Secretary of the Treasury Robert E. Rubin Address before the Council on Foreign Relations

Secretary of the Treasury Robert E. Rubin Address before the Council on Foreign Relations

October 27, 1997

TREASURY SECRETARY ROBERT E. RUBIN

What I would like to do is use our time together this morning to discuss the importance of prosperity and growth in Asia to our own economic well-being and to discuss the challenges and opportunities in our relationship with China--subjects that are on a great many minds because of the recent financial instability in Southeast Asia and China's President Jiang Zemin's landmark visit to the United States.

The starting point, it seems to me, for this discussion is that today the United States has a profound interest in economic well-being and financial stability in Asia. Developing countries in Asia accounted for about one fifth of U.S. exports last year, and we now export more to Asia than to Europe. We live in a period of enormous change and transformation in Asia--as all of you well know--which offer tremendous opportunities and some risks.

The ongoing financial instability in Southeast Asia underscores the increasing interdependence of the world's economies. Twenty-five years ago, I would wager few outside Thailand could name Thailand's currency or would notice if the baht depreciated by 45 percent. Now, the problems in one developing economy can affect its neighbors and potentially--though certainly not necessarily--at least some developing or transitioning countries elsewhere and all of that can affect exports and trade in the developed nations, including our own.

Having said this, clearly one of the major reasons for Asia's success has been the development of global financial markets. Twenty five years ago, few investors thought of investing in developing countries such as those in Asia. Now, $250 billion in private sector capital flow each year to developing countries around the world, financing investment and growth. The global markets have brought tremendous benefits to developing countries and their citizens. On the other hand, as events in Southeast Asia clearly illustrate, there are risks involved in this globalization of financial markets. For this reason, a high priority for the Clinton Administration has been to work with other countries to better equip the World Bank and IMF to prevent crises from occurring and to address them if they do occur, a process we intensified about three years ago at the Halifax G-7 summit.

All these improvements, notwithstanding, however, one thing is clear as we review the financial instability in Southeast Asia: the path to recovery, as always in such situations, ultimately depends on each affected country implementing a sound reform regime encompassing sound macroeconomic policies, structural reform, financial sector reform, and open markets, though certainly the specifics will depend on the circumstances of the country. In Southeast Asia this is in effect, in pursuit of the strategies that have been so central to Southeast Asia's success, in the first place. When sound policies are pursued, confidence--and capital--return.

Another lesson from the financial crises that have occurred over the last several years--not just in Asia--is that when there are financial crisis they are either precipitated or exacerbated by problems in the banking system. Establishing a strong framework of policies and regulatory institutions to underpin the financial sector--as well as improving management and expertise inside financial institutions--is key to maintaining stability but is a challenge not easily met in developing countries, even with World Bank and other technical assistance. It is also extremely useful to open financial sectors to foreign institutions, who then bring in capital and expertise.

These are not easy issues for any nation to address. In addressing them, there is a very important role for the IMF, World Bank, and the international community, but that international action must not be seen as insulating countries from the consequences of bad policy decisions, else a serious moral hazard problem could develop. In fact, countries like Mexico that have experienced these crises have paid a heavy economic price even as they have recovered with the aid of good policy and international financial support, so I do not believe, as to countries, a moral hazard problem is developing. With regard to investor moral hazard, investors should be subject to the discipline of risk.

Let me add one more note on Southeast Asia, by saying that these countries have great long term strengths, such as a strong work ethic, high savings rate, and heavy emphasis on education, which provide a solid base.

Let me turn now to China, a nation that is critical to Asian prosperity and stability. The relationship between the United States and China, the largest industrialized nation and the largest developing nation on earth, is now and will ever more be critically important for the United States, China, Asia and the global economy.

A month ago, I visited China, just after the historic 15th Party Congress. I met with President Jiang, as well as Vice Premier Zhu Rongji and Finance Minister Liu In my meetings with the Chinese leadership, they expressed great commitment to economic reform, and recognition of the challenges that lie ahead.

China faces many difficult issues in building a successful, modern economy such as raising agricultural productivity, satisfying energy needs, spreading the benefits of economic growth from the coast to the interior of the country, and working to make sure that economic growth does not come at the expense of the environment. But let me just focus on two overarching economic challenges that China faces: market reform and integrating into the global economy.

First, with regard to continuing on the path of market reform, the next major step will be the privatization--or diversification of ownership--of state-owned enterprises, announced at the 15th Party Congress. This will be an enormous undertaking--as of 1995, China had three hundred thousand state owned enterprises employing about 80 million people. This will clearly result in significant adjustments, and President Jiang said in our meeting that it is essential that there be training and assistance to help dislocated people get back in to the economy as quickly as possible. I mentioned to him that this is an issue that we also have to deal with, as dynamic change in our economy, though to the benefit of most, creates dislocations for some. Restructuring these state owned enterprises is a great challenge for China, but it is absolutely essential to building a modern and competitive economy.

