The United States and China at the Dawn of a New Century

CIAO DATE: 2/00

The United States and China at the Dawn of a New Century

October 12, 1999, New York

Speeches and Transcripts: 1999

Thank you. We meet at an important time for Asia as it seeks to put the recent financial crises behind it and build the basis for strong and sustainable long-term growth into the next millennium. The outcome will be the result of the individual and collective efforts of every country in the region. But perhaps nothing will be more important to Asia’s long-term future and American interests in Asia than what takes place in the region’s most populous nation. In that spirit, I would like to focus my remarks today on China.

Earlier today, I was pleased to announce that the 12^th meeting of China-United States Joint Economic Committee will be held in slightly less than two weeks’ time, in Beijing. Meetings between the finance ministers of what may soon be the world’s two largest economies ought to be regular events—and increasingly, they are.

This 12^th Session comes at an important moment for the Chinese people—coming as it does in the wake of the recent fiftieth anniversary celebrations—and an important time for China’s economic transition. I expect that the discussions will focus on international economic issues of mutual concern, macro-economic and structural questions facing China, international law enforcement issues such as combating money laundering, and of course, the very live question of China’s entry into the World Trade Organization.

I would like today to take the opportunity to place these discussions in their broader context.

When we convene this year’s JEC it will be just over twenty years since Secretary Blumenthal first made his historic trip to Beijing to negotiate the terms for normalizing our trade relations to China. Since then:

China’s economy has grown by more than 350 percent in real terms.
It has risen to being 11^th largest trading nation in the world.
The number of Chinese with access to a television has risen one hundred-fold, to one billion.

Ever since the rise of Assyria and Sparta, emerging economic strength and major changes in the economic balance of power have raised the specter of war and conquest. In this century alone we have seen two World Wars that followed closely on the emergence of major new economic powers. And the pace of economic change in China—and indeed through much of Asia—is literally unprecedented in history, with standards of living for billions of people quadrupling or more in a single generation.

That this has so far been achieved without major conflict, despite the pervasive rivalries between the peoples of Asian nations, is a reflection of the progress that has been made across the region toward openness and integration. And it speaks to the success of postwar international institutions in helping to cement that progress. But if the next quarter century in Asia is to be as successful as the last it will be crucial that China define its greatness in the right way and that it fit into the global economic system.

As President Clinton has said, if we have learned anything in the last few years from events in Russia it is that the weaknesses of great nations can pose as a big a challenge to the United States as their strengths. Our long-term strategy must be to encourage the right kind of success in China: to help it grow into a strong, prosperous and open society, to come together not fall apart, and to become part of institutions that promote our deepest values and interests and can build mutual trust.

For all its recent progress, China has enormous challenges to overcome if it is to find a successful long-term path:

As Gerald Segal has noted, the home to one fifth of mankind still ranks 107^th- next to Namibia—in the United Nations’ Human Development index.
Each year many millions of people migrate to the cities in search of jobs, and in many places unemployment is now well into double digits.
Drugs and arms trafficking—even piracy—and corruption all pose a rising threat.

In the end, the solutions to these problems will lie in the choices that China makes. But its success will also depend on the choices we make in our regional and bilateral relations with China. Let me say a few words about the largest economic challenges that China faces today. I will then consider the role that regional and global efforts can make, and the core priorities for the United States.

Core Economic Challenges for a 21^st Century China

China’s remarkable progress since 1979 has been based on a simple and potent recipe: freeing labor from the land, and allowing the multiplier to operate on a vast stock of human resources that previously went untapped. After two decades, this has placed China, if not at the beginning of the end of its market transition then certainly at the end of the beginning.

In a sense, China’s problem now is the same as the one that Japan and other rapid industrializers have faced. For catch-up, by definition, can only take you so far. As we are all learning, continuous growth in a new economy demands continuous improvement in efficiency and innovation.

There’s a saying in Shanghai these days that when foreign investors say they’re in China for the long-term—it means they have been there 5 years and they’re still losing money. As the leadership recognizes, when it comes to laying the basis for this more difficult kind of growth, China has a long way to go—and profound obstacles still to overcome.

Three complex and interrelated problems stand out.

First, financial sector reform.

Financial markets do not just oil the wheels of economic growth. They are the wheels. Well-functioning financial markets are the difference between getting a country’s savings into high-return investments—and tying up those precious resources in moribund state-owned-enterprises or cash hoards under mattresses. But today, far from being a spur to future growth, China’s financial sector is probably its gravest handicap.

