[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                    U.S. INTERESTS IN THE REFORM OF 
                   CHINA'S FINANCIAL SERVICES SECTOR 
=======================================================================
                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 6, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-35
                              -------

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel



















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 6, 2007.................................................     1
Appendix:
    June 6, 2007.................................................    45

                               WITNESSES
                        Wednesday, June 6, 2007

Aldonas, Grant D., William M. Scholl Chair in International 
  Business, Center for Strategic and International Studies.......    13
Decker, Michael, Senior Managing Director, Research and Public 
  Policy, The Securities Industry and Financial Markets 
  Association....................................................     9
Evans, Hon. Donald L., Chief Executive Officer, The Financial 
  Services Forum.................................................     5
Prasad, Eswar S., Tolani Senior Professor of Trade Policy at 
  Cornell University, and former head of the IMF's China Division    11
Sorensen, Norman R., President, Principal International, Inc.....     7

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    46
    Brown-Waite, Hon. Ginny......................................    49
    Aldonas, Grant D.............................................    50
    Decker, Michael..............................................    64
    Evans, Hon. Donald L.........................................    83
    Prasad, Eswar S..............................................   103
    Sorensen, Norman R...........................................   110

              Additional Material Submitted for the Record

Frank, Hon. Barney:
Statement of Paul Schott Stevens, President and CEO, Investment 
  Company Institute..............................................   120
Pearce, Hon. Stevan:
    Questions submitted to Hon. Donald L. Evans, Norman R. 
      Sorensen, Michael Decker, Eswar S. Prasad, and Grant D. 
      Aldonas....................................................   123
    Responses from Hon. Donald L. Evans (Other witnesses did not 
      respond)...................................................   126


