Briefing on the Upcoming U.S.-China S&ED

Special Briefing
Kurt M. Campbell
Assistant Secretary, Bureau of East Asian and Pacific Affairs
Treasury's Senior Coordinator and Executive Secretary for China and the Strategic and Economic Dialogue (S&ED) David Loevinger
Washington, DC
May 5, 2011

MS. FULTON: Good afternoon. Welcome to the Department of State. Very pleased to have with us this afternoon Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell, and Senior Coordinator and Executive Secretary for China and the Strategic and Economic Dialogue at the Department of Treasury David Loevinger, here to talk about you – talk to you about next week’s Strategic and Economic Dialogue.

I’m going to turn it over to each of our guest speakers to make a brief statement and then we’ll open it up. We have about 20 minutes for questions today. So without further ado, Mr. Loevinger, please.

MR. LOEVINGER: Thank you. It’s a pleasure to be here. Next week marks the third round of our Strategic and Economic Dialogue with China. It was established in 2009 by Presidents Obama and Hu, and it’s led by the senior representatives for the Strategic and Economic Dialogue – Secretary Clinton and Secretary Geithner on the U.S. side; Vice Premier Wang Qishan and State Councilor Dai Bingguo on the Chinese side.

The objective of the Strategic and Economic Dialogue is to bring together across both governments the right people at the right level to talk about, engage, and make progress on issues of concern to both countries. The growing importance of our bilateral/economic relationship is reflected by the senior-level representation that we’re going to see at our meetings next week in the economic track, and that’s what I’m going to focus my remarks on.

We’re going to have 16 U.S. Government agency heads representing the U.S. delegation, including Fed Chairman Bernanke, Commerce Secretary Locke, Labor Secretary Solis, and SEC Chairman Schapiro. There will be about 20 Chinese agencies on the economic side represented, eight at the agency head level, including Finance Minister Xie, Central Bank Governor Zhou, the Minister of Science and Technology Wan, and Commerce Minister Chen.

Since this Administration established the S&ED two years ago, we have seen the beginning of very promising shifts in economic policy in China that have the potential to benefit China, the United States, and the world.

Let’s go back 18 months. Eighteen months ago, China’s exchange rate was frozen. Today, it’s moving. And since last June, the exchange rate has appreciated by about 5 percent against the U.S. dollar, and at an annual rate of about 10 percent when you take into account China’s higher inflation rate. Eighteen months ago, China was proposing to promote domestic innovation in ways that threatened to cut off U.S. companies and U.S. products from China’s large and rapidly growing government procurement market. Now, we’re making progress in removing these discriminatory practices.

Eighteen months ago, there was essentially no offshore RMB market. Today in Hong Kong, Chinese and foreign companies can increasingly issue RMB-denominated financial products and access the services of all of the world’s leading financial institutions without having to navigate onerous bureaucratic hurdles. Eighteen months ago, China’s economic strategy was still under its previous Five-Year Plan and was far too dependent on export-led growth. Today, China’s new Five-Year Plan is committed to transforming its economy into one where future economic growth will be based much more on domestic demand and consumption. And today, China has committed, along with the U.S., in working through the G-20 to reduce future external and trade imbalances.

These changes, which we’ve achieved through the S&ED and other parts of our bilateral relationship, offer the prospect of substantial gains for U.S. companies and U.S. workers, but many challenges remain. Next week, we will discuss these challenges candidly but constructively with our Chinese counterparts. Next week, we are going to press China to let its exchange rate adjust at a faster pace to correct its still substantial undervaluation.

We’re going to press China to implement the important agreements achieved between President Hu and President Obama on protecting intellectual property rights in China and delinking government procurement from innovation policies. We’re going to encourage China to move more quickly in lifting the ceiling on interest rates, on bank deposits in order to put more money into Chinese consumers’ pockets. We’re going to press them to make it easier for foreigners to make portfolio investments in China, and for Chinese to make portfolio investments abroad. And we’re going to encourage them to provide more opportunities for foreign financial services firms so that they can play a greater role in helping generate the kinds of financial products that Chinese households need to meet their financial goals and ensure against life’s risks, and to help Chinese companies – particularly small and medium-sized enterprises – grow their business.

To broaden the discussion we’re having on leveling the playing field, Secretaries Clinton and Geithner will be hosting the CEO roundtable on the second day of the S&ED. This will include CEOs both from the United States and from China.

