This week, Secretary Jacob J. Lew led discussions on our economic priorities with the Chinese delegation, headed by Vice Premier Wang Yang. They were joined by leaders from 17 U.S. government agencies, and heads and senior officials representing all key Chinese economic ministries. Through the Economic Track of the Strategic and Economic Dialogue (S&ED), the Obama Administration is working to deliver concrete benefits for U.S. firms and workers from our economic relationship with China. As the world’s second largest economy, it is important that China act in accordance with international norms and rules and pursue a growth strategy that relies more on domestic demand and less on resource intensive exports. This week, we saw engagement through the S&ED Economic Track yield real progress in addressing investment barriers, leveling the playing field, and strengthening intellectual property protection.
· Negotiating a High-Standard U.S.-China Bilateral Investment Treaty (BIT): China announced its intention to pursue a BIT with the United States that, for the first time, will cover all phases of investment, including market access, and sectors of the Chinese economy (except for any limited and transparent negotiated exceptions). A high standard U.S.-China BIT is a priority for the United States and is critical to leveling the playing field for American workers and businesses. A successful BIT negotiation would open up China’s highly restrictive system to foreign investment and help create a wide range of opportunities for U.S. firms to participate in the Chinese market. We are pleased by China’s interest in moving forward with negotiations that could address a range of U.S. commercial and economic priorities, including greater market access, removal of investment barriers, protections against technology transfer, and increased transparency.
· Opening China’s Services Market to U.S. Firms: China committed to open up further to foreign investment in services, including through the establishment of the Shanghai Free Trade Zone pilot. While detailed guidelines are forthcoming, the pilot is expected to permit foreign enterprises to compete on the same terms as Chinese firms across a wide range of services sectors. U.S. services firms are among the most competitive in the world and will contribute to China’s services market as it grows and becomes more open to foreign investment. China also identified the e-commerce and commercial factoring sectors as areas for future liberalization to foreign investment. In addition, China plans to reduce the tax burden on services firms, by extending its VAT-for-Business pilot program to cover the entire country and to cover additional sectors in 2014.
· Unlocking China’s Procurement Market: China has not joined the WTO Government Procurement Agreement, despite having one of the world’s largest and fastest growing procurement markets. China announced that it will take additional steps to open its market to U.S. firms by committing to submit a revised offer to the WTO Government Procurement Committee by the end of the year that will include improvements in some key areas such as lowered thresholds and increased coverage of sub-central entities. China also committed to begin intensive technical discussions with the United States this summer with the aim of tackling remaining obstacles to China’s GPA accession.
· Enhancing Cyber Security and Protecting Intellectual Property Rights (IPR): Innovation is fundamental to America’s competitiveness and growth, and preventing the theft of U.S. intellectual property (IP), including trade secrets, remains a top Administration priority. During the S&ED, Chinese officials acknowledged U.S. concerns over the growing problem of the cyber-enabled theft of trade secrets and business confidential information. U.S. and Chinese economic officials discussed the need to address this issue head on. China pledged to better protect against trade secret misappropriation through strengthened enforcement. China also committed to take concrete measures to promote the use of legal software by its state-owned enterprises (SOEs), including state-owned financial institutions, which account for a major share of the country’s economy and computer users.
· Developing International Guidelines on Export Finance: To help ensure that U.S. exports are not disadvantaged by cheap Chinese government financing, China affirmed its support for the current multilateral negotiation of sectoral guidelines as concrete progress towards achieving our joint commitment to conclude negotiations in 2014 for new comprehensive international guidelines on export financing by the major providers of export credits that would be consistent with international best practices.
· Fostering Energy Transparency, Collaboration, and Reform: China pledged to increase the transparency and quality of the information it publishes on its energy sector, which will help to smooth the functioning of global energy markets. China also pledged to cooperate with the United States on policies for managing its oil stocks.
· Fostering Participation in China’s Energy Sector: China committed to accelerate the development of the legal and regulatory framework in the unconventional oil and natural gas sectors, a move which will help China to realize the potential of its domestic energy resources. China also announced that it welcomes participation by U.S. companies in energy development.
· Promoting Legal and Regulatory Transparency: After a several year hiatus, China pledged to re-engage in a regular transparency dialogue at the Vice Minister level, which will enhance our ability to ensure that U.S. firms doing business in China are provided greater legal and regulatory certainty.
· Exchange Rate Liberalization: China committed to move to a market-determined exchange rate. This is a critical part of China’s efforts to rebalance its economy, as it will both reorient Chinese production towards goods for domestic residents and strengthen the purchasing power of the growing Chinese middle class. Since June 2010, when China moved the renminbi off its peg against the dollar, the renminbi has appreciated by over 16 percent against the dollar after accounting for differences in inflation. Since 2005, the renminbi has appreciated by about 35 percent against the dollar. China pledged to continue taking steps to let the market play a fundamental role in exchange rate formation, and also indicated its active consideration of subscribing to the international standard for public reporting of reserves data, the IMF’s Special Data Dissemination Standard (SDDS), which would be a significant step forward in enhancing its reserve transparency.
· Strengthening Financial Regulatory Cooperation: China’s securities regulator announced that it will begin providing certain audit work papers to the Securities and Exchange Commission and the Public Company Accounting Oversight Board, an important step towards resolving a long-standing impasse on enforcement cooperation related to companies that are listed in the United States. U.S. and Chinese audit regulators also committed to accelerating efforts towards establishing a cooperation mechanism for cross border audit oversight.
· Expanding Opportunities for U.S. Financial Services Providers: China pledged to continue to open up its financial sector to U.S. participation. China pledged that locally-incorporated foreign banks and securities firms will be able to directly trade government bond futures, and to encourage investment by foreign and domestic institutional investors in these products. China also welcomed participation by foreign firms in corporate bond underwriting and pledged to facilitate further evaluations of interested underwriters for participation in this market. China pledged to expand its consumer finance company pilot program to new cities and to additional foreign and domestic firms, which will increase the availability of financial services to Chinese households and help boost consumption. As it continues to move forward with renminbi internationalization, China welcomed participation by foreign banks in renminbi settlement of cross-border trade and investment.
· Developing China’s Financial Markets: To help channel capital to the most productive investments, and away from less efficient SOEs, China pledged to expand the pricing flexibility of financial market participants, advance market-based interest rate reform, and let the market play a larger role in credit allocation. China announced plans to re-launch government bond futures, which will support interest rate liberalization by helping to establish a benchmark interest rate yield curve. In addition, China will boost income security for Chinese households and support capital markets development through a commitment to promote tax-deferred pensions on a pilot basis, which it will expand to new cities and provinces, and welcome foreign firms’ participation.
· Boosting Household Consumption: China is taking a number of additional steps to boost household income and purchasing power, enabling households to spend more on goods and services, including from U.S. suppliers. To reduce the need for precautionary household savings, which often end up being invested in China’s export sector, China pledged to significantly increase social security and employment spending by two percentage points of total fiscal spending by the end of 2015.
· Boosting SOE Dividend Payouts: China pledged to increase the dividends paid by its SOEs and to increase the SOE dividend revenue transferred to social welfare, rather than retaining earnings within the SOE sector. This will increase the resources available to support social welfare programs for households, while reducing the resources available to support SOEs.
· Eliminating Preferential Input Pricing for SOEs: China for the first time pledged to ensure that enterprises of all forms of ownership have equal access to inputs, such as energy, land, and water, and to develop a market-based mechanism for determining the prices of those inputs. This will help level the playing field for domestic and foreign enterprises competing with Chinese SOEs that often pay below market cost for their inputs, and are key steps to ensuring that SOEs do not have an artificial advantage.