                    U.S. INTERESTS IN THE REFORM OF 
                   CHINA'S FINANCIAL SERVICES SECTOR 

                              ----------                              


                        Wednesday, June 6, 2007

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Waters, Velazquez, Watt, 
Moore of Kansas, Clay, McCarthy, Scott, Green, Cleaver, Sires, 
Ellison, Klein, Wilson, Donnelly; Bachus, Baker, Pryce, Castle, 
Gillmor, Manzullo, Capito, Garrett, Neugebauer, Davis of 
Kentucky, and Roskam.
    The Chairman. The hearing will come to order. This hearing 
of the Committee on Financial Services is called pursuant to 
our jurisdiction over trade and financial services, and we deal 
with the very important subject of the ability of the American 
financial services industry to do business in China. I, along 
with many others, have talked about the unhappiness among a lot 
of Americans at what seems to them to be an uneven deal that 
they are getting, in which there is a great deal of growth and 
they do not participate and then there is also this concern 
that many have in America about an increasing problem in the 
trade balance perception that the world's rules are not as fair 
as they should be. Now, I am aware of the fact that in the 
world in general nothing is ever fair in the eyes of many 
people.
    We have a very interesting physical phenomenon that I have 
noted in my years on this committee: namely, we have within the 
country, but also internationally, in the economic field 
something that you would have thought defied logic and maybe 
gravity and that is a constantly declining playing field. 
People often talk about how the playing field is not level, and 
in all the years in which I have heard people talk about an 
unlevel playing field, I have never heard anyone who was at the 
top. It is a playing field which always slants against 
individuals.
    So apparently it is, as I said, just as we have an economic 
constantly downward sloping curves in some functions, we have a 
constantly downward sloping playing field. But just because 
people often unfairly invoke something doesn't mean they are 
always wrong. And it does seem to me that the playing field 
between the United States and China in terms of openness of 
each one's economy to the other is, in fact, unlevel.
    The Chinese currently benefit enormously from the openness 
of the American economy and from the prosperity of Americans. 
It is not entirely one-sided--obviously Americans get some 
benefit from this as well--but the American economy, it seems 
to me, is far more open to those areas of Chinese economic 
activity where they have the advantage than the reverse. And 
that in areas where Americans have an expertise and an ability 
to compete that exceeds that of the Chinese, they have been 
much less willing to allow that to operate than they are to 
take advantage of it when it goes the other way.
    A one-sided invocation of the principal of openness and of 
free trade is not only in my judgment flawed intellectually but 
it is deeply flawed politically. The Chinese should understand 
that until and unless they do a better job of practicing in 
China what they preach within the United States, namely, 
openness in terms of your economy even when another economy 
might outperform you, they will continue to run into 
resistance.
    I have joined with some others on the Ways and Means 
Committee and the Energy and Commerce Committee in our concern 
about China currency. I know we will hear today assertions that 
these things are linked, that part of the problem that the 
Chinese talk about when they say they cannot fully allow 
economic activity by our financial sector is in part a self-
inflicted wound because of the manipulation of their currency. 
But there will be the concerns about the currency, and there 
will be other concerns. There are, of course, geopolitical 
concerns that are not directly relevant here.
    But the Chinese should understand that until there is more 
openness to American financial services activity, until there 
is a serious effort in China to protect intellectual property--
not the jurisdiction of this committee but relevant--the notion 
that a society as controlled as China where you can in fact 
regulate the number of children and censor the Internet--which 
we were told was supposed to be uncensorable--but you cannot 
stop people from massively pirating other people's intellectual 
property, does not sense.
    And we are told, ``Well, do not be protectionist and do not 
be restrictionist,'' and those are legitimate debates to have 
elsewhere. Today, we are arguing, I believe, to the Chinese 
that if they wish to maintain the kind of political support 
they will need in America for them to be able to continue to 
enjoy the advantages of the American economy, there is going to 
have to be a great deal more reciprocity than there has been to 
date.
    I will now recognize the gentleman from Louisiana, Mr. 
Baker.
    Mr. Baker. I thank the chairman. And by way of explanation, 
Mr. Bachus is on his way to the hearing this morning. I am 
advised that for reasons beyond his control, he was 
unfortunately detained, but he will participate and will arrive 
soon.
    In his absence, I merely wish to observe that this is not a 
simplistic policy matter which can be readily resolved by 
simple actions of the Congress with a single bill being 
adopted, at least I hope that is not the remedy that is 
ultimately suggested. China abandoned its decade-long policy of 
pegging the yuan to the dollar in July of 2005.
    Since that period of time, I am advised that the actual 
increase has been limited to about 8 percent against the 
dollar. Principally, because the dollar is weakened, the trade 
weighted exchange weight really has not budged significantly. 
In real trade-weighted terms, it is about 10 percent cheaper 
today than at the dollar's peak valuation in 2002.
    This should be noted in the context of this conversation 
about what appears to be a government-driven market advantage 
to U.S. interests. I am the first to acknowledge that China's 
trade surplus with America increased $233 billion just last 
year. This is by no means insignificant, accounting for almost 
30 percent of our total deficit. The total current account 
surplus reached an estimated $250 billion or 9 percent of GDP. 
We are still in the first 4 months of 2007, the current year, 
the trade surplus jumped by 88 percent compared with the same 
period in 2006.
    However, not all economists are of the same mindset as to 
how we should address or respond to these factual observations. 
There are some who feel that it is inappropriate to be arguing 
from a U.S. perspective for a great appreciation in Chinese 
currency. It is even difficult to establish and agree on what 
the correct value might actually be. I only bring these points 
up at the outset to establish that we should be intellectually 
cautious as we move forward in this matter and understand all 
