May 23, 2007
HP-421

Transcript of U.S. Delegation Press Conference - Second Meeting of the
U.S.-China Strategic Economic Dialogue

SECRETARY PAULSON: I'm grateful to my colleagues who are standing here with me. Their constant, steady leadership is vital to maintaining and strengthening U.S.-China relations. We only have these meetings twice a year but the work of the SED is ongoing. Every one of these cabinet officers is instrumental to the success of our economic relationship with China. They and their staffs have spent a great deal of time and effort and logged a lot of air miles working on these issues since our December meeting in Beijing.

This session of the SED allowed us to sit with our Chinese counterparts and assess our progress on a number of fronts. While there is much more to do, we have made progress in a variety of areas, I would like to ask a few of my colleagues to highlight some of the significant items.

To begin with, Secretary Peters is going to say a few words about civil aviation.

SECRETARY PETERS: Secretary Paulson, thank you so much and good morning to all of you. Thank you for being here today.

It is my great pleasure today, on behalf of President Bush, and truly a great pleasure on my part to announce that the United States has reached a new air services agreement with China. This agreement will strengthen both of our economies. It will open opportunities for business, travel, and tourism, and cultural exchanges across the Pacific. I would like to express my sincere appreciation to President Bush, President Hu, Madam Wu Yi, and of course Secretary Paulson.

The energy and the leadership of this strategic economic dialogue has been invaluable in helping us reach this historic accord. Today's agreement is tangible proof of the value of the SED. There was clear understanding during the first meeting in Beijing that aviation is a critical part of the dialogue on broadening and deepening our trade relationship.

In the modern world, international trade simply cannot operate without air transportation. Aviation makes it possible to move products and people through vast countries like ours and across borders quickly and efficiently.

At December's SED, we set a goal of making meaningful progress toward amending a U.S.-China air service agreement in time for the spring meeting. I stress the importance that my country attached to this goal when I met with Minister Yang and others during my trip to China in April, and I reiterated again when we had the opportunity to meet in a very productive session on Tuesday.

Today, I am able to report that we have made more than progress. We have a breakthrough, a breakthrough agreement that opens the way for more frequent and more affordable and convenient air services between China and the United States. Over the next several years, we estimate that this agreement will stimulate some $5 billion in new business for our airlines as they take advantage for growing demand for travel between our two countries.

Today's best estimate is that as much as 16 percent of U.S.-China passenger traffic is being lost to airlines from a third country. This means lost revenues for both of our carriers and lost opportunity for our flight crews and other airline employees. This agreement gives both of our countries much greater freedom to serve the growing U.S.-China market by introducing new carriers and additional service in the key cities of Beijing, Shanghai, and Guangzhou.

We have seen the intense interest by U.S. airlines in offering this service as they have competed for the limited new routes under the current agreement. The competition for these routes make some of the Olympic events look tame by comparison. With our new agreement, our carriers will be able to more than double the number of daily passenger flights they offer between the United States and China and 13 new daily flights over the next five years.

By 2012, U.S. carriers will be able to operate 23 daily flights to China. That is up from just 10 today. And at the same time, the new agreement raises restrictions on air cargo flights between our countries. And by 2011 we will have full air cargo services available.

In a market where every filled seat and every piece of cargo shipped can mean a difference between success and failure, this agreement will go far in guaranteeing the success of our airlines in both of our countries.

We have also agreed to resume negotiations in early 2010 to see how we can get to open skies for passenger carriers as quickly as possible. Both sides have restated their shared and ultimate objective of getting a fully liberalized agreement in place just as the U.S. recently accomplished with the European Union.

Let me conclude by extending my personal thanks to Minster Yang who is a true visionary, and without whom this agreement would not have been possible. I would also like to thank the expert team of negotiators from both of our countries who have worked very diligently and under tight pressure to bring these talks to such a successful conclusion. Step by step, we are making it easier, cheaper, and more convenient to fly people and to ship goods between our two countries. Both countries understand that the path to friendship and cooperation is paved with easy access and close connections.

Thank you to all who have been involved. Secretary, thank you for your leadership.

SECTRETARY PAULSON: Mary, thank you very much.

Let me turn quickly to financial services. Increasing the pace of reform in China's financial services markets is important to spread prosperity to all of China's people, promote greater stability, and to support China's transition to a more determined exchange rate.

