US, China agree to restart investment treaty talks

US Treasury Secretary Jack Lew responds to a question during a news conference following the conclusion of the 2013 US-China Strategic and Economic Dialogue at the Treasury Department in Washington on Thursday. Lew hailed China’s agreement to restart talks on an investment treaty as a sign of positive change in Beijing, as China retools its economic growth model away from heavy investment and exports towards growth driven by consumption.

Reuters/Washington

The US and China have agreed to restart stalled negotiations on an investment treaty, with Beijing dropping previous efforts to protect certain sectors of its economy from the start.

The agreement to resume negotiations was welcomed by the US business community as a major advance on Thursday during annual Strategic and Economic Dialogue talks in Washington, which have often produced few agreements of substance.

Top officials from both sides strived to project a friendly, businesslike tone as they tried to build what China calls a “new model of major country relations” between the world’s two biggest economies in the first year of Chinese President Xi Jinping’s mandate.

US Treasury Secretary Jack Lew hailed the investment treaty commitment as a sign of positive change in Beijing as China retools its economic growth model away from heavy investment and exports towards growth driven by consumption.

“China announced its intention to negotiate a high standard bilateral investment treaty with us that will include all stages of investment and all sectors — a significant breakthrough, and the first time China has agreed to do so with another country,” he said as the talks concluded.

China and the US began negotiations on a pact to govern bilateral investment in 2008 under then-US President George W Bush, but discussions were put on hold after President Barack Obama took office the following year.

Previously, Beijing had agreed to talks only if certain Chinese industries, especially in its service sector, were exempt. But it agreed to drop blanket restrictions for the current talks, a US Treasury official said.

The official, briefing reporters at the US-China economic talks, said the move was an encouraging sign the world’s second-largest economy was willing to open up more sectors to foreign competition.

Chinese Commerce Minister Gao Hucheng told reporters China and the US shared “a common purpose, which is to try to find ways to reduce and mitigate differences and barriers that both sides place in our trade and investment relations.”

Explaining China’s motives for reopening the investment talks, Chinese Vice-Finance Minister Zhu Guangyao said China had about $20bn of direct investment in the US and $1.2tn in US treasury bills.

“With such an extensive investment relationship, it is necessary for the two sides to have an institutional environment for the protection of these investments,” he told reporters.

In addition, Zhu said, “Business leaders from China and the US have a strong desire to invest in the market of the other. They both want an open and more transparent market.”

Analysts and US officials said another factor was a relative reversal of fortunes from previous years, with the US enjoying economic recovery while China grappled with a slowing economy that showed the limits of its model.

“This set of meetings, as many of the meetings that I’ve had in recent months have had this character to them, that there’s a renewed recognition and respect for the resilience of the American economy,” said Lew.

US business groups welcomed the agreement to resume negotiations, but warned that both sides still faced many other tough issues and that negotiations on a treaty could be lengthy. Any pact would need to be ratified by the US Senate.

“The US Chamber called for this last year as a pre-condition, and we are very pleased that both governments rose to the challenge,” said Myron Brilliant, head of international affairs at the US Chamber of Commerce.

US investors face barriers or ownership limits in about 90 Chinese sectors, while Chinese companies seeking to invest in the US often fear a political backlash in Congress or rejection on national security grounds.

“If China negotiates a treaty that not only protects investments after they are made but also improves US investors’ access to the Chinese market, this would be a real breakthrough,” said Michael Smart of consultants Rock Creek Global Advisers, who worked on investment issues in the Bush White House.

Meanwhile, Chinese regulators will hand over some audit documents of US-listed Chinese companies to US securities regulators, Lew said yesterday, a move that may thaw a dispute over multiple accounting scandals.

Washington wants greater oversight after alleged misconduct at US-listed firms based in China led to billions in losses, but investigations into possible fraud have been stymied as auditors have refused to turn over papers for fear of violating Chinese secrecy laws.

A US Securities and Exchange Commission (SEC) official also testified in court yesterday that documents relating to one company may arrive soon, according to a person in the court room.

But underscoring doubts over China’s willingness to provide the documents, the official added that the China Securities Regulatory Commission (CSRC) has had a history of not following through on requests for assistance.

The SEC has been struggling for years to obtain audit work in China and many of the companies in question have seen their auditors resign. In some cases, the SEC and US exchanges have delisted or deregistered the companies with accounting irregularities.

“China’s securities regulator announced that it will begin providing certain requested audit work papers to our market regulators, an important step towards resolving a long-standing impasse on enforcement cooperation related to companies that are listed in the US,” Lew told a news conference.

A spokesman for the CSRC also said this week that China was ready to provide the documents.

The remarks by the SEC official were made in an administrative trial in which the SEC is trying to persuade a judge to sanction the Chinese affiliates of Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young for refusing to provide audit work papers.

Alberto Arevalo, an official in the SEC’s international affairs office, said China recently asked the SEC to pay a shipping tab so it could send about 20 boxes of audit documents for Longtop Financial Technologies, according to the person in the court room.

The records could arrive as soon as Monday, Arevalo was quoted as saying. But Arevalo added he does not believe getting records through the CSRC is a viable option for the SEC.

Of the 23 various requests for assistance to China over the years, China did not once offer any meaningful help, he told the judge. The SEC also throughout the trial yesterday displayed e-mails dating back more than a year in which Chinese officials promised to share documents, and then never followed through.

It was not immediately clear how this latest development could affect the SEC’s pending case against the five large accounting firms.

The SEC is also trying to convince a judge in a federal court to force Deloitte Touche Tohmatsu CPA, LTC, Longtop’s auditor, to provide the records. If the Chinese come through as promised, this could potentially help resolve the separate case against Deloitte.

If the SEC does get some of the records, it could mark the second major diplomatic breakthrough with China concerning accounting fraud this year.

In May, the Public Company Accounting Oversight Board announced it had struck a nonbinding deal with China to get access to audit work papers to assist with investigations against auditors.

But the deal was only a partial victory because it only pertains to audit documents requested in connection with investigations by the PCAOB. It does not allow for on-site routine inspections, which are separate from investigations and are done on a regular basis to ensure compliance.

PCAOB spokeswoman Colleen Brennan said Thursday the announcement by the Chinese is a positive step forward, but noted that the PCAOB wanted to strike a second agreement with the Chinese to allow for inspections as well.