the moving parts.
    This is a country of a billion people with enormous assets, 
which is awakening to the principles of a free-market system, 
and once fully acclimated to U.S. principles of 
competitiveness, I suspect they will be more than competent in 
competing in the international marketplace. One does not have 
to go back far to recognize you picked up an item, a pair of 
glasses, and somewhere on it was stamped, ``Made in Japan,'' or 
``Made in Indonesia,'' or ``Made in Korea,'' or ``Made in 
Taiwan.'' Now, they are all basically the suppliers to China, 
who is becoming the aggregating manufacturer. If they were to 
somehow mysteriously disappear, does anyone think those prior 
labels would not resurface in the American economy? So let us 
understand before we act. It may be a big challenge, but I 
think we owe it to ourselves. I yield back.
    The Chairman. Now, we have been joined by the ranking 
member, and I recognize him for 5 minutes.
    Mr. Bachus. Mr. Chairman, I apologize to the committee for 
being late. I was greeted this morning by a police officer at 
the door telling me that there was a suspected pipe bomb in 
front of my residence between 3rd and 4th on Maryland so I did 
just now get a police escort over here. That was nice. They 
blew it up and it was harmless. I did not get close enough to 
it. I am going to submit my statement for the record, I do not 
want to delay the hearing any more.
    And we have a very prestigious group of witnesses. We are 
all--our focus I think, many Americans, we are focused on China 
and trade by China, and we all have a bit of mixed emotions. We 
are happy that they are successful and that they are a 
capitalist system, or not capitalist system, it is actually I 
am not sure what it is, but transition from communism to a more 
open market has really brought a lot of prosperity to China. It 
has brought a lot of benefits to America. With those benefits 
are some negative consequences. I have great faith in Treasury 
Secretary Paulson and his negotiations, but anyone who has been 
to China--I have been to China five times--knows that the 
Chinese have a different perspective than we do. We tend to 
think of tomorrow or next week; they tend to think of 3 years 
from now or 10 years from now or 20 years from now.
    So, even though we agree that we are going to do something, 
our timelines are quite different. I do believe it is essential 
that we maintain good relations with China. It is good for 
Americans, and it is good for the Chinese. And I sincerely 
believe the Chinese feel the same way. We are two countries 
that are very dependent on each other, and I think going 
forward the one thing my opening statement talks about is we 
made a financial--we had a similar situation with Japan, where 
we had a large trade deficit, and one thing we were able to 
offer them was financial services; it is an area in which we 
excel.
    We made a financial services agreement with Japan, which 
has been very beneficial to both countries, and I have 
advocated for the last 2 years that the United States and China 
sign a financial services agreement similar to what we did with 
Japan. It would really help China address a lot of its 
demographic and economic problems. It would be very beneficial 
for the Chinese citizens. It would be of great benefit to them, 
and it would also help us address our trade deficit.
    But with that, I will yield back and I look forward to 
hearing from the witnesses.
    The Chairman. Before recognizing the gentleman from New 
Jersey, I ask unanimous consent to insert into the record at 
this point a statement from Mr. Paul Stevens, president and CEO 
of the Investment Company Institute. If there is no objection, 
that will be made a part of the record.
    The gentleman from New Jersey, Mr. Garrett, is recognized 
for 2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, and thank you 
everyone for your testimony today on China and the financial 
services sector.
    I would just like to briefly comment for a moment about the 
other side of the Taiwan Straits, that is Taiwan and how it 
fares regarding issues that we will discuss here today. To 
begin with, let me applaud the democratic Taiwan's 
accomplishments and willingness to improve access to the U.S. 
financial markets, banking, and insurance industries. But, in 
contrast, I think it is important for us here today to 
highlight the necessity and feasibility for China to reform its 
financial services and access to international financial 
service providers.
    We often applaud Taiwan's efforts in having transformed 
itself into a democracy, and we urge China to emulate Taiwan 
politically, but I equally and strongly believe that Taiwan can 
serve as a successful economic model for China as well. 
According to a report done by Nicholas Lardy and Daniel Rosen 
of the Institute for International Economics, ``Taiwan has 
reformed its financial sector significantly in recent years, in 
some respects, more quickly than required as documented in the 
2003 National Trade Estimate Report from the USTR.''
    One of the U.S. insurance representatives even pointed out 
that Taiwan not only accepted the model schedule for insurance 
put forth by the United States for WTO accession, but also was 
the first to embrace extended commitments under the schedule, 
including regulatory procedures for approval as well. I have 
co-sponsored a resolution that calls for a U.S.-Taiwan free 
trade agreement and through such an agreement, I believe that 
we can further harmonize the trade policies of these countries 
that would benefit both the United States and businesses in 
Asia. So I would just be curious from the panel here when you 
give your testimony and the questions later on your thoughts on 
this comparison and when we discuss these issues today and to 
hear from you whether you think that China can learn or look to 
the economic model and the actions that Taiwan has taken in the 
past.
    And with that, I yield back.
    The Chairman. If there are no further statements, we will 
proceed to the witnesses, and I appreciate this very 
knowledgeable panel being available. We are going to begin with 
Don Evans, the former Secretary of Commerce. He was, I am told, 
the 34th Secretary of Commerce, and he has now come before us 
as the chief executive officer of the Financial Services Forum. 
We have worked on a number of issues. I will report to him now, 
since I like to give good news, that the conversations we have 
had with our colleagues in the Senate lead me to think that we 
are going to have a CFIUS bill on the President's desk before 
we break for the 4th of July, and I think that is an 
accomplishment, a bipartisan one on behalf of this committee 
and a bicameral one that we will all be looking forward to. And 
that is just one of a number of issues on which we have worked 
with Mr. Evans. So, please, Mr. Secretary, you are recognized 
for 5 minutes. All of your statements will be put into the 
record.
    Mr. Secretary?