I've laid out in detail many times, including the speech in Shanghai – the steps I believe China needs to take to develop its financial markets. In our meetings we made some progress in this area. The Chinese announced they will remove a block of entry of new foreign securities firms and resume licensing securities companies this year. They will also allow foreign securities firms to expand into brokerage, proprietary training and fund management businesses. They will increase supplies for their qualified foreign institutional investors, the QFIIs, from $10 billion* to $30 billion, and remove restrictions on the investments in qualified domestic institutional investors – the QDIIs – to make outside of China.

Together, these will expand opportunities for U.S. financial services firms and by allowing greater financial flows, help create the basis for moving to a more market-determined exchange rate. Also, China will allow foreign-invested banks, including U.S. banks to offer their own brand of Renminbi-denominated credit and debit cards, and will complete decisions on pending applications for U.S. non-life-insurers by August 1^st, 2007.

And the Chinese have taken some steps to increase the flexibility of their exchange rate in RMB and inside – (inaudible) – for greater flexibility in the short term and for a transition to market-determined exchange rate in the medium term.

The Chinese share our goal of well-developed financial sector – this supports balanced growth. Where we differ is not over the goals, but over the pace of change, and I believe that the greater risk for China is in moving too slowly, not in moving too quickly.

Of course our discussions here are focused on opening all of Chinese markets, not just the financial sector. Let me ask Secretary Gutierrez and Ambassador Schwab to say a few words about that. First, Carlos.

SECRETARY GUTIERREZ: Thank you. Thank you, Secretary Paulson.

Intellectual property and market access remain at the top of our agenda every time we meet with Chinese officials. Improving protection and enforcement of intellectual property as you well know is really at the top of the list of concerns for our companies to do business in China. The Chinese have passed tougher laws. Now is the time for tough enforcement of those laws, and we had conversations on that.

We also need better market access across a range of industries to continue to drive competition. We believe, and we have discussed, and I believe the Chinese officials understand this, competition will sharpen Chinese industry while giving U.S. companies the opportunity to bring the goods and services to millions of Chinese consumers. We agree that accelerating discussions to develop tourism – this will build on the announcement Secretary Peters has made. Technology, trade, and transparency were also high on the agenda. U.S. high technology exports to China were up 44 percent in 2006 to $17.7 billion. We explained steps that we will take to facilitate such exports to trusted civilian customers in China while maintaining our national security guidelines. We also discussed with our Chinese counterparts ways to increase the transparency of China's rule-making process.

We listened to China's concerns about a recent decision to apply countervailing duties and confirmed our position and our firm commitment to use tools at our disposal to enforce fair competition. We welcome China as a responsible member and an important contributor to the global economy, and we look forward to working together to achieve a level playing field for all of us.

AMBASSADOR SCHWAB: As the name implies, obviously this is a dialogue and therefore one aspect of the broader array of venues and activities important to a mature bilateral trading reception. SED II covered a range of important topics in the trade arena: the Doha round prospects, China's role; China's commitments to the World Trade Organization; trade and agricultural goods, including beef; trade and services, including trade and prospects for opening trade more fully, and environmental goods and services; and regulatory conditions, including protection of intellectual property rights that are necessary for the Chinese economy to develop and to put the bilateral trading relationship on a more stable footing. Suffice it to say, we had a healthy exchange of views.

SECRETARY PAULSON: Thank you, Sue and Carlos.

We have also made progress in the area of energy and the environment. Energy security and a cleaner environment are high priorities for both of our nations. Our two markets for energy are big enough that by working together, we can drive the development of clean energy technology that will improve the environment and reduce our dependence on imported fuel. There will be a briefing on these particular items later today. And we all know that consumer confidence is a vital ingredient in growing any trade relationship. During these two days, this issue was discussed with regard to food safety.

Let me turn now to Secretary Leavitt and then Secretary Johanns on that topic.

SECRETARY LEAVITT: There are many shared issues that we have with the Chinese government. We have discussed at some length in side sessions about the pandemic influenza. We have talked about rural health care. We had lengthy discussions on the cooperative continued research. But recent events have forced very clearly as one of our top concerns the safety of food and medicines.

The Food and Drug Administration Commissioner Van Eschenbach and I raised these concerns directly to the highest levels of the Chinese government. We made clear that we need to improve in the areas of cooperation, information sharing, and the registration firms. The Chinese government clearly understands that the world marketplace will swiftly disadvantage any nation or economy or firm that is not able to establish a sense of confidence and reliability in safety. We have a continuing dialogue with them. We'll have additional meetings this week, and we expect that it will in fact create a pathway for our mutual cooperation and benefit.

