December 13, 2007
hp-752

Transcript of U.S. Delegation Press Conference
Third Meeting of the U.S.-China Strategic Economic Dialogue
Xianghe, China

Secretary Paulson: Good afternoon, everyone, and thank you for being here. Thank you, my cabinet colleagues, for your substantive engagement in this SED meeting. Active participation from everyone here as well as additional colleagues back in Washington enabled us to make substantial progress in our economic relationship with China.

As I said earlier, to me the handling of the food and product safety issues emerging in recent months is proof of the effectiveness of the SED. Rather than recriminations and finger pointing when this issue arose, both our nations were quick to sit down together and work the substance of the issues.

We are able to do that because in this first year of our dialogue we have deepened relationships and understanding across our governments.

Mike Leavitt's work on this issue is a model for addressing all the issues within our economic dialogue.

Let me note a few other highlights of our meeting before we get to your questions.

First, we agreed to put a working group together to develop a ten year plan for review at our next meeting on cooperation on energy and the environment. The issues of energy security and environmental sustainability are vitally important to both of our nations. I find it an exciting prospect that we will set out a long term and strategic plan for working together toward progress in these important areas.

I am also pleased that we are beginning a strategic effort to work together to combat illegal logging. This is a long term challenge and I am encouraged by this significant first step.

We had very healthy discussions about China's progress in rebalancing its economy, expanding domestic consumption and moving away from export led growth. The Chinese recognize growing inflationary pressures in their economy and that a more flexible currency expands their ability to use monetary policy to stabilize their economy.

I would also note that we have made modest progress in the financial services area, expanding opportunities for global financial services companies to do business in China.

Opening China's financial markets to foreign competition strengthens the financial backbone of the Chinese economy and it's critical to China's goals of spreading the benefits of growth to all the Chinese people.

While we hold these meetings twice a year, the work of the SED proceeds all year long. Progress proceeds at a different pace on different issues over the course of a year.

We will host the next formal meeting in Washington next spring. In the mean time I'm confident we'll be working closely together to implement our strategic plans and announce results during the course of the year.

Now let's take your questions.

Question: A question about the financial services [inaudible]. I didn't know if you could maybe spend some time just outlining where the caps exist now, where you'd like to see the caps go in securities and banking in particular. And if you could maybe outline more generally what was achieved here and how important they are.

Secretary Paulson: Let me make a general comment first, and then I'll make your comment on equity caps.

You all know how strongly I feel about financial services, and the reason I do is because when you look at balancing growth in the Chinese economy or in any economy, capital markets play a very important role and they have a multiplier effect really throughout the entire economy and they also help citizens develop savings. By increasing their rate of return they'll have to save less in order to accomplish the same goal. So this is important.

Again, the point we make on ownership caps is, we make it because it's not only good for foreign firms to come in and invest, it basically is the right way to develop an industry and the securities industry operates best when the owner, when there's control by a world class firm, and it helps the entire society.

So we've made progress in virtually every area of the securities business and in the financial services business over the course of the SED, and this reflects the fact that China is committed to opening up the markets and has been opening up the markets for some time.

With regard to ownership, I think this is a very important issue. The Chinese have not agreed to raise equity ownership caps. What they've agreed to do is, what they're going to do over the next year in both the banking area and in securities to have a study, to develop recommendations regarding foreign ownership or equity participation in the industry. And what they had agreed to do after the last SED which they're moving forward with is expanding the scope of operations for foreign securities and joint ventures and to halt the moratorium on joint ventures.

Yes?

That's [inaudible] basically negotiating, trying to negotiate another deal. She's working hard for both of our countries here. [Laughter].

Question: From Market News International. Governor Zhou Xiaochuan just said that you discussed gradually enlarging the pace of yuan flexibility. ECB President [Jean-Claude] Trichet left Beijing a few weeks ago suggesting that the Chinese had said they would also, that they would study faster appreciation as well. Did you get a similar message or any indication that China is willing to pick up the pace of appreciation?

Secretary Paulson: Let's first of all look at the facts. They've agreed to the principle. They've been appreciating their renminbi and the pace of appreciation has increased. Over the last year it's been increasing at an annual rate of close to six percent.