  STATEMENT OF THE HONORABLE DONALD L. EVANS, CHIEF EXECUTIVE 
             OFFICER, THE FINANCIAL SERVICES FORUM

    Mr. Evans. Mr. Chairman, thank you for your leadership on 
CFIUS very much. It is bipartisan and bicameral but terrific 
leadership. Thank you for that.
    The Chairman. I got a grievance from the appropriate union 
about the gentleman from Missouri working on a classification.
    Mr. Evans. I do not know, but I am surely not going to sit 
in the chair of Congressman Boren, I can tell you that.
    Chairman Frank, Ranking Member Bachus, and other 
distinguished members, I am delighted to be here. Thank you for 
the opportunity to participate in this important hearing and 
for your public service.
    I will focus my brief opening comments on how increased 
market access for U.S. financial services firms in China's 
capital markets will benefit America and American workers. A 
more efficient financial sector in China is a prerequisite to 
successfully addressing issues that have complicated the U.S./
China economic relationship, chief among them, further currency 
reform and the trade imbalance.
    Regarding the currency, most China observers agree that an 
immediate shift to a fully market determined one is very 
difficult given that Chinese banks, securities firms, and other 
businesses lack the expertise to develop and trade financial 
instruments used to hedge the risks associated with greater 
currency volatility. Chinese authorities are also concerned 
that a rapid appreciation in the yuan would disrupt the current 
pace of economic growth and job creation, which could impact 
the U.S. and global economies as well.
    A more open and modern financial sector is the answer to 
both concerns. Sophisticated derivative products and hedging 
techniques provided by foreign financial services firms would 
enable China to deal with greater currency volatility and more 
sophisticated capital markets would enhance the ability of the 
Chinese economy to weather economic shocks. For these reasons, 
China should pursue more rapid appreciation of the yuan by 
opening its financial sector to greater foreign participation.
    Turning to the trade deficit, helping China move toward a 
more services-based, consumer-driven economy, a major economic 
goal of China's leadership, will help to integrate more than $1 
billion Chinese consumers into the global economy, creating 
vast new markets for American products and services. This is 
the most powerful remedy to the U.S./China trade imbalance. 
This will not happen overnight, but the long-term benefits for 
U.S. businesses and workers are astounding.
    Chinese households save as much as half of their income as 
compared to single digit savings in the United States and 
Europe. The pronounced propensity to save is related to the 
declining role of the State and the fact that most Chinese 
depend on private savings for health care, retirement, and 
education of their children, and the economic consequences of 
accidents or unforeseen events. Access to financial products 
and services that we take for granted: personal loans; credit 
cards; mortgages; 401(k)'s; pensions; and insurance products 
will reduce the need for precautionary savings and facilitate 
consumption. As China's consumers, a fifth of the world's 
population, participate in the global marketplace, new markets 
will open for American products and services.
    Mr. Chairman, the fastest way for China to develop the 
modern financial system it needs to achieve more sustainable 
economic growth allow for a more flexible currency and 
increased consumer consumption is to import it by opening its 
financial sector to greater participation by foreign financial 
services firms. If you care about the currency issue, or if you 
care about the trade deficit, you care about expanded access 
for financial services in China. By providing the financial 
products and services that China's citizens and businesses need 
to save, invest, insure against risks, and consume at higher 
levels, foreign financial institutions, including the United 
States providers, would help China develop an economy that is 
less dependent on exports, more consumption driven, and, 
therefore expanding markets for American products and services, 
and a powerful engine for creating good 21st century jobs for 
American workers.
    Thank you very much for the opportunity to appear at this 
hearing, Mr. Chairman.
    [The prepared statement of Mr. Evans can be found on page 
83 of the appendix.]
    The Chairman. Thank you, Mr. Evans, and I appreciate your 
encountering the difficulty. I am told we have the glitch 
cleared up now so we will go to our next witness, and here we 
are, sorry, Mr. Norman Sorensen, who is the president of 
Principal International, Incorporated.
    Mr. Sorensen, please go ahead.

     STATEMENT OF NORMAN R. SORENSEN, PRESIDENT, PRINCIPAL 
                      INTERNATIONAL, INC.