These are our policy priorities. Obviously, China will raise its policy priorities at the S&ED. And we understand very clearly that to sustain China’s future growth, China will not be able to draw, to the same extent it has in the past, on factors which drove its very impressive growth for the last 30 years. These are things like a rapidly growing labor force, China’s accession to the WTO, and adaptation of relatively low-level technology. So we understand that China wants continued access to our market, greater access to U.S. high-technology exports, recognition as a market economy, and new investment opportunities for Chinese enterprises here in the United States.

On the last point, I should say very clearly that the U.S. welcomes foreign investment, including from China, but it’s important that the Chinese understand – and we will explain this at the S&ED – that our ability to make progress on the issues that matter to China depends on how much progress we see on the issues that matter most to us.

Finally, while we think that our strategy in the S&ED across the U.S. Government is helping us seize the opportunities and meet the challenges of a rapidly growing China, the most important discussions and the most important decisions regarding our ability to deal with these opportunities and challenges will not be taking place at the S&ED. That’s because the most important decisions and discussions involve policies that reside here at home. If we’re going to meet the challenges, if we’re going to seize the opportunities that China presents, the United States has to invest more in R&D, invest more in education and in public infrastructure. We need to create stronger incentives for companies to invest in the United States, both American companies and foreign companies. We need to more effectively promote U.S. exports and we need to restore fiscal responsibility.

Thank you.

ASSISTANT SECRETARY CAMPBELL: Thank you very much, David. Good afternoon, everyone. It’s great to see you here at the State Department. I recognize that you all have questions, so I’ll just make a few brief opening comments, and then we’ll both be very pleased to take your questions and do the best we can going forward.

David has described the Strategic and Economic Dialogue. I think it is well known to you. In many respects, it is our most important venue, our mechanism if you will, for managing this very complex relationship between the United States and China. Following on the successful visit of President Hu Jintao to Washington earlier this year, our intent is to make sure that we follow through on many of the areas that the two leaders and their senior teams committed to work together on.

Secretary Clinton leads the strategic component of our dialogue, and her counterpart is State Councilor Dai Bingguo. We’ve tried to add a few innovations to this year’s discussion. In addition to extraordinarily deep Chinese participation on a range of issues from a host of ministries and government agencies in China, we are also trying to find time for the principals and their key teams to sit down together to talk in an intimate fashion on some of the most important and critical issues confronting the relationship at the current time.

I think our intent is to have a candid and honest set of discussions on a range of issues, starting with regional problems. We want to compare notes on where we stand with respect to North Korea, and we will be very clear on what our expectations are for moving forward. We will want to talk about our joint approaches to Iran, given recent developments. And we will also look farther afield – our current interests and recent efforts to discuss issues in Sudan and elsewhere.

We will also have discussions about cross-cutting issues. One of the goals of these dialogues is to bring together people from a variety of agencies and to break down the barriers inside both of our governments to more effectively tackle issues like energy security, development, food assistance, and the like.

Another innovation at this year’s Strategic and Economic Dialogue is that we will have military representatives at a senior level from the Chinese side, joined by senior military representatives both from the Pentagon and U.S. forces in Hawaii. I think our goal is to have discussions that bring together critical diplomats and military officials. I think our goal here is to create greater understanding around issues that have the potential for miscalculation and inadvertence in our relationship, and I think we all recognize that these security issues are increasingly important in the smooth management of our relationship going forward.

I do want to underscore it is our intention to raise issues of concern directly, honestly, and opening with our Chinese interlocutors, including issues of concern associated with human rights.

I think with that, that’s our overall presentation. We start on Sunday night, a small dinner at Blair House. The Secretary – the two secretaries will be having meetings both together and in respective agencies. Part of the Chinese delegation will be having meetings in the White House. We will have strong participation at every level of our government, and I think we all recognize how important it is that these discussions proceed smoothly and that there is a candid and clear set of interactions between our two sides to avoid problems of misunderstanding and miscalculation.

With that, let me ask David to come back up to the podium. Please, if I could ask – I know many of you, but we have reporters on the Treasury side here, so if you could identify yourselves and then just – and then she’ll direct the question towards us. So, David, here, please.

MS. FULTON: First question, right here.