SECRETARY JOHANNS: If I might offer just a quick refresher, I deal with meat and poultry at USDA, and Mike deals with pretty much everything else. So we both get involved in food safety issues and because of that we were both involved in the discussions that ocurred over the last couple of days with China.

We discussed with China our concerns about the safety of Chinese food exports system. I would mention that those conversations took place not only at our level but they also took play as recently as this morning at the next level, the undersecretary's level, where Dr. Raymond met at the USDA this morning with Chinese officials. We believe strongly that we have to have the regulatory system that assures the American public of safety in the quality of food that is being imported to the United States. And whether that would be from China or any other country.

In order to provide that assurance here in the United States, we are asking China to work with us in many areas. And as Mike indicated, those conversations are continuing right up to the time that the Chinese leave the United States. Secretary Leavitt and I will continue to discuss steps that that we feel would be necessary with our counterparts from China, and again, we anticipate meetings right up to the time that the Chinese leave. As we continue our discussions, we will be happy to share any additional details that may come out in the next 24 to 48 hours.

Let me just wrap up and say that I thought our conversations were helpful. I thought the Chinese worked with us very, very well, and so I'm optimistic about the next couple of days in dealing with these very, very important issues. Thank you.

SECRETARY PAULSON: Thank you very much, Mike and Mike.

Now I would like to ask Secretary Chao and Secretary Jackson to mention a few important things in their areas.

SECRETARY CHAO: As part of the Strategic Economic Dialogue, the U.S. Department of Labor will sign three letters of understanding with China's ministry of labor and social security to help strengthen the social safety net for China's workers. A stronger social safety net will allow Chinese workers to decrease their high rate of precautionary savings so that they will buy more goods and services, including more U.S.-produced goods and services.

The three areas of cooperation are in pensions, especially employer-provided pensions in the private sector, unemployment insurance, and labor market statistics. Labor market statistics were added because accurately measuring employment and data concerning the workforce is critical to designing social safety net programs for workers. These agreements are part of an ongoing exchange, part of ongoing exchanges that the U.S. Department of Labor has been pursuing with China for several years, which will also lead to cooperation in health and safety and compensation issues as well. Thank you.

SECRETARY JACKSON: Secretary Paulson and my other colleagues, over the past two days, we have devoted discussion to mutual benefits from the growing connectivity between the economies of our two countries. One of the statistics that bears this out is the financial market place most of all. In 2002, the total Chinese investment in U.S. agency marketplace securities was once at a million dollars. By June of 2006, this number had grown one thousand fold to $107 billion.

The Chinese economy is benefiting from high-yield safe investments in mortgage-backed securities. Here at home, American homeowners are benefiting from low interest rates on mortgage loans resulting from the great Chinese demand for these securities.

This week's dialogue has been constructive. We look forward to further the discussion and further integrating that capital when I get to Beijing this July. Thank you.

SECRETARY PAULSON: Thank you Elaine and Alphonso. Now, in conclusions, we have built strong relationships since President Bush and President Hu agreed to the SED last fall. I believe this dialogue gives us our best opportunity to increase the pace of change in China. By gathering the economic teams from both nations together, we can put a wide variety of issues on the table and focus on the items that are high priorities for both of our nations. We will continue to work on all of these issues in the coming weeks and months, and the third cabinet-level meeting of the SED will occur later this year in China.

Now we'll take your questions. Yes.

Q: Secretary Paulson – thank you. Thank you. My name is – (inaudible) – from China – (inaudible). And Secretary Paulson, do you set any deadline for China to appreciate Renminbi more faster, and how does China respond to this issue, and how will you – will you deal with this matter with the congressman, thank you?

SECRETARY PAULSON: Okay, that is a question I have had before so I can – (laughter) – I can assure you, and I also have that with the congressman. (laughter)

But let me say in all seriousness, the Renminbi and the rate of appreciation, the degree of flexibility is an important economic issue. It is an important issue in trade forums, but even more importantly, it has become a symbol for the rate of reform, the pace of reform of the Chinese economy. So we talked about it a lot. And we had a number of very good presentations on it, one in particular during the Strategic Economic Dialogue.

And the way I think about it is this: The Chinese clearly – (inaudible) – have stated the principle of greater Renminbi flexibility. They will cite statistics and clearly they have been moving the Renminbi more quickly. There has been more movement in the Renminbi, more flexibility over the last six months to a year. So there is no doubt that that is going on.