    Mr. Sorensen. Thank you, Mr. Chairman, Ranking Member 
Bachus, and members of the committee for the opportunity to 
testify today. I am Norman Sorensen, president of Principal 
International, Inc., which is a subsidiary of Principal 
Financial Group based in Des Moines, Iowa. I testify before you 
in my current role as chairman of the International Committee 
of ACLI, the American Council of Life Insurers, and in my 
capacity as the president of Principal International.
    ACLI is a unified voice for the United States life 
insurance, re-insurance, and pension retirement security 
industry--373 member companies are present in every major 
global market including China. Principal Financial Group is the 
Nation's 401(k) leader and provider of retirement benefits and 
assists asset management in the United States and abroad. We 
are in 11 countries, including China, where we have one of the 
most successful and well-recognized asset management companies, 
the China Construction Bank, a Principal asset management 
company.
    With the recently concluded second session of the U.S./
China Strategic Economic Dialogue, the SED, I am here to 
underscore the importance to our industry of continued 
engagement with China on economic and broader financial 
services issues and to seek your continued support as we 
address the remaining challenges. In our industry, China 
pledged in the SED II, just concluded: One, to complete the 
review of branch to subsidiary license conversion applications 
by August and to institute a policy of completing all future 
license applications within 60 days; two, to have by the time 
of the third session, which is December in Beijing, a 
streamlined licensing regime for financial services firms 
seeking to provide enterprise annuity services in place; and, 
three, to expand the qualified domestic institutional investor 
and qualified foreign institutional investor programs broadly.
    We view these commitments as meaningful, important, and 
part of a longer term process which our industry and the 
Administration has been working vigorously to advance and which 
Congress has been supporting all along.
    The SED provides us an opportunity to heighten the level of 
focus and attention in two critical areas: One, the need for 
China to redouble efforts to comply with its WTO commitments on 
insurance, re-insurance, and pension products; and, two, the 
need for China to hasten financial reform, supported by greater 
liberalization of financial services markets, including 
removing equity limits on foreign financial services firms and 
establishing a one-stop shop which can approve licenses for 
providing enterprise pension annuities, which is a new Chinese 
program.
    China is the world's 11th largest insurance market by total 
premium volume, the 8th by life insurance, with almost $70 
billion in total premiums in 2006, including $50 billion in 
life insurance, nearly a threefold increase since 2001. Foreign 
insurance companies, ACLI members and U.S. companies among 
them, have a 4 percent share of that market with roughly $3.5 
billion in annual premiums. That is growing at about 40 percent 
per annum.
    Although ranked in the top 10 globally, China's life 
insurance market is underpenetrated, with only 40 percent of 
households having life insurance. As Mr. Evans had indicated 
before, the financial services area at the consumer level is 
still in the early stages of development. The Chinese spend 
only about $35 per annum on insurance, far below developed 
markets. As China's middle class grows, especially in the lower 
and middle class, it will rank among the world's largest middle 
class and largest life insurance markets by 2020. The 
demographics already indicate that.
    To address the pension gap, which is very important, 
Chinese regulators started in the spring of 2005 to establish 
an enterprise annuity pension system similar to our 401(k)--
they basically copied our plans. Conservatively, our estimates 
indicate that within 10 years, the assets under management for 
this program should be close to $100 billion. Within 25 years, 
they should reach $1 trillion. While a number of foreign firms 
have been licensed to provide trustee management and services 
for pension assets, no American firm has yet been licensed to 
underwrite pension products directly.
    We remain committed to ongoing engagement and dialogue with 
our Chinese counterparts and have confidence in the process 
started by the SED, as well as other ongoing bilateral 
discussions, such as the JCCT and multi-lateral discussions in 
Geneva under the WTO. We welcome all efforts to help the 
industry address and resolve longstanding issues of concern, 
including approval concurrent as opposed to consecutive 
branching for insurance companies, for example, and recognition 
of global experience and assets for insurers seeking asset 
management licenses in China, all of which were discussed most 
recently during the SED. In particular, I am interested in 
approval of pension licenses under the new Enterprise Annuity 
Pension System, which is going to be huge in China.
    Principal Financial Group and ACLI welcome the creation of 
the Enterprise Annuity System, and China's decision in the SED 
to streamline the application process for financial 
institutions. This afternoon I will be meeting with Ambassador 
Holmer and Secretary Paulson's staff to continue the process of 
detailing what these commitments actually mean and pushing 
forward to produce solid results before the SED Session III in 
December in Beijing. Clarifying the regulatory framework to 
authorize single provider plans under a single license is 
extremely important, both to the principal and to the ACLI 
members.
    Finally, progress in these areas has the potential to 
greatly increase American participation in China's efforts to 
improve its social safety net, as Mr. Evans indicated earlier, 
and grow its financial service industry assets. Given our 
experience in this area, management of most of those assets 
should come to American companies. We believe that working 
constructively to resolve the issues noted above and taking 
additional bold steps, such as removing equity caps and 
significantly expanding foreign participation in China's 
Enterprise Annuity System, would represent a fortuitous win/win 
for the United States and China, one which we should all work 
to expand.
    Thank you very much.
    [The prepared statement of Mr. Sorensen can be found on 
page 110 of the appendix.]
    The Chairman. Thank you, Mr. Sorensen. Next, we are going 
to hear from Michael Decker, who is the senior managing 
director of the Securities Industry and Financial Markets 
Association, an organization which frequently gives the 
committee the benefit of its advice and counsel and it is an 
organization that we very much enjoy working with.
    Mr. Decker?

STATEMENT OF MICHAEL DECKER, SENIOR MANAGING DIRECTOR, RESEARCH 
   AND PUBLIC POLICY, THE SECURITIES INDUSTRY AND FINANCIAL 
                      MARKETS ASSOCIATION