Also crucial to China building a modern economy will be a strong and effective financial sector, which is key to every successful economy. State owned enterprises are enormous debtors to the Chinese banking system and unwinding those relationships, including loans that have been made, will be a major challenge. There will undoubtedly be many other difficult challenges in building a strong financial system--we know that all too well from our own history. But again, the strength of the financial sector is key to a well-functioning economy and meeting the challenge of building such a system would be greatly enhanced by allowing competition, including foreign competition, that would bring in outside capital and expertise.

Let me briefly mention three other critical ingredients for market reform in China. First, allowing the free flow of information is indispensable to the well-being of financial markets and an economy as a whole. In this regard, I think it is very constructive that final agreement has been reached with Shinwa, the Chinese press agency, that is intended to ensure that Shinwa's regulation will not interfere with the ability of these firms to meet the needs of their Chinese customers. The second ingredient is predictability for the investment, and the conduct of economic activity, which requires the rule of law and transparency. Third is combating corruption, which, has a corrosive effect on economic growth. The Chinese leadership recognized this imperative by highlighting it at the 15th Party Congress, and there have been recent arrests and convictions of high-profile individuals for corruption.

Another major challenge China faces in its economy is continuing to move forward on integration into the global economy. China's exports have soared, rising about fifteen-fold between 1978 and 1996. China's imports have risen sharply too, both in dollar amounts and as a share of China's rapidly-growing economy; and China is now the world's second largest recipient of foreign direct investment, after the United States.

But much remains to be done to integrate China into the global economy, and the next step is for China to join the World Trade Organization, a step we strongly support. China has taken steps to open its markets but serious impediments to trade and investment remain. Chinese entry into the WTO must be on commercially-viable terms, which means it must be based on a firm commitment to meaningful market opening--for manufacturing, agricultural products, and services.

China's lack of trade openness--is increasingly discussed in this country because it is directly related to an issue that troubles many with respect to our relations with China, our bilateral trade deficit, which in recent years has risen at a rapid rate. What has happened is that to some extent our trade deficit with China has increased because companies from other Asian economies are shifting their low wage production to China, and as a result we experienced a corresponding improvement in our trade balance with those other countries.

Another factor contributing to our trade imbalance with China is its exchange rate policy and its accumulation of reserves, even though trade impacts may not be the purpose of this policy. China's current account surplus, along with huge capital inflows, has created an immense accumulation of reserves--$130 billion, the second-highest level in the world. While comfortable levels of reserves are essential for every economy, especially in the context of recent financial turbulence, the levels China has reached raise questions as to whether continued reserves growth represents an efficient use of China's savings, a matter I discussed with China's leadership when I was in Beijing. China can earn higher returns by investing in real capital than by money market investments. Such a move would not only bolster Chinese development, it would help increase Chinese imports, helping to moderate China's external imbalances.

Before I conclude on this, let me make one final, important point: the United States and China are deepening ties and making progress toward a stable, mature relationship, but we do have significant differences, particularly with respect to human rights. No nation can claim perfection on these matters, but throughout our history we've been a strong advocate of human rights throughout the globe. Respect for human rights is part of our identity as a people and we believe these rights are universal. This issue will continue to be an important part of our dialogue with countries around the world, including China, and President Clinton will certainly raise this issue with President Jiang this week. I might add that respect for human rights leads to more open debate, more vigorous exchange of ideas--and therefore also promotes economic development.

In conclusion, our two countries will best make progress in our relationship--including on the issues where we disagree--by understanding each other and by engaging in continuing dialogue. We need to increase that greatly on the government to government level, but we also need to build increased understanding by the Chinese and American people about each other's countries, and among the American people about the importance of a strong relationship with China. The Council on Foreign Relations can play an ever more important role in the U.S.-China relationship in the year to come by heightening its forum on building increased understanding in all these respects.

And in my view, this is only part--though a very important part--of an urgent need to more broadly increase American public understanding of the opportunities and issues of the global economy and the importance of U.S. leadership in the global economy. I am deeply concerned that the public support for forward looking international economic policy, such as fast track or may be moving backwards at a time when this country's economic, national security and geopolitical interests require just the opposite. There needs to be a redoubled effort by all of us, especially an organization so critically involved in our nation's foreign policy as your council--if our nation is going to be well positioned to deal with the opportunities and challenges of the next century.

Thank you very much.