As Nicholas Lardy has noted, the Chinese financial sector has a number of features that were also present in the Asian economies that went on to suffer crises: notably a very rapid build-up in domestic credit, an equally dramatic increase in the leverage of industrial enterprises, and a rising share of non-performing loans. However, the basic nature of the financial problem in China is very different than in those economies, relating more to the interlocking relationship between SOEs, banks and the government and its fiscal and broader economic consequences.

Recognizing the seriousness of the problem, the Chinese government has made financial sector reform a high priority in recent years, and has undertaken important reforms. Promising recent steps include the reorganization of People’s Bank of China along regional lines to reduce local political pressure on supervisors, and the creation of RTC-style asset management companies to deal with non-performing loans at state commercial banks.

No one should imagine that breaking the dependence of loss-making SOEs and their workers on a near-bankrupt financial sector will be easy—or that the task of building a stable, well-capitalized, truly commercial financial system is close to being completed. But nor should they imagine that China can achieve a stable and prosperous transition without these things.

Second, state-owned-enterprise reform and reducing state economic controls.

The success of China’s reforms since 1979 has been to allow competitive forces to take hold of a rising share of the economy. But as we learned from Hungary and other partial reformers in the former Soviet bloc in the 1970s and 1980s—loss-making industrial SOEs and widespread central controls are dragging burdens that a growing economy cannot carry indefinitely.

Reform of China’s loss-making SOEs was the focus of the recent Party Plenum, and the leadership has reaffirmed its commitment to resolve the problem by the end of next year. However, while there have been some recent achievements in the textile and coal sectors, it is fair to say that SOE reform remains on a cautious path—and the state’s control over key sectors of economic activity looks set to be retained for some time.

To be sure, with unemployment and underemployment already a serious problem in China, we cannot expect changes that have been resisted so long to come easily or quickly. But if there is one lesson of recent events around the world must be that in the end, government direction of economic activity, limited competition, and promotion and protection of particular industries does not produce the lasting growth in living standards that China needs. And it bears emphasis that growth is itself threatened by a situation in which the SOE sector absorbs perhaps 85 percent of bank loans in the economy—while producing less than one third of its output.

Third, building the intangible infrastructure of a market economy.

China wants to succeed in the global economy of the 21st century. And in this new world, even more than in the century just ending, I am convinced that the quality of governance will be a key determinant of that kind of success. Ultimately, the long-term challenge for China must be the same as that facing every other economy in Asia today. This is to create an institutional environment in which investment and innovation can flourish.

That means, among other things: sound money, the rule of law, fair tax laws and enforcement; private ownership and free land markets; intellectual and physical property rights; independent courts that enforce laws and contracts; strong banks that safeguard peoples’ savings and channel those savings to productive investment; securities markets that deter fraud and protect investor rights; social spending targeted to those really in need. And it means transparency and a free market in ideas.

In its reforms of the financial sector, especially, the Chinese leadership is taking some first difficult steps toward these things. But as the world moves from an industrial to an information era, the degree of freedom will surely become an ever more important prerequisite for economic success. There is no firewall between economic freedom and freedom in its many other dimensions. The free flow of information is essential to free society, to free markets and to a strong financial system.

In addition to all of these profound challenges for Chinese economic reform we should remember that other long-term trends will be imposing their own constraints in the years to come:

China’s population will be aging enormously. Today there are around ten workers in China for every pensioner, in fifty years’ time there will be only three.
And China will have to cope with the human and economic consequences of environment degradation. China’s air and water—particularly in urban areas—are now among the polluted in the world.

At bottom, as President Clinton has said, “China’s greatest challenge in the coming years will be to maintain stability and growth at home by meeting, rather than stifling, the growing demands of its people for openness and accountability.” Seen in this light, closer integration of China into the world economic system acquires a dual significance: as a force for economic success in China and as a force for enhanced regional and global stability.

China As Regional Anchor

The United States has supported China’s efforts to play a constructive role in the regional institutions and decisions that will help shape Asia’s economic future—in its strong and continued participation in APEC and, most recently, in its response to the recent crises.