QUESTION: (Inaudible) with (inaudible) Japanese newspaper. Two questions for Mr. Loevinger, one question for Mr. Campbell. Regarding economy – economic issues, since middle of last year, U.S. Treasury started to emphasize that in order to combat inflation – in order to counter inflation, it would be good for China to appreciate – accelerate the appreciation of the RMB. And at that time, Chinese side oppose – strongly opposed to that. But now we think they are starting to say that it would be effective for them to use those. So finally, do you think Chinese side decided to agree on the U.S. assessment, and do you see any change of the change in tone or changing policy of the Chinese accelerate policy? I mean, more acceleration of the appreciation of RMB.

And also, the other day Mr. – Secretary Geithner told us that the – he’s now get more attention to the next stage of financial reform in China on top of the main issues. Are – is – does this imply that the – if you are defined the S&ED efforts past two years – like maybe mainly focusing on that currency issue, but now you are moving onto the next level – I mean, second level that you’re going to talk more broader things?

And one question for Mr. Campbell. You touched on the human rights issue should be important, and you’re going to touch on the human rights issue. How are you going to press China on human rights front, especially given that in light of the severe human rights separation by the Chinese Government, the – when we saw the Arab Springs?

MR. LOEVINGER: Okay. So first on your two questions, we absolutely see a change in tone in our discussions with our Chinese interlocutors that they are talking more and more about how a stronger RMB can help them contain inflationary pressures in China, including the rise of commodity prices and other imports.

On financial sector reform, I’d say – again, this is our third S&ED. And the first S&ED was in 2009, and the focus then was how the U.S. and China, both through our own actions and collective actions, could stabilize the global economy, stabilize the global financial system. In the last S&ED, we talked about, again, through individual and collective actions, how we could strengthen recovery. The focus this year is how do we sustain the recovery going forward. I think both China and the U.S. are much more confident about the strength and durability of the recovery. And we see an important aspect of what we talk about when we say rebalancing growth is that financial sector reform in China can play a very important role.

I just gave one example of how roughly 75 percent of Chinese household savings, very large savings, are still in bank deposits that largely earn a negative rate of return after inflation. If China can, over time, ease the restrictions on the interest rate the banks can offer to depositors, that’s going to put more money in Chinese consumers’ pockets and help promote China’s efforts to promote a more consumption-led economy.

ASSISTANT SECRETARY CAMPBELL: And to – was it your fifth question or your – I can’t remember what number – (laughter) – so I lost count halfway through. So, look, on the important issue that you raised with respect to human rights, I think it is our position that we want to approach this critical matter from a principled and consistent approach. You will see that in the President’s meeting, in the Secretary’s statements, in all her meetings, we raise human rights issues, not just generally but specifically, specific cases. We ask Chinese interlocutors for explanations about disappearances, about arrests and legal procedures which we feel are either lacking or inappropriate, and it is our position that we will continue to do so as part of a broad, strategic approach to our relationship.

And Secretary Clinton – and I think not just the Secretary, but other key members of the U.S. delegation, I think, will be raising these matters with counterparts in the Chinese system. It is important that on these matters of really not just national import, but international import, the Chinese hear concerns not just simply from the Secretary of State or key players in the White House, but all members of the American political establishment because these truly are matters that have the potential to affect our overall relationship.

MS. FULTON: Next question.

QUESTION: Ian Talley here, Dow Jones. What concern – Europe has been talking about filing a WTO case in terms of export subsidies in China. What concern and evidence do you have over export subsidies in China? Is there a case for a WTO suit, and will you be warning the officials here of that? And secondly, is it necessary for China to liberalize its financial markets to speed up its exchange rate appreciation to prevent sterilization costs from being too high?

MR. LOEVINGER: Okay. On your first question, I’m glad you raised that. That is another very important part of our dialogue with China in the economic track. There is a whole array of international organizations and conventions that govern international trade and finance. Many of these were established in the ’70s and ’80s, when China was a very small player on the global economic stage. Now, China is the second largest economy, one of the largest exporters, one of the largest markets for the U.S. and other countries. And so it is vitally important in the S&ED that we continue our work to bring China into this full array of conventions and organizations and reform and modernize these conventions and organizations to reflect the global economy of 2011 and not 1948.

And the reason why I’m answering your question that way is one of the issues that we have started discussing with China is the international arrangement on official export credits. This was, again, negotiated many decades ago. No one cared whether China was in or out. China was just too small a player. Now, China is the world’s largest provider of official export credits, and I think China increasingly understands that when the global rules were being written on things like official export credits, it’s important – increasingly important that China is at the table.

