U.S.-China Business Council
As Prepared for Delivery
Next week in Washington, Secretary Clinton and I will host the third meeting of the Strategic and Economic Dialogue (S&ED) with China. The S&ED brings together senior leaders of the U.S. and Chinese governments to discuss the most critical issues our two countries face, today and into the future.
I want to describe the state of our economic relationship with China, where we are making progress, and where we will next direct our attention.
Over the past two years, we have seen the beginning of promising shifts in the economic policy in China that have the potential to benefit China, the United States, and the world as a whole.
A year ago, China’s exchange rate was frozen. Today, it is moving. Since last June, the renminbi has appreciated against the dollar by over five percent, and at an annual rate of about ten percent when China’s higher inflation is taken into account. China’s leaders increasingly acknowledge the importance of currency appreciation as a tool to fight inflation.
For many years, China maintained comprehensive controls on the movement of funds into and out of the country and on the ability of people outside China to use the Chinese currency. Today, China is taking steps to relax these restrictions.
For many years, China built an economic strategy that was dependent on exports. Today, China is committed to transforming its economy into one where future economic growth is generated primarily through domestic demand. And China has committed in the G-20 to reducing future external and trade imbalances.
Two years ago, China was taking actions that would further tilt the commercial playing field in favor of Chinese companies and against those companies that compete with them. During his visit to Washington this January, President Hu made important commitments to help level the playing field, by strengthening intellectual property rights protection and enforcement, removing policies that were designed to encourage Chinese technologies at the expense of U.S. and foreign technologies, and moving toward greater government procurement opportunities for non-Chinese companies.
Together, these steps have helped expand opportunities for U.S. producers in China. Last year, U.S. exports grew fifty percent faster to China than to the rest of the world and have now reached $110 billion.
These changes in policy direction offer the prospect of much more substantial economic gains for U.S. companies and workers in the future, provided we see durable changes in actual policies on the ground.
The renminbi remains substantially undervalued. China needs to let the exchange rate adjust at a faster pace to correct that undervaluation.
More rapid exchange rate adjustment will help bring down inflation in China. It will reduce pressure on emerging economies that have open capital markets and allow their exchange rates to adjust. And a stronger Chinese exchange rate will raise the incomes and spending of Chinese households, and it will encourage Chinese firms to produce for the domestic market.
The commitments China made on protecting intellectual property and delinking government procurement and innovation policies during President Hu’s visit are a significant step forward. And of course we hope and expect to see continued progress in implementing these commitments effectively.
We will also expand our engagement to encourage a more fair and efficient allocation of credit and capital in China. This is important to level the playing field with China’s state-owned enterprises (SOEs), put more money in the pockets of China’s consumers, and create opportunities for private enterprises – including for American firms – across a broad range of services.
With its current system of controls on both bank deposit and loan rates, China’s financial sector policy is designed to channel low-cost loans to SOEs, by lowering returns to Chinese depositors. Access to low-cost credit gives SOEs an advantage over the private firms – both domestic and foreign, including American firms – that compete with them.
The financial distortions that give preferential advantages to SOEs add to trade tension and to calls for protection among China's trade partners.
Artificially holding down bank deposit rates deprives China’s households of income on their largest financial asset, hindering efforts to promote domestic consumption. Restricted deposit rates require Chinese households to save even higher shares of income in order to pay for large purchases such as homes, cars, and education.
China has committed to reform its financial sector as part of its new Five-Year Plan. Through the S&ED, we are encouraging China to allow markets to determine interest rates and the allocation of credit, to develop a more diversified financial system, with deeper bond and equity markets, and to make it easier for foreigners to make portfolio investments in China and for Chinese citizens to make portfolio investments abroad.
As China tries to promote the international use of the renminbi, it will need to modernize its financial system with a wider range of financial sector products and with freer flows of capital, both within China and between China and the rest of the world. We are also encouraging China to provide more opportunities to foreign financial institutions so that they can play a greater role in offering financial products to Chinese individuals and expanding the role of the equity and bond markets in meeting the capital needs of Chinese companies.
We have a lot at stake in this economic relationship, as does China.
China wants continued access to the U.S. market, greater access to U.S. high-tech exports, recognition as a market economy, and new investment opportunities for Chinese firms in the United States.
The United States welcomes investment from China. And Chinese investment in the United States is growing rapidly. A recent survey suggests Chinese investors see America as one of the most attractive markets in the world and one of the easiest in which to do business.
We are willing to continue to make progress on these and other issues that matter to China, but our ability to do so depends on how much progress we see from China on the issues that matter most to us.
Of course, our ability to take advantage of the economic opportunities and to meet the challenges in this relationship depends on our ability in the United States to deal with our economic challenges here at home.
Our great strengths as a country have been in our openness to ideas and talent, our capacity to innovate, our excellence in higher education, a willingness to invest public resources strategically in scientific research and discovery, and the political will to confront challenges with wisdom and force.
We must build on these strengths, even as we make the hard decisions to bring the budget deficit down to a level that will put our overall debt burden, as a share of the economy, on a declining path.
We have made a lot of progress in strengthening our relationship with China over the last two years. We look forward to welcoming the Chinese delegation next week and to discussing with them how we can best build on that progress.