    Mr. Decker. Good morning, Chairman Frank, and thank you for 
the opportunity to be here. We appreciate your support and that 
of your colleagues in expanding trade and financial services. 
One of the most important things China can do to ensure long-
term economic stability and growth is to build their financial 
markets. The Chinese recognize this and in many ways they are 
working hard to build efficient and robust markets that will 
serve the needs of investors and companies who need capital. 
One of the best ways to build their markets is to open 
participation and financial services to companies from outside 
China, including the United States. In the area of securities, 
China has made some progress in removing barriers against non-
Chinese securities firms but there is a long way to go to make 
the China securities markets truly open.
    Attracting non-Chinese companies to the Chinese markets 
would bring many benefits to both China and to firms from the 
United States and elsewhere who want to participate in China's 
growth. For China, opening their markets would bring capital, 
expertise, innovation, experience, and efficiency. For 
securities firms in the United States and elsewhere, better 
access to the Chinese markets would bring the opportunity to 
help build the financial system from its very early stages and 
would represent an unprecedented commercial opportunity with 
major implications for the competitiveness and growth of this 
vital sector.
    Despite these promises, China has been reluctant to take 
several key steps to reap the benefits of a more open market. 
Working directly and through the Treasury Department, we at 
SIFMA have urged China to make several key policy changes to 
make the Chinese markets more accessible for non-Chinese 
securities firms. These include lifting the effective 
moratorium on the approval of new joint ventures between 
Chinese and non-Chinese securities firms. China announced at 
the recent SED meeting that they will lift the moratorium later 
this year but they did not specify precisely when.
    Permitting foreign securities firms to own 100 percent of 
their local operations in China and to organize themselves in 
whatever corporate form is best. Currently non-Chinese 
securities firms can only participate in the local market 
through minority positions and joint ventures with Chinese 
companies or by acquiring stakes in local firms.
    Expanding the types of securities activities that foreign 
firms can engage in. Currently, joint ventures involving 
foreign securities firms can underwrite and trade certain 
securities but are prohibited from trading in the large and 
liquid A shares market. China announced recently that they will 
expand the permitted activities for foreign securities firms, 
including in brokerage, proprietary, trading, and fund 
management. We welcome this development but, again, China has 
said only that they will announce such an expansion prior to 
the SED III planned for this December.
    Expanding the qualified foreign institutional investors 
program. The QFII program permits certain foreign institutional 
investors to invest in the A shares market and was a major step 
forward in opening the Chinese markets. But China can go even 
further by lifting certain restrictions on QFII's that limit 
the programs attractiveness. During the just completed SED 
meeting, China agreed to raise the QFII limit from $10 billion 
to $30 billion.
    And finalizing the implementation of the Qualified Domestic 
Institutional Investor Program. The QDII Program permits 
Chinese banks to pool funds from local investors to invest 
outside China. In addition, we have urged China to amend its 
process of developing and implementing domestic market 
regulations to be more transparent and fair. We have also 
recommended changes to China's interim derivatives rules, which 
have prevented securities firms from creating and distributing 
derivative products.
    Finally, SIFMA is actively engaged with China on helping to 
build the capital markets infrastructure there. For example, 
last year, our affiliate, the Asia Securities Industry and 
Financial Markets Association based in Hong Kong, entered into 
a partnership with China Bond, the clearing and settlement 
facility in China, to improve China's trade processing system. 
We have also been communicating with China's securities 
regulator on crafting a regulatory plan for the local corporate 
bond market, and we have been conducting training sessions for 
Chinese regulators and others on the re-purchase agreement 
market. We believe these initiatives go hand-in-hand with 
opening access to the Chinese markets. After all, the more 
robust and efficient the Chinese capital markets, the more 
opportunity there will be for both Chinese and non-Chinese 
firms to compete.
    The Treasury Department has been very responsive to the 
interest of U.S. firms in opening access to the Chinese 
financial services industry. We thank Treasury for its efforts 
in engaging China on these important issues. We are hopeful 
that a continued dialogue among U.S. and Chinese governments 
and Chinese and foreign financial services firms will result in 
continued progress on opening the Chinese markets to all who 
wish to compete there.
    Thank you again, Chairman Frank, for inviting us to 
participate in this important hearing, and I look forward to 
the committee's questions.
    [The prepared statement of Mr. Decker can be found on page 
64 of the appendix.]
    The Chairman. Thank you. Next we have Dr. Eswar Prasad. He 
is the senior professor of trade policy at Cornell University, 
and he was formerly the head of the IMF's China Division. Thank 
you.
    Dr. Prasad, please proceed.

STATEMENT OF ESWAR S. PRASAD, TOLANI SENIOR PROFESSOR OF TRADE 
  POLICY AT CORNELL UNIVERSITY, AND FORMER HEAD OF THE IMF'S 
                         CHINA DIVISION

    Mr. Prasad. Thank you, Mr. Chairman. The process of broader 
financial liberalization in China is important to the United 
States for two reasons. One is that it has implications for 
China's balanced economic development, which is clearly of 
interest to the United States for a variety of reasons, and the 
second is that the pace and manner in which this financial 
liberalization is conducted will obviously have important 
repercussions on the bilateral economic relationship between 
China and the United States.
    So let's start by thinking about what the financial system 
in China looks like. In China, essentially the state-owned 
banking system remains dominant at this stage. Deposits in the 
banking system in fact amount to almost double GDP. And despite 
all that you have heard about the stock market in recent 
months, the stock market capitalization in total is only about 
60 percent of GDP. The corporate bond market remains very 
small, and many of the other segments of the financial markets 
remain very small, so the banks are really the key game in 
town.
    Now, the Chinese have essentially taken the approach of 
trying to reform the state-owned banking system and there are a 
couple of important issues here. One is that traditionally the 
state banks had a process of directed lending, which 
essentially meant that a lot of money was funneled to state 
enterprises, which are financially unviable, and the legacy of 
those non-performing loans is now coming home to roost.
    Capital controls have played a very important role in 
protecting the domestic banking system from external 
competition by restricting the entry of foreign banks until 
recently and by making it harder to take capital out of the 
country, and both of these dimensions are important. This lack 
of competition for the banking system has limited financial 
innovations and kept the risks of the financial system heavily 
concentrated among banks.
    In recent years, the government has moved aggressively to 
rid the legacy problems of the banking system, and if you think 
about the magnitude of problems that the Chinese authorities 
are facing, they are really quite staggering. Non-performing 
loans in the banking system a few years ago were estimated to 
be about 50 percent of GDP. State-owned shares--shares in 
state-owned companies--were largely non-traded, which meant 
that even though you had a functioning stock market, the 
capitalizations that you saw in the stock market were not 
really valid representations of the value of those companies. 
So that again was a transition problem that the government is 
dealing with.
    The implication of all this is that banking sector 
weaknesses have contributed to the very unbalanced pattern of 
economic development in recent years, which means that 
investment has been the primary driver of growth, accounting in 
fact for almost 40 percent of GDP and more than half of GDP 
growth in recent years. The investment boom has raised fears of 
a resurgence in non-performing loans if the economy were to 
slow down and there are also risks of asset-priced bubbles and 
a future deflation in the economy.
    So the problems are really staggering and the Chinese 
recognize that foreign participation in the financial system is 
essential or at least a very important catalyst in terms of 
moving forward and yet they have not moved forward in terms of 
what seems to be in their own interest.
    And there are three possible reasons for this: One, the 
concern about the preparedness of local financial firms to deal 
with foreign competition; two, whether they have their own 
regulatory and administrative capacities to deal with the 
increasing sophistication of financial instruments; and three, 
cross-border penetration of domestic financial firms which will 
be exacerbated at one level if foreign financial firms enter. 
They are also a little concerned that lifting the restrictions 
in cross-border capital flows, which they believe will 
inevitably happen with the larger foreign presence in the 
domestic financial markets, could cause them to lose control of 
their capital in-flows and out-flows, and given the managed 
exchange rate system that they are trying to sustain, could 
cause problems.
    And in each of these I think there is a very clear agenda 
through which the United States could contribute to this 
process. One is to emphasize that in terms of domestic 
financial market development, the entry of foreign firms may in 
fact have a very beneficial effect in terms of efficiency, in 
terms of improving the quality of financial instruments and 
corporate governance that domestic firms can put forward, and 
basically by bringing in expertise that would push forward 
financial reforms.
    In terms of administrative and regulatory capacities, 
again, I feel that the United States has a very real 
opportunity to be able to cooperate with the Chinese and to 
take care of their concerns on that front in order that they 
would feel more comfortable about opening up to foreign 
financial firms. Finally, I think there has to be a recognition 
that openness to capital in-flows, and equally to out-flows, 
plays a very important role in terms of domestic financial 
market development.
    And here again the Chinese are open in a philosophical 
sense, but I think guiding them through the expertise that the 
United States has to offer is going to be very important. And, 
arguably, I think in terms of this bilateral economic dialogue, 
tools such as the Strategic Economic Dialogue do have a very 
important role to play in terms of creating channels through 
which this expertise can be pushed forward and also in terms of 
indicating to the Chinese how importantly linked the variety of 
reforms are, the financial market reforms, the exchange rate 
flexibility, which the United States has been pushing for, and 
a much broader set of comprehensive reforms, which I think are 
going to be important for the United States and for China in 
terms of a balanced economic relationship.
    Thank you.
    [The prepared statement of Mr. Prasad can be found on page 
103 of the appendix.]
    The Chairman. Thank you very much. Now, we will hear from 
Grant D. Aldonas, the holder of the William A. Scholl Chair in 
International Business at the Center for Strategic and 
International Studies.
    Mr. Aldonas?

