would say to you is that the big driver is supply and demand. And global production capacity has been relatively flat for ten years and demand has been increasing. And I think that is the predominant factor in oil prices.

Yes?

Q: Thank you, Mr. Secretary. Circumstances have changed a lot since SED IV. China has appreciated its currency more than 20 percent so far. And – (inaudible) – has been exposed in U.S. financial system, such as the subprime mortgage crisis. My question is how have these changed circumstances affected the dynamics of SED IV? For example, did the Chinese challenge the U.S. system might not be the best model? Thank you.

SECRETARY PAULSON: Quite clear on that. First of all, in terms of currency, we expressed an understanding and appreciation for the accelerated pace of appreciation of the renminbi. And we clearly see a continuing need to continue to make progress in currency flexibility. But we understand what has been accomplished, number one.

Number two, with regard to currency, I've never heard the Chinese move from their position that they need a currency that is more flexible over time and that they're working toward a currency that is market-determined, because they know that's in their best interest. They have a market-driven – want to get to a totally market-driven economy. They're going to be able to manage their economy much more effectively if they had a market-driven currency, be better at fighting inflation. Monetary policy would be more effective. And so, they've never backed away from that. The discussion has been about the rate and pace of change.

Now, with regard to the subprime crisis and the turmoil that's gone on in our markets, they have clearly said they'd look to us and to a number of other European countries – but predominantly to the U.S. – as a model, that we were the teachers. And now they see the teachers aren't perfect. And so, they want to – we had a lot of discussion. They want to learn from our mistakes and we're going to talk much more about some of the things we're encountering and some of the challenges we have and the way in which they're dealing with them. But again, they haven't at all moved away from their need to develop their capital markets more fully and to open up.

And it was encouraging to me that the progress was reflected in a whole series of steps that they informed us about. They talked about non-deposit taking financial institutions now being able to make consumer loans. They talked about insurance companies – I think it would be easier for them to invest part of their portfolio overseas. They have gone forward in expanding the scope now of their first brokerage, investment banking joint venture in China. They are going to make it possible now for foreign firms to issue ADRs in China, so raise equity in China. And so, they're going to make it easier for foreign banks who want to raise capital to issue subordinated debt denominated in RMBs. So again, I think it's important to see that they're taking a long-term approach and continuing to make progress there.

Yes, in the back, and then I'll –

Q: I wanted to know if you consider the launch of the BIT talks a big personal achievement for you and for the Bush administration.

SECRETARY PAULSON: I'm sorry. I didn't hear the –

Q: Would you consider the launch of the bilateral investment treaty talks a big achievement for you personally and for the Bush administration? And how do you expect the Congress to greet this?

SECRETARY PAULSON: Well, let me say, I don't think the launch is a big achievement. The launch is an important step to take because you can't achieve success on something unless you launch it. And so, if we successfully complete a bilateral investment treaty, it will be a big achievement whenever that is completed.

And we're going to begin negotiations and it's important because again here we're dealing with historically – we have a lot of U.S investment in China. And China had been in an earlier stage of their development. Now they're getting to the point where they have more companies of the size and stature and financial resources – they're going to want to invest outside of their country. And so, each of us have an interest in providing more protection for investors and sending a strong signal about the importance of open investment. And so, we will – we are going to work hard to negotiate a high-quality U.S. model BIT. And congratulate us when we successfully do that. Yes?

Q: Thank you, Mr. Paulson. Yesterday, the Chinese central bank governor expressed concern over the weakening dollar. He said that this was driving up the price of commodities, including oil, as well as inflation. And basically –

SECRETARY PAULSON: He said what was driving up oil inflation?

Q: The weakening dollar has been driving up the price of commodities including oil and inflation in China, and also imposing some kind of prejudice on the renminbi itself.

SECRETARY PAULSON: Well, I would say this. I addressed that and there is no pushback there, as there is any other place when I address it, because the facts speak for themselves. If you go back to February of 2002, the dollar has depreciated 24 or 25 percent and the price of oil has gone up over 500 percent. And it's gone up dramatically in every currency. And when you look at what's happened to food prices, it's a similar story. And I think everyone that looks at this seriously knows that there is one fundamental cause and that is we need more sources of energy, alternative sources of energy. And we need more production capacity in oil.

And I'll take one more question. Yes, the gentleman there. Okay, I'll take two more. I saw you, so you'll be next in the line.

Q: Would you elaborate on the concept of so-called ecopartnerships within the context of the new 10-year agreement?

SECRETARY PAULSON: Well, what we've done here with this is we've recognized that we're not going to get to the kind of success we need to have unless we set some very bold long-term objectives and then try various approaches involving different blocs of society. Now, the Chinese have had great success when they view that in terms of their economic zones during their development. And you remember Shenzhen and what they accomplished there.

And so, I think in China, there is a concept of something along the lines of green zones. And we've seen this in other parts of the world. When I was in Abu Dhabi, I was very impressed looking at a project for a totally green city that they were putting together. But as they talk with people in the U.S., that's obviously a different approach. We have a different system. But there are interchanges right now between Chinese and various different regional interchanges. The Chinese, when they go to Chicago, they say Mayor Daley's rooftop gardens. There's just a variety of ideas there. And so, this is again something to energize societies and to be able to communicate, share ideas. And it will take different forms in different countries.

Q: Thank you very much. Recently I've seen some reports saying that Chinese officials have been more aggressive in expressing their dissatisfaction over the United States on some issues like the weakening of U.S. dollars that were just mentioned. So did you view such kind of pressure during this U.S. SED session? And what are the issues that both sides most disagree with, if there is any?

SECRETARY PAULSON: I read that account. And I certainly, for someone – and I think none of our colleagues; it was quite the reverse. And as you got to know each other better, rather than making speeches and talking past each other, there's just a serious understanding of what the issues are, that two different systems – how best to address them? And I would say this: We have encouraged China to play a bigger role in the global economy and multilateral organizations, to participate in anything, more proactively in the Doha Round to all kinds of other forums. And I've read some of the statements but I don't see why Chinese officials can't say something about the U.S. dollar weakness; everybody else seems to say it around the world. (Laughter.) And I always make the same point that we have – every economy has got some ups and downs. We're going through a tougher period right now. But we're doing, I think, the right things.

And when we have an issue in the U.S., we tend to move through it pretty quickly because we shine a light on it; we move quickly to clean it up. And I will tell you, I look at the underlying strength of our economy and the fundamentals longer term, and I don't think we take a back seat to any other industrial nation. And I think that's going to be reflected in our currency value.

And so, but I encourage the Chinese to be frank and speak out. We're frank. And I view it as a positive sign.

Thank you all very much.