Throughout this difficult period President Jiang and Premier Zhu have made clear that they recognize China’s own stake in a lasting restoration of growth and stability in Asia and across the emerging market economies. And they have made clear that they understand the contribution that China can make to that outcome:

Through China’s involvement in the Manila Framework Group for better managing financial crises, founded by finance ministry and central bank officials from key Asian economies in November 1997.
Through its support for multilateral emergency financing packages for the Asian crisis economies.
And, especially, through keeping China’s own exchange rate stable at a time of crisis. China’s commitment to maintaining a stable renminbi served it well during this period—and it well served the interests of the Asia-Pacific as a whole.

China’s role in helping to build a more stable global financial system has now been further recognized in its inclusion in the G20. This new permanent informal mechanism for dialogue on economic and financial issues among officials from the G7 and key emerging market economies will meet for the first time later this year. We hope and expect that China will be an active participant.

The United States and China

There is little doubt that a constructive bilateral relationship between the United States and China will be critical to the shape and prosperity of the 21st century global economy. China will choose its own destiny. But by working with China as it reforms, by expanding our areas of cooperation and by dealing forthrightly with our differences—in all of these ways we can advance fundamental American interests and values.

Principled and successful United States engagement with China in the years ahead will involve a wide range of concerns that are not strictly economic: from combating global warming and nuclear proliferation, to global aviation regulation, to expanding our people-to-people ties.

For our part the Treasury Department will be working, at the upcoming JEC and in other fora to strengthen our cooperation on international law enforcement issues such as money laundering, and we will also be continuing to call on China to observe the terms of the Memorandum of Understanding and Statement of Cooperation on prison labor.

Beyond these issues, what will be most important for China’s economic future will be the approach we adopt toward the closer integration of China with the global trading system.

Many see a rising economy with millions of poor people within its borders as a threat to American economic interests. And starting from this perspective, they worry about the implications of such a country becoming more integrated with our own markets. This Administration—and all of those who have supported, on a bipartisan basis, China’s closer integration with the world trading system for well over a decade—perceive it rather differently.

Of course, it is important to ensure in our relations with China that our commercial interests are protected. But to seek to contain China economically—to keep it poor and to isolate it from our markets—is to see our long-term core interests precisely backwards.

The truth is that an open and prosperous China will best promote our national commercial interests—and it will best promote our broader national economic and security interests:

It will open an enormous export market to our producers and our farmers. Even the limited opening that has already occurred has quadrupled our exports to China in the past decade, to the point where an estimated 400,000 American jobs now depend on them.
It will support faster growth in productivity and wages in China—and thus faster real living standards and higher demand for our products in the future.
And, as I have described, it will provide a catalyst for broad economic and institutional change that could help China in the 21^st century become the open, stable and prosperous observer of global norms that we would all like to see.

The United States’ stake in a more open Chinese economy underpins our bilateral and multilateral trade policy toward China. But look closely at the various market access and intellectual property right agreements we have negotiated with China in recent years and you will see that they rest on broader international standards—such as transparency, fair contract enforcement procedures and checks on arbitrary government action.

That is why, in the long run, we believe that the best framework for our trade relations with China would be the market-oriented and rules-based system of the World Trade Organization. The WTO provides a tested means to reduce trade barriers on a reciprocal basis, to prevent unfair trade practices, and to enforce commitments on open and fair trade.

For all of these reasons, the Administration remains committed to China’s accession to the WTO on strong, commercially meaningful terms. But the prospects for reaching an agreement will depend largely on the Chinese and their willingness to address our priority concerns, including in the area of financial services. We will not conclude these negotiations until China’s commitments are very clear, and the interests of American producers are adequately safeguarded from sudden market shifts.

To be sure, a World Trade Organization cannot fully live up to the founders’ intent while it excludes a country that is home for one fifth of mankind. Nor can it do so by including countries that have not firmly committed to its basic principles: commercial reciprocity and respect for international law.

Conclusion

China has been a major power in the world for five thousand years. When George Washington became President it produced one third of the world’s output and was home to around one sixth of the world population. As the tragedies of the past 100 years have made clear, it is subject to convulsive and sudden change. But surely the right policy for us is a consistent policy of giving strength to favorable trends where they are under way in China, while at the same time as assuring that we protect our deepest interests and values.

History will judge whether both countries rose to the challenges this new era presents and worked to lay the foundation for unprecedented regional and global security and prosperity—or whether we let that potential go to waste. We are not guaranteed to succeed. But we will certainly reduce the chances for success if we fail to forge a constructive path with China and support its closer integration in the world system.

This is what the meetings among President Clinton, President Jiang and Premier Zhu in the past few years have been about. And it will very much be the spirit of the twelfth JEC in Beijing on October 25