   STATEMENT OF GRANT D. ALDONAS, WILLIAM M. SCHOLL CHAIR IN 
INTERNATIONAL BUSINESS, CENTER FOR STRATEGIC AND INTERNATIONAL 
                            STUDIES

    Mr. Aldonas. Thank you, Mr. Chairman, and I want to thank 
the committee for holding this hearing. I happen to think that 
this is the key issue in our bilateral relationship with China. 
The points that I want to highlight complement what the other 
members of the panel have said. The first thing is the 
tremendous stake that we have in the outcome of the reform 
process in China, not only because of the market access it 
would provide American firms, but reform of the capital markets 
in China are absolutely critical to eliminating the underlying 
distortions in the Chinese economy that become trade problems 
and generate the pressure for protection and isolating the 
United States economy, a policy that would hurt both us and 
China as a part of the process. So we have a tremendous stake 
in the outcome in terms of what it drives in the way of change 
on the ground in China.
    The second thing is that broader economic policy goals in 
China, the choices they are making, are what is going to drive 
reform. I do not have any expectation that the WTO is going to 
deliver anything in terms of new market commitments in short 
order given that the Doha Round talks are stalled. And the 
final point I want to emphasize as I go through my remarks is 
that the time is ripe for reform. If you look at the economic 
situation worldwide today, and the economic situation in China, 
there will be no more benign and no better economic environment 
for China to undertake the fundamental reforms that they need 
to undertake in their own interest than it is now.
    With that, let me just turn to our stake in the process. 
First, obviously, we have a tremendous commercial stake, as you 
have heard from the other witnesses in terms of the export of 
financial services. We are tremendously competitive in that 
arena and it is something that our firms still remain hobbled 
despite the WTO commitments of China in terms of their market 
access into the Chinese market.
    But the second factor I think is actually more important, 
the stake we have in the outcome is ending a series of lax 
credit practices that have driven additions to capacity in the 
Chinese market that when the economic activity turns down in 
China, they spill over in international markets, they are 
imported to the United States, and we face dislocation as a 
result of those lax lending practices. Disciplines inside the 
Chinese capital markets would do a lot to eliminate the 
distortions that metastasize into trade problems and that you 
all see as trade friction from your constituents.
    We have a stake in the success of the reforms also because 
China now represents one of the main engines in the 
international economy, any sharp reversal in China's fortunes 
would have negative consequences for the world, for China, and 
for the United States. We are tightly interwoven now with the 
Chinese economy in ways that I think are fundamental. That 
means we need to take great care but it is also why we should 
be driving the process of capital markets reform in China.
    Despite its impressive record of growth, China has very 
serious economic vulnerabilities. They have a two-speed economy 
with a growing disparity between high economic growth along the 
coast and those portions of the economy that are deeply 
integrated in world markets, slow growth in China's interior 
provinces where most of China's population still lives, a 
heavily distorted mix of economic activity that really results 
from the lax credit practices that I mentioned, the lack of 
discipline in China's financial markets and undue reliance on 
export demand is the main driver of economic growth rather than 
a more balanced approach that relies on domestic demand and 
that of course has generated a significant backlash from 
China's trading partners.
    And I have to say it is not just a phenomenon in the United 
States. It is interesting that India now surpasses the United 
States as the largest filer of anti-dumping actions. The target 
of all those anti-dumping actions are China. This is not just a 
phenomena where you are seeing a protectionist drift in the 
United States as a result of China's export-driven growth; you 
are seeing that worldwide at this point.
    The last thing is that there is a tremendous demographic 
challenge China is facing as a result of the one child policy. 
It is growing old before it grows rich. That means that there 
is an awful lot that they need out of the private sector to 
create a social safety net that does not currently exist. That 
creates phenomenal opportunities for U.S. firms if the Chinese 
policymakers are wise enough to let the American firms in to 
help grapple with those problems.
    The last thing is the tremendous economic adjustment that 
my colleague alluded to that has to go on in the Chinese 
economy if you are trying to draw 700 million more people out 
of poverty and into productive employment somewhere in the 
Chinese economy.
    Well, given the stake that we have in the outcome of the 
reform process, it is entirely reasonable to ask where are we 
in the reform process. And at this juncture, I have to say that 
China did undertake significant liberalizations in its WTO 
commitments and has lived up to those commitments. They exceed 
commitments that any other developing country has made. Now, on 
the other hand, if in fact the goal of China's accession 
process was to encourage a more efficient allocation of capital 
and resources throughout the Chinese economy, in this instance 
the WTO commitments fell far short of that goal. There are 
simply too many restrictions on market access for U.S. 
companies to have the profound and powerful impact they could 
for all the reasons I stated earlier.
    Well, at that point, I want to turn just to where we are in 
terms of the world economy. We are seeing the strongest growth 
that we have seen in 3 decades. We have growth at about 5 
percent. China's growth is likely to exceed double digits for 
more than a decade now. It will do so again this year. It has 
savings that are at least half of its current GDP. It has an 
enormous foreign exchange surplus. When you add all that 
together, in China's context and in the world's context, there 
will never be a better moment actually to undertake the 
reforms.
    The savings, the foreign exchange surplus all serve as a 
buffer against the risks that they will face when they 
undertake these reforms but there is simply no better time. The 
pressures inside the Chinese economy are such that things will 
only get worse on each of the challenges that I mentioned over 
time. If they want to solve this problem, the easiest way to do 
it frankly is to import a financial services market from the 
United States.
    Thank you very much.
    [The prepared statement of Mr. Aldonas can be found on page 
50 of the appendix.]
    The Chairman. Thank you. Let me begin, and I understand 
this is a matter of some delicacy, particularly for those who 
represent institutions, companies that might want to be doing 
business, but I would like to ask all the panelists, assuming 
that it is a desirable goal for the restrictions that China 
imposes to be relaxed, are there things the U.S. Government 
should be doing that it is not now doing or that it is not now 
doing with sufficient vigor to advance that? What should our 
posture be in our negotiations and are there things we could do 
more than we are now doing? Let me start with Dr. Prasad and 
Mr. Aldonas, who have less at stake in terms of any pending 
applications, but the others can think about how to soft-peddle 
whatever they want to say while they are talking. So we will 
start with either one of you.
    Mr. Prasad. Well, I am leaving for China tomorrow morning 
so I guess I should be a little careful what I say.
    [Laughter]
    Mr. Prasad. I think one very important thing the United 
States has to do is to put issues such as exchange rate 
flexibility in a broader context. Now in a sense, discussions 
of financial services liberalization and exchange rate 
flexibility have almost been moving on parallel tracks, and I 
think the authorities' desire to move forward in financial 
sector reform, which has been alluded to, they really care 
about it, should be turned around to advantage in some sense 
because ultimately these things are linked in the following 
way.
    You cannot really move forward financial sector reform, 
especially banking reform, unless you have independent monetary 
policy and can guide credit through the interest rate, and you 
cannot guide credit through the interest rate unless you have 
an independent monetary policy, which you cannot do if you do 
not have a flexible exchange rate. So I think actually making 
these connections and showing how capital account 
liberalization and exchange rate flexibility are important for 
domestic financial reform and how these have to move in tandem 
is very important.
    The Chairman. That is very important. I notice you make 
this point on page six, and Mr. Morris on my staff underlined 
it for me. We have had people say, ``Well, the Chinese cannot 
do anything about their currency and about really freeing the 
currency from the constraints until they have reformed their 
financial system.'' And, as I understand what you are saying, 
it is almost the other way around, that in fact as long as they 
are artificially depressing their currency, the banking system 
will to some extent have to be a servant of that policy and 
will be accommodating that policy rather than being able to 
serve a more independent function. Is that an accurate--
    Mr. Prasad. That is exactly right. There is some 
misconception that exchange rate flexibility necessarily 
implies the full opening of the capital account to both in-
flows and out-flows and that is not the case. They have a 
relatively restricted capital account now, which they are 
opening--
    The Chairman. In fact, what you are saying is that as long 
as you have this very manipulated currency, that is an obstacle 
to the financial openness because you have an added goal for 
the financial system, which is to meet the needs of this 
currency depression.
    Mr. Prasad. Manipulated currency is not quite the term I 
would use but it is true that they need a more flexible 
currency. But the focus really is not so much on the level of 
the currency, which is where the debate in the United States 
tends to focus on, but about allowing the currency to move up 
or down, and it could very well move down, if they did allow 
the capital account to be open and if they allowed some of the 
domestic savings to go out of the economy.
    The Chairman. Well in fairness, I think, to those of us in 
America who have been arguing that, I do not know who said that 
they should arbitrarily be raising the level. The argument has 
been to let it float freely and there is a sense that it would 
go up. But I agree nobody is insisting that they artificially 
peg it high.
    Mr. Aldonas. Mr. Chairman?
    The Chairman. Yes, Mr. Aldonas?
    Mr. Aldonas. I have to say that I am agnostic about a lot 
of the debate about the currency peg, I really--
    The Chairman. I am glad to meet a member of the Bush 
Administration who acknowledges being agnostic in any respect. 
I appreciate that.
    [Laughter]
    Mr. Aldonas. The distortions in the Chinese economy are 
such, and the conditions under which people talk about 
revaluation are such, that I do not think we can honestly say 
what the value of the reminbi would be. Having said that, the 
Chinese have the argument precisely wrong: maintaining the peg 
does not help them with the reform process or address the 
economic challenge that they have. In fact, reforming the 
currency is an absolutely essential step to encouraging the 
reforms, to driving change inside their own economy.
    The old line is that, ``The dentist who pulls your tooth 
slowly does not do you any favors,'' and in this instance, by 
maintaining the peg, in effect what they are doing is pulling 
the tooth slowly on the reforms that have to happen in the 
Chinese economy. So when they say that we are worried about our 
economic vulnerabilities, my own reaction is your economic 
vulnerabilities are going to grow unless you resolve the peg. 
But that is, again, without regard to the arguments that are 
made about whether it is fair or unfair.
    The Chairman. Well, again, there are people here who are 
assuming it would go up, but I do not know of anybody who has 
said, ``Raise the level of your currency.'' The argument is to 
let it float, assuming that is where it will go.
    Mr. Sorensen, you had something?
    Mr. Sorensen. Mr. Chairman, you asked a very specific 
question, which is what can the U.S. Government--
    The Chairman. I know, general questions make me nuts.
    Mr. Sorensen. What can the U.S. Government do that it is 
not doing today? I would suggest that Congress and your 
committee, Mr. Chairman, can play a tremendously powerful role 
in supporting the SED dialogue, not only in supporting it but 
insisting that the deliverables that the Chinese are beginning 
to commit to are in fact delivered. If you add your weight to 
the process, the SED and Secretary Paulson and the 
Administration--
    The Chairman. ``SED'' stands for what, now?
    Mr. Sorensen. The Strategic Economic Dialogue--
    The Chairman. Thank you.
    Mr. Sorensen.--that Secretary Paulson has been undertaking 
with Madam Wu Yi. Times are changing very fast in China. I am 
there every 2 months. I am going there again next month. And I 
can see the positive winds, as Mr. Aldonas is saying, of 
change. But if Congress can support the SED and insist on the 
deliverables very, very actively and very insistently, I think 
the Chinese will get the sense that we are a united front, and 
it is not just the Administration that is pushing these 
reforms.
    The Chairman. Thank you. Mr. Bachus?
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Aldonas, you said 
that China will grow--their economy will grow by 10 or 12 
percent for the next 10 years, that is the assumption that is 
pretty much universal but is that in fact true? They are a 
first-class manufacturer but their financial markets, their 
ability to invest capital efficiently and effectively is not 
first-class or even second-class, it is very third-rate. And I 
say that--I think they realize they have a long way to go. And 
you talked about the demographic challenges and that they have 
to reform their financial markets and their financial services 
if the middle class, if the 700, I think billion, Chinese 
participate with the other 300 or 400 billion. But if they do 
not do that, are all these assumptions people are making, they 
cannot keep growing at 10 percent if they do not do exactly 
what we are saying they need to do, can they?
    Mr. Aldonas. Thank you, Congressman. I should clarify, what 
I said was they have been growing for a decade at double 
digits. I do not actually expect that on the trajectory they 
are on, with the relative capital inefficiency that is built 
into the Chinese system, that they can maintain that level of 
growth. And even the growth that exists is so weighted towards 
certain activities, like construction and a variety of other 
things, it is not actually providing a lot of value to the 
average Chinese citizen.
    The best measure of that is that a McKinsey study showed 
that in the 1990's, as there were great productivity gains that 
cost about $3.30 of investment to produce a one dollar of GDP 
growth. Since 2001, that number has become $4.90 for every 
dollar of GDP growth. What that means is at a time when you 
would expect most economies are becoming relatively more 
capital-efficient, they have become less capital-efficient. And 
that is not the trajectory you want to be on if in fact you are 
moving toward a society where you are going to have fewer 
workers, many more retirees, and many more social problems to 
deal with.
    Mr. Bachus. Anybody else? Secretary Evans?
    Mr. Evans. Yes, I would just--when I first went to China 
back in 2001, there was a lot of concern among economists as to 
whether or not we were going to see a hard landing or a soft 
landing in China because of the dramatic growth that people had 
seen the previous 10 years or so. Here we are some 6 or 7 years 
later and we are continuing to see this double-digit kind of 
growth. I think more and more economists are starting to get 
comfortable that China is doing a relatively effective job of 
managing the ongoing growth and structuring itself for long-
term economic growth.
    But what they do need to do is they do need to turn it into 
a consumption-based economy. Right now, it is an industrial-
driven, export-based economy, and they know that to really 
continue this kind of pace of 10 percent growth, they have to 
become more like America where two-thirds of the GDP is driven 
by consumption, and you cannot get there when 1 million Chinese 
own credit cards and 500 million of them own cell phones. You 
have to have the financial tools in place for the citizens of 
the country to begin to become consumers. And we have 
articulated some of that already, but I think that just really 
puts a hard focus on what they need to do, and I think they 
know they need to do it.
    And I am going to follow-up on what the chairman asked a 
little bit earlier too. What else can we do? I really think, in 
my experience dealing with the Chinese, they are really 
starting to understand the important role that Congress plays 
in the process. I do not think they understood that 5 or 6 
years ago. I think within the last year or so they are starting 
to get the picture and starting to get the message. What I 
would say is if this committee could go, or members could go, 
and I am sure, as you said, you have already been over there 5 
times, if I go over there and look them in the eye and tell 
them, ``This is what we expect,'' and they are very open, they 
are receptive. I am over there once a year at least, talking to 
all the regulators. But for them to hear from you in their 
country, I think, is a powerful statement. They are starting to 
understand the important role that this body will play in the 
ongoing economic relationship between our two countries.
    Mr. Bachus. Yes, Mr. Sorensen?
    Mr. Sorensen. Congressman, one of the things that has been 
mentioned here is a social safety net. We are in the pension 
business, Principal Financial Group, that is what we do, we are 
in China with that objective. China just established basically 
the first ever social safety net. It is the enterprise annuity 
system, which is like our 401(k). We should be thankful that 
they copied our system and did not emulate the European 
systems, which, as you know, are upside down and almost 
insolvent.
    As they establish this social safety net by allowing 
Chinese households to save for retirement, the Chinese capital 
markets will grow like ours did in the United States. The 
potential for U.S. companies to participate in that market is 
immense. It can grow very, very quickly and it will. So I think 
that Congress and your committee should, in my opinion, 
consider supporting that process very, very strongly because 
over the past 40 years since the 401(k) was created, 25 or 30 
years ago, the capital markets have benefitted enormously from 
that. As people understand that they do have