If you look at economic data, it's easy to make the case that there is more need to move the Renminbi now than there was even in July of 2005 because if you look at the Renminbi on a trade-weighted basis or look at it in economic terms, making allowances for productivity gains, there is a continued need to move the Renminbi.

So we make the case and they listen and they are moving the Renminbi. They have widened the band. Now, that is – on the one hand, it's an important signal, but what really is going to make the difference is how much they take advantage of the – (inaudible) – as the Renminbi moves. And so the Renminbi – someone could make the case that the Renminbi doesn't take full advantage of the narrower band but I choose to take that as a positive signal, and I think the real test will be how much flexibility there is in the Renminbi on a daily basis and over time.

So this is an important area. They agree with us on principle. The question is the pace of change. The pace of change has picked up, but I believe it will be very much in their best interest and the rest of the world's best interest if they will move more quickly.

Yeah.

Q: Thank you. Pete Kasperowicz from Inside U.S. Trade. A question for Ambassador Schwab: All of you mentioned at some point or another that this meeting is designed to help create momentum in other meetings like the JCCT. That would seem to be needed since, by your own accord, China has failed to meet the obligations it undertook in April of 2006. What sense do you get from this meeting that China is willing to meet those commitments and maybe move further beyond?

AMBASSADOR SCHWAB: I think first of all, in terms of the JCCT meeting commitments in April of 2006, I think we have a mixed picture, including a lot of positive elements to point to. In intellectual property rights for example, business software with the Chinese computer companies freeloading legal operating software for computers to leave the factory. That has had an appreciable measurable impact on the piracy of business software. So take that as a for-example for a success.

There is still activity underway and implementation that we're looking forward to seeing. In addition to – as you can imagine, with this many ministers in town, we also take advantage of the presence of the various Chinese ministers to do sidebar conversations, quiet conversations over lunch or dinner, meeting separately. And we talk about the range of issues, including, as I noted, China's compliance with its WTO commitments. And we are moving ahead. One is never satisfied, but we are moving ahead and we're seeing some progress.

SECRETARY PAULSON: Yes, the gentleman.

Q: Perhaps this is question for Secretary Johanns about beef. Any progress on the beef front? (Laughter.)

SECRETARY JOHANNS: Well, we did talk about beef. I had an opportunity on a couple of occasions to visit with my counterparts about beef. Also during the general session, I would say, though, to announce the very, very positive decision that was issued by the OIE. So what I can offer at this point is that now with the OIE backing up the safety of our beef, what we are asking China to do, and for that matter, all of our trading partners, is to embrace the OIE standard and allow for the trade in beef based upon that standard. China happens to be here this week, so we made that request to them but I can tell you, we are dispatching information across the globe to our trading partners on the OIE decision. So it won't just be China that will receive this request; it will be Japan; it will be Hong Kong; it will be Korea; it will be all of our trading partners in beef. So I can't announce a breakthrough but we had a good week this week because of the OIE decision.

SECRETARY PAULSON: Let me just make one point that I think most of you here know but maybe all of you don't. The SED is not – doesn't replace the other bilateral mechanisms we have with JCCT, the JCM, the JEC. So what we do is we focus on longer-term structural issues and issues that are of the most concern in the short term, and so that is the approach that the SED is.

The gentleman in the second row?

Q: (Inaudible). For longer term, any discussion has ever mentioned about the bubble of the Chinese stock market – I mean, any reaction for the Chinese side that they worry about the – (inaudible) – before the Beijing Olympics? Thank you.

SECRETARY PAULSON: Well, we don't – I'm not going to comment on the views I have one way or the other on the level of any market. And I certainly would never characterize something as a bubble. But we did, we spent a lot of time talking about financial markets and capital markets. And one of the points we made, one of the points I made is that China has come a long way in the development of the overall economy. They have gotten farther to go, but they have come a long way.

They had meaningful reforms in the financial markets, but the financial markets are not yet reflective or representative of the success of the Chinese economy. And when you think about innovation – and we talked about innovation a lot today – and I made the point that it's also important to have innovation in financial products and allow the most innovative financial products when they're appropriate. And so the – as the Chinese market develops and as the Chinese market gets representative and sophisticated, institutional markets when they are allowed more hedging techniques, risk management techniques, there will be ultimately more protection for individual investors. Of course, markets go up and markets go down and so investors in every market need to be prepared to have losses from time to time. Yes?