On the link between financial sector reform and exchange rate reform, obviously there’s a lot of important links. China continues to intervene massively in foreign exchange markets to constrain the appreciation of its currency and then to – as it buys foreign currency, it’s injecting RMB into the market and to help manage inflationary pressures, it then has to soak up the RMB that it issues. And some of the ways it does that, like reserve requirements, it imposes costs on the banking system and on bank depositors. And so these issues of exchange rate reform and financial sector reform are obviously linked. If China were to let the exchange rate appreciate and be more flexible, that would reduce pressures on the banking system and help free up a more liberal market-oriented financial sector.

MS. FULTON: Next question, Andy.

QUESTION: Andy Quinn from Reuters.


QUESTION: I’m wondering if you could talk a little bit more about the inclusion of the military side of this S&ED. When was that decision made, at what level? And is that – was there any concern from the Diaoyutai/Senkaku incidents of last year, the South Pacific – the South China Sea policy that the Secretary rolled out in Hanoi, that those sort of particularly sea tensions are dangerous and haven’t been managed properly?

ASSISTANT SECRETARY CAMPBELL: It’s an excellent question, and thank you for it. I think it has been long our intent to develop dialogue with China on emerging and, frankly, traditional security issues that involve not just traditional players in the foreign ministry but also other players in the Chinese Government, including the military and others. And it is our belief that the most effective way to deal with some of these emerging problems and challenges is to ensure that we have a cross-cutting representation in some of these dialogues.

Earlier this year, so you know, Secretary Gates had a good visit to Beijing, and I think reestablished our mil-to-mil partnership, our relationship. The senior Chinese official will be visiting Washington in the coming weeks. I think our desire in this dialogue is, given its importance, to ensure that key players in our military establish, including Admiral Willard from Hawaii – he’s the commander of our forces – key players in the Pentagon, and also senior players from the Chinese General Staff have the opportunity to interact again with civilian counterparts on critical issues. And that’s exactly what we’ve set out to do. I think it’s an important innovation. I think it provides a venue for improving trust and predictability in the overall relationship.

MS. FULTON: Next question.

QUESTION: My name is (inaudible) with Phoenix TV.


QUESTION: My question is, among a wide range of issues you mentioned, what is the most important one you want to address at the coming up S&ED? And also, yesterday, Secretary Gary Locke said some promises China made at S&ED two years ago falls far short from – of the promise. Do you share the same concern on the strategic side? Thank you.

ASSISTANT SECRETARY CAMPBELL: I would find it hard to give you an absolute hierarchy on the issues that are of manifest importance between the United States and China. In fact, there are many, and I’ve tried to articulate some of those at the outset. And frankly, we want to see progress on all of those issues. We saw some important statements on the part of our Chinese interlocutors and of the Chinese hierarchy when President Hu Jintao visited on issues, for instance, relating to North Korea. I think we seek to follow up on some of those discussions overall.

I think we recognize that cooperation and developing habits of cooperation and finding common ground, common cause, is a challenging, time-consuming endeavor. We’re committed to it, and we’re looking forward to this next round of the S& – the Strategic and Economic Dialogue to work constructively and consistently on a broad range of issues as described earlier.

MS. FULTON: Next question?

ASSISTANT SECRETARY CAMPBELL: Do you want to do the Gary Locke thing? Why don’t you do the Gary – I think the Gary Locke part of the question.

MR. LOEVINGER: Okay. I mean, I consider – the S&ED is a year-round process. We try and make progress where we can when senior officials come and meet. But throughout the year, we sit down at the staff level and carefully look at the commitments that each side has made, and we take our commitments very seriously.

I think China takes its commitments very seriously. And a recent example was China’s commitment to allow foreign banks to underwrite commercial bonds in its inter-bank market. That was a promise that they had made at the first S&ED. We continued to press them on it. And a few weeks ago, they issued an announcement that invited foreign banks to underwrite corporate bonds.

And so everything may not happen a week after the S&ED, but it’s something that both sides pay very close attention to.

MS. FULTON: Okay. Right here.

QUESTION: (Inaudible), China’s Action Media. Two questions – one economic and one political. The economic question is: It’s reported that China is considering strategy about diversifying its foreign reserve investment. So will U.S. and China talk about this in the S&ED? And if yes, what will you talk about?

The second one is – I mean, what’s your view on China’s role in the U.S. antiterrorism war? And do you think bin Ladin’s death will have some influence on the future U.S.-China relationship in terms of this?