I've talked with the Chinese long enough about this that we don't spend a lot of time talking about how fast is fast. Okay? It's very easy for people to say words. We agree with the principle and we talked about a number of topics. We talked about the benefits of faster appreciation. There's no sign that depreciation to date has done anything to hurt the Chinese economy. And at a time when they are focused on the overheating and containing inflation, I don't think anybody debates the fact that monetary policy can be an effective tool as opposed to just using administrative means and having a currency that reflects market fundamentals would be a good thing. You all read the newspapers, you know that they're hearing from others around the world. So that's how I'd leave that.

Question: Mr. Secretary, I'm Allen Cheng, Bloomberg News here in Beijing. The U.S. Trade Representative, Mrs. Schwab, yesterday mentioned that there's been some back-sliding by the Chinese over the last couple of years. Can you talk a little bit? Over this SED did you see some areas where the Chinese have not kept their commitments? Where they are not making progress on commitments --

Secretary Paulson: I would just say two things. First of all there are two sets of issues. One is WTO compliance which is very very important. I don't think it's strategically interesting, it's essential. There we have dispute resolution mechanisms, we have direct negotiations. I know Sue Schwab and Carlos Gutierrez and others are very very much focused on that. There is no doubt that there are areas where our side believes they could be doing a better job of living up to their commitments and where there has been some retrogression.

In terms of the SED which is focused on long term economic issues and the most pressing, sensitive short term issues, there's been only progress. So we could all debate whether there should be more progress, but there has been progress and there's been progress that we wouldn't have if we didn't have this. So I'm focused on the progress. I'm focused on the opportunity and the size of the market and the rate at which our exports are growing and the very real progress we're making here.

I have a lot of other people up here who will be happy to take your questions, too.

Question: Financial Times. Mr. Paulson, as Treasury Secretary do you have any comment on the announcement overnight by the four central banks? Have you seen that announcement?

Secretary Paulson: I haven't. There was just an announcement by four central banks? So I don't have a comment on that, no.

Question: You mentioned and have spoken at length about currency and the impact that a faster yuan appreciation would allow more leeway for the Chinese to have monetary policy options. Yesterday the Governor of the Chinese Central Bank said that the feds rate cut could lead to more liquidity throughout the world and therefore have an impact on China's monetary policy. Would you like to comment on --

Secretary Paulson: I leave the monetary policy to Ben Bernanke in the U.S. and my central banking friends, so I'm not going to comment on it other than the comment that I've already made that it is pretty hard to have effective monetary policy with a degree of sterilization. And Zhou Xiaochuan understands that. To the extent they're issuing renminbi to buy in dollars, that they don't have a lot of flexibility with their monetary policy. But overall, I don't have any comment on it.

Question: AP. Minister Chen yesterday mentioned that he was quite worried about the weakness of the U.S. currency, weakness in the U.S. economy, and that when he was confronted by the American side with calls for a faster UN appreciation he responded that he was more concerned with those issues. Were you able or are you now able to offer any assurances, any reassurances, that that won't be a problem for China?

Secretary Paulson: Let me say first of all I think what both countries understand is that we both benefit by economic strength in each place. The Chinese, it's very important to them that the U.S. economy is strong and continues to grow. It's very important to the U.S. that China has a strong, stable development. So you can't have a discussion like this without talking about our economies. I gave my view that our economy was a healthy, diversified economy that was going to continue to grow. I talked openly, as I have whenever I'm asked about this publicly, I talked about the risk in housing and the turmoil in the capital markets. But the backdrop is a strong global economy, a healthy U.S. economy, and as we work through this.

Question: Adrian Mullen from NBC News. I think you commented on this earlier, but perhaps you or Ambassador Schwab could clarify this. Is there actually a ban on further U.S.-made movies in China through February? If not, what exactly is going on?

Secretary Paulson: What was your question? The ban on movies? Sue, do you want to comment, or Carlos?

Ambassador Schwab: We don't actually know if there is a ban. There have been rumors, stories, concerns expressed about it. We are making inquiries. Obviously if there were such a ban, whether it's one month, three months, five months, it would be a very serious matter.

Secretary Gutierrez: We're still addressing that issue. We are equally concerned. We don't have a precise response but we are all over it and we want to find out if there is a ban, and if there is such a ban why. So we still don't have a precise answer for you, but before we leave we're still going to take up this issue.

Secretary Paulson: We got it, so that was two for one.

Question: [Inaudible] Television. Could you maybe clarify a little bit more [inaudible] the Chinese? You mentioned [inaudible] security industry in China, but did you get any concrete pledges at all about lifting the moratorium on the brokerages?

Secretary Paulson: I have every confidence from everything we've been told on what's underway that you'll see a lifting of moratoriums and expansion of the scope. Remember, there have been just a whole series of things, steps in almost every industry that they've agreed to do, and these take new rules. They need to roll it out. One of the things I had an opportunity to do when I first arrived was to sit down with Shang Fulin, the CSRC, and he's very focused on all these things. They're moving ahead and you'll see them.

I would say from our perspective, we want them to do more, move faster. From his perspective, he's running like a bunny, believe me. They're busy, they're active, and we keep lists not only of things we're doing when we look forward and with new deliverables, but we and the Chinese keep a list of what's been agreed to. They're very meticulous about saying we've done this, it's going to take a little bit longer to get this done, but we'll get it done and so on.

Question: [Inaudible]?

Secretary Paulson: Yes, I do.

Question: [Inaudible] red herring. The most important thing for China at this time, particularly at a time of potential economic weakness in the U.S. and elsewhere.

Secretary Paulson: I would say this --

Question: I know, but is the most important thing about China boosting its own domestic demand, isn't that a much more important --

Secretary Paulson: I was just going to say here's how I've always thought about the currency. You've heard me speak about it before.

For those who believe that solving the currency issue and having a renminbi that's more realistically valued, would get at the imbalances in a really significant way, they're misinformed because the imbalances are created by the fact that our nation is growing and not saving, and that China has an economy that is built around exports, investing heavily in export industries, and has relative low levels of domestic consumption and very high savings rates and high precautionary savings rates. So it's going to take a while to get at this and it's going to have to deal with the fundamental structural issues.

We focus on the renminbi because in many ways that is a proxy for reform. It's very difficult to have a market driven economy with all the tools you would have in a market driven economy if you don't have real market signals. And it's very hard to develop a financial services industry if you don't have real market signals. And if you have a currency that doesn't reflect fundamental economics, it's difficult to do this.

Again, I emphasize the Chinese understand this, they see the need to appreciate the renminbi, so we're arguing, again, about stability. And we both agree we need a China that's economically stable and successful and growing. There's a point of discussion as to whether it's riskier to take bigger steps in the reform area or not. And frankly, we believe that there's a greater risk in moving too slowly here. So that's from China's perspective.

From the global community, there will continue to be issues and concerns because China is a bit of an anomaly. It's been a miracle their economic growth, so they now are a very big factor in economic trade in goods and services. But while all the other countries that play that kind of role in the global economy have currencies that are market determined, China isn't ready to have a market determined currency yet, but they need to move in that direction and they're going to continue to hear about it until I think they get a market determined currency. That's why I talk so much about capital markets, because I think that's, having more competitive capital markets is a prerequisite to a market determined currency.

Anyone else before we --

Question: Mr. Secretary, Glenn Summerville from Reuters. The fact sheet cites a decision by China to permit foreign companies doing business in China to issue yuan-denominated equity. How much pressure was there for that from the U.S. side, and how much resistance from the Chinese, and what is the potential impact of that?

Secretary Paulson: First of all, I think it's a very positive move. I'm glad you've cited it. Let me just say on all of these things, there's not one of the issues we're talking about in the securities area where the Chinese don't say we're moving in that direction. We understand what we need to do. We're opening up our securities markets. It's important that we have to develop our regulatory structure, we have to develop our infrastructure. We're moving as quickly as we think is prudent. So there had always been a recognition on their part that this was something that would be a good thing to do. It's something we encourage them to do. I think General Motors has done a financing, there's been some movement here, and you'll see more movement. And I think that's very important and it's going to be a very healthy part of the development of their capital markets.

One more.

Question: I'm with the South China Morning Post. I just wanted to ask a little bit of clarification on the issuance of renminbi stocks and bonds. Does this mean that U.S. companies are going to be able to issue [inaudible] in China? And when is this going to happen? And has there been a demand from U.S. companies to do this? Thank you.

Secretary Paulson: There's clearly a demand for U.S. or foreign companies, any company doing business in China and investing in China, to be able to finance yourself in renminbi and the domestic market is a good thing. And being able to finance debt securities or asset backed securities like General Motors did, or equities. And so you will see this I think. You say when, it will be, I'm sure, rolled out gradually. But I think you're going to see, you will be seeing foreign companies with investments here being able to finance themselves in the equity and debt markets.

Thank you all very much.