Q: Secretary Paulson, Banco Delta Asia, which is of great interest to China and the region. Last month you mentioned that the strategic objective was to have a de-nuclearized Korean peninsula. My question is who that objective – I'm Banco Delta Asia –

SECRETARY PAULSON: I just – the objective was to have what?

Q: You mentioned in last month's press conference that the objective was – the strategic objective was to have a de-nuclearized Korean peninsula for Banco Delta Asia on the issue. And, I'm sorry question is that –

SECRETARY PAULSON: I don't know why I'm missing the point. I can't hear you.

Q: It's about Banco Delta Asia and North Korea. Banco Delta Asia.

SECRETARY PAULSON: Oh, Banco Delta Asia. Okay, I've got it.

Q: Yes, I'm sorry. Last month at a press conference, you mentioned the strategic objective was to have a de-nuclearized Korean peninsula. My question is, for that objective, are you willing to have special measures or give waivers to American banks that are willing to transfer the North Korean funds since they can't do so without violating the – (inaudible)?

SECRETARY PAULSON: Yes, the first – what I said last month in an effort – I believe you asked the question about Banco Delta Asia and the sanctions on Banco Delta Asia and I said the biggest, the overriding objective, the forest through the trees is a de-nuclearized Korean peninsula and that still remains the objective. There is – I'm still cautiously optimistic.

And in terms of Banco Delta Asia, that situation speaks for itself. The rule speaks for itself. I think it's pretty clear to everyone in the world today that when the U.S. government, when we take steps to preserve the security of the banking system and to protect it against abuses of proliferation, money laundering, any other illegal activities, that that has a positive result and I think that is a very, very powerful measure that we use. And I think it ultimately drives better behavior. And so I think what we're working towards, I said, is the de-nuclearization of the peninsula and we're ultimately looking for changed behavior.

Q: Thank you, Mr. Paulson. I'm with Beijing Review. Have you got any responses from the Congress toward the two-day discussions? Are they satisfied? And what's your expectation for Madame Wu Yi's meetings with the Congress tomorrow? Thank you.

SECRETARY PAULSON: I don't think it's fair of me to have expectations and let me say we just finished the meetings today, so I'm not sure what Congress's reaction will be. I can say there were a number of congressional leaders at our dinner last night that Secretary Rice hosted at the State Department, including Chairman Rangel, so there was some discussion there. But again, as I've said before, we intentionally scheduled this meeting at a time when Congress is in session because we thought it would be very good for the Chinese to have an opportunity to meet directly with our Congress.

I believe that their expectations are that they will hear some strong views that we've explained to them that the American people have concerns about trade, globalization, don't believe the benefits of trade are being shared evenly or equally with our trading partners, particularly China. And so I think they're expecting to hear that from Congress and hopefully it will be a good two-way dialogue and a learning experience on both sides, as these discussions always are. Way back, the gentleman?

Q: Hi, with Dow Jones. I just wanted to ask about the securities deal that you all announced today. If I'm reading this correctly, does this mean that foreign securities firms no longer need to form joint ventures before they can do a share transaction from China? And for foreign brokerages looking to expand into the fund management sector, do they no longer have to form joint ventures with domestic firms?

SECRETARY PAULSON: No, there's been – (inaudible) and it would be – to step back, that one of our big objectives of the SED is to be talking about things that go well beyond the WTO obligations and that means opening up China's markets to competition, their markets for goods and for services.

And the financial markets is one area we've emphasized a lot because opening up the financial markets will do things for the whole rest of the economy; it's a multiplier. And we have made the case repeatedly that you can't find an example anywhere in the world of outstanding capital markets that are composed of joint ventures. If you want outstanding capital markets, you let the best companies in the world come in to compete and that's the same with any other markets – any of the other, telecommunications markets, air service markets, any market.

And so no, what we've announced have been incremental changes – what China's announced, not what we have announced. What China's announced have been incremental changes. So there's still joint ventures and what they said is that they will have to get a hold on joint ventures and securities areas so they're going to take the hold off and they're going to be setting up new joint ventures and they are then going to expand the products and services that existing joint ventures can offer, which is a positive step forward. They've also said that banks that have – U.S. banks and other foreign banks that have subsidiaries in China and can take Renminbi deposits will be able to issue their own Renminbi debit and credit cards. And then they've changed the QFII, expanded the QFII allocations. So that's what's been announced.

Q: Thank you very much.

SECRETARY PAULSON: Okay, thank you.

* CORRECTION: from $20 billion.