The Fifth US-China Strategic Economic Dialogue andAction to Combat the Global Financial Crisis
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets ResearchI.

Fifth round of the US-China Strategic Economic Dialogue

The fifth round of the US-China Strategic Economic Dialogue (SED V), held in
Beijing on 4-5 December, was the final round to be held during the Bush presidency,
the first having been held in December 2006 as a result of an agreement between
President George W. Bush and President Hu Jintao. There was considerable interest in
the agenda because of the global financial crisis, which has intensified since thecollapse of Lehman Brothers in September.
The Joint US-China Fact Sheet released after the meeting identified five areas
where the two countries agreed to cooperate: (1) macroeconomic cooperation andfinancial services, (2) cooperation on energy and the environment, (3) trade andinvestment, (4) food and product safety, and (5) international economic cooperation.
China’s Ministry of Foreign Affairs released a Chinese version, while the two sides
agreed on a number of important measures to stabilize financial markets and combat
the global financial crisis.

II. Agreement on important measures to stabilize financial
markets and combat the global financial crisis
1. Agreement between US Export-Import Bank and Export-Import Bank ofChina to make available resources for trade financing facilities
The two governments agreed that the US Export-Import Bank would provide
additional resources of $12 billion, and the Export-Import Bank of China additional
resources of up to $8 billion, if needed, to assist in the financing of the export of USand Chinese goods and services. It is envisaged that these additional facilities will
also be used to maintain trade with emerging and developing economies affected by
the global financial crisis. The two sides also agreed that these facilities would beincreased to $38 billion by 2009.
As of 2007, China was the US’s third-largest export market in monetary terms,
while the US was China’s second-largest export market. Trade between the two1

Nomura Journal of Capital Markets Spring 2009 Vol.1 No.1

countries therefore has a considerable impact on global trade. With global trade
expected to continue to decline in 2009, the creation of these additional facilities isalso likely to attract attention as bilateral action to combat the global financial crisis.

2. Restrictions on financing by foreign incorporated banks in China to be eased
The Chinese government agreed to allow foreign incorporated banks in China totrade bonds in the interbank market, whether for their customers or their own accounts,on the same basis as Chinese-invested banks. It also agreed that, in exceptional
circumstances, qualified foreign banks would be allowed to increase their liquidity
through either guarantees or foreign currency loans from overseas affiliates on atemporary basis, notwithstanding the (State Administration of Foreign Exchange’s)
short-term quotas (i.e., of 12 months or less) on external debt.
The latter (liquidity-increasing) measure is intended to combat the global financial
crisis. After March 2007, the Chinese authorities reduced the amount of external debt
that financial institutions in China were allowed to incur. This was to prevent inflowsof (especially, short-term) foreign capital from exerting upward pressure on therenminbi and creating surplus liquidity. These restrictions on external debt wereenforced on (the branches and subsidiaries of) foreign incorporated banks withparticular rigor, and these were encouraged to borrow foreign currency from otherbanks on the domestic foreign exchange market in China rather than from overseas
sources. Since the collapse of Lehman Brothers in September, however, foreign
incorporated banks in China have faced a credit crunch of their own as they havefound it increasingly difficult to obtain funds. Therefore the decision by the Chinese
authorities as part of SED V to make it easier for foreign incorporated banks in Chinato obtain funds from their parent banks should ease this credit crunch as well as thecredit crunch faced by foreign incorporated companies in China that have borrowed
from these banks.

3. Widening membership of the Financial Stability Forum
Both governments agreed to support extending membership of the Financial
Stability Forum (FSF) to China and other important emerging market economies.
Similarly, they agreed that representation in international financial institutions should
be adjusted to better reflect changing economic weights in the world economy.
The FSF was established by the G7 in 1999 to promote international cooperation inand the exchange of information on regulating and monitoring financial markets inorder to make them more stable. It will be interesting to see what signals China will
send from the FSF and international financial institutions such as International
Monetary Fund (IMF) as emerging market economies are given a greater say in theirdecision-making processes.

The Fifth US-China Strategic Economic Dialogue and Action to Combat the Global Financial Crisis

24. Foreign direct investment in the US
The US reaffirmed that it welcomes foreign investment, including in its financial
sector and commercially-oriented investments made through China’s foreignexchange reserves and sovereign wealth fund, and its commitments to: (1) the open
and nondiscriminatory principles for recipients of sovereign wealth fund investment
identified by the Organization for Economic Cooperation and Development; (2) apply
the same regulatory standards to all applications made by Chinese banks, securities
and fund management companies as they apply to US or other foreign financial
institutions in like circumstances; (3) process expeditiously Chinese financial
institutions’ applications; and (4) ensure that the Committee on Foreign Investment inthe United States (CFIUS) process accords consistent and fair treatment of all foreign
investment without prejudice to the place of origin. At SED IV (in June 2008) the twosides agreed to begin negotiations on a bilateral investment treaty and have thus far
met three times for that purpose.
Via its foreign reserves China is the world’s largest holder of US Treasury andagency bonds but is concerned that a rapid appreciation of the renminbi could reducethe value of its holdings of these and other assets. Similarly, there have been reportsthat China Investment Corporation (CIC), China’s sovereign wealth fund, has now
racked up an unrealized loss on its stakes in the US investment group Blackstone LP
and investment bank Morgan Stanley. While the (separate) fact sheet on SED V
released by the US Treasury mentions that the US representatives expressed theirconcerns about the renminbi’s exchange rate, it has been reported in the press that thetwo sides also discussed China’s concerns about protecting the value of its holdings ofUS assets. However, there is no mention at all of the renminbi’s exchange rate in theJoint US-China Fact Sheet.

III. Prospects for US-China Strategic Economic Dialogue
Although China’ special representative at the meeting (and therefore counterpart toUS Treasury Secretary Henry Paulson), Vice Premier Wang Qishan, who also attended
SED IV, is a major figure in Chinese financial circles, having previously served as
deputy governor of the People’s Bank of China, as well as being an old acquaintanceof Mr Paulson’s, there does not appear to have been much discussion or any particular
agreement this time on opening up China’s financial markets-unlike at previous suchmeetings. Nevertheless, the fact that the two sides agreed to conduct technicalcooperation on the preferential tax treatment of defined contribution pension plans
may mark an important development in the reform of China’s pension system.
President Barack Obama appointed the former New York Federal Reserve Bank
Governor Timothy Geithner as his treasury secretary in January 2009. As well as
doing an MA in Far Eastern Studies, Mr Geithner has worked at the US Embassy inTokyo. In addition, he is a well known figure in financial circles both in the US andother countries, having been involved in the US response to the Asian Financial Crisis
after he joined the US Treasury as well as in its response to the current global

3

Nomura Journal of Capital Markets Spring 2009 Vol.1 No.1

financial crisis. We will follow with interest what happens to Mr Geithner, who is wellacquainted with both Asian financial markets and market participants, in his new role
and what happens to the US-China Strategic Economic Dialogue. We would expect
both countries to wish to continue the dialogue in some shape or form in the pursuit of
their mutual interest.

The Fifth US-China Strategic Economic Dialogue and Action to Combat the Global Financial Crisis

4