MR. LOEVINGER: Okay. So the first thing on reserve management, we’re going to be talking about monetary policy, we’re going to be talking about exchange rate policy, we’re going to be talking about fiscal policy, we’ll be talking about reserve management policy. That’s what we do in the S&ED. That’s why we bring people like Ben Bernanke and Governor Zhou and all the senior officials on both sides together to talk. We have a lot of questions for the Chinese side; the Chinese have a lot of questions for us. So of course, we’re going to talk about all the important policies.

ASSISTANT SECRETARY CAMPBELL: Let me just say it is our intention to discuss recent developments in the Middle East with our Chinese interlocutors. And yesterday, you will have seen that official Chinese news organs – and the foreign ministry put out a statement that supported recent American actions in Pakistan with relation to Usama bin Ladin, and I think the U.S. side very much appreciated the support from Chinese interlocutors. And I think there’s a recognition that there are areas in which both China and the United States face challenges associated with terrorism and the like in the international environment, and we seek opportunities to both discuss them and find suitable and appropriate arenas for cooperation going forward.

MS. FULTON: Next question.

QUESTION: Yeah. It’s for Mr. Loevinger. At the state visit, as you said, you’re going to follow on some of the commitments that were made there, and so far, three and a half months in some of the business community seems to be voicing concerns that they haven’t seen enough public dialogue in Chinese from the central government with regards to the indigenous innovation pledge to delink from government procurement, and they’re also very concerned that they’ve not seen any increase in legal software sales to government entities, which was another pledge, to audit that process and publicly make that audit. So I’m wondering, what are the sort of things that you would hope to hear from the Chinese at this meeting on those issues, and also if you’re interested in – what we should look for in terms if there is a way to move the bilateral investment treaty, which Secretary Geithner said the other day is in both countries’ – tops of their agenda. What would we look for if there is some decision to move that to a next level?

MR. LOEVINGER: Okay. Thanks, Scott. One of our priorities is to make sure that the important commitments that President Hu made when he came to Washington in January are fulfilled. And the follow-up on the previous question, commitments are important, but action, tangible action is even more important. So at the S&ED without a doubt, we have been talking a lot with our Chinese counterparts, and we’ll continue to talk about how we can turn these very important agreements into tangible results on the ground, on innovation, delinking, procurement policy from innovation policy, and also to ensure not only that Chinese Government agencies have the fiscal resources to buy legal software, but that they stop using illegal and unlicensed software.

You’re second question? Oh, yeah. So without a doubt, another important area that’s going to get a lot of discussion because of the interest of both sides is what we can do to promote open investment policies. Foreign direct investment has been fundamentally important to the growth of China. It’s hard to imagine the Chinese economic miracle that we’ve seen could have occurred without foreign direct investment. And foreign investment has been fundamentally important to the growth of the United States. We want to keep that going. Chinese companies are increasingly interested in investing in the U.S. So yes, without a doubt, we’re going to be talking about ways we can promote cross border investment.

MS. FULTON: I think we have time for just maybe one more question. Right here.

QUESTION: I was wondering, are you going to be bringing up Chinese censorship of the events in the Middle East of the Arab Spring events with them? And also, you said you were going to bring up the issue of Sudan with them, in light of the recent events, the referendum, recent violence there. What message are you going to bring to them on Sudan?

ASSISTANT SECRETARY CAMPBELL: First of all, I think as you know, Secretary Clinton, on a number of occasions, I think, has been a very articulate voice about a whole host of issues associated with internet freedom. She has underscored that in public and in her private conversations with a host of individuals in China and elsewhere. And I think she will look to reaffirm those messages as well. I think one of the reasons that we want a dialogue with China is to be able to have a discussion, to share our perceptions about developments in the Middle East. This will be the first time that we’ve really met at a consequential high level since the developments that have swept through the Middle East, and I think it will be important to hear what Chinese interlocutors and friends have to say about what’s transpired there and what potential impacts they feel those developments might have on their own society.

I think on Sudan, what I would recommend is that we will be doing a debrief subsequently, and I think I’ll be able to give you greater details at that time about what we hope to – more of what we have discussed and what potential progress we’ve made. All right.

MS. FULTON: With that, gentleman, thank you for your time.

ASSISTANT SECRETARY CAMPBELL: Thank you all very much.

MS. FULTON: We appreciate it. Thank you.

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PRN: 2011/700