What To Expect From This Year’s China-US Strategic And Economic Dialogue

The eighth China-US Strategic and Economic Dialogue (SED), the flagship dialogue started in 2009 to facilitate cooperation between the two largest economies in the world, will likely focus on bilateral investment treaty, China’s excess capacity and the RMB exchange rate scheme, says a research note by Mizuho Securities Asia Ltd.

This year, the China delegation is headed by State Councillor Yang Jiechi and Vice-Premier Wang Yang to meet with their U.S. counterparts, including U.S. Secretary of State John Kerry and Treasury Secretary Jacob Lew.

Delegates from both sides have expressed their intention to achieve an investment pact at this year’s SED. This may involve a further narrowing of the negative list for industries that remain closed to foreign investment.

The challenges will be U.S. pressure on China to open up its market for financial services further, as well as criticism that the current negative list remains too long.

U.S. demands may be difficult to satisfy, especially as there has been a temporary setback in China’s capital account opening due to pressure on the RMB.

Since the discussion began in 2008, 24 rounds of negotiations have been carried out, and it is unlikely that an agreement can be reached in 2016.

U.S. Treasury Under Secretary for International Affairs, Nathan Sheets, noted that a focus of the dialogue would be on excess industrial capacity at China’s state-owned enterprises (SOEs).

On May 18, the U.S. Commerce Department paved the way to levy a 522% anti-dumping import duty on Chinese-made cold-rolled flat steel, in response to U.S. steelmakers claims that the Chinese government is unfairly subsidizing its steel exports.

The discussion provides an alternative angle, from which to look at China’s zombie SOEs, which are the key to China’s economic malaise, says the report.

While pledging to solve the problem through SOE reform, the Chinese government has made it clear that SOEs deemed strategic would continue to receive government support to strengthen their competitiveness both globally and domestically.

Solving China’s SOE problem, as such, could require significant effort outside the SED.

Discussion on the RMB exchange rate will be the easiest of the three to reach consensus, says Mizuho. At the 13th Sino-US Financial Symposium in Hangzhou on 21-22 May, both China and the U.S. were keen to maintain a stable RMB exchange rate against the U.S. dollar.

China is unlikely it will tolerate significant depreciation in the run up to the G20 Hangzhou summit in September and the official admission of the RMB into the IMF’s SDR in October.

Meanwhile, the Federal Open Market Committee (FOMC) minutes also suggested that the U.S. Federal Reserve had to delay the rate hike in September 2015 amid concerns of growing risk in China.

Beyond the economic issues, the SED will also cover other areas such as China’s escalating maritime dispute with the U.S. and other countries in the South China Sea.

While the interests of China and the U.S. become more closely aligned as China rises in power, their competition could also grow more intense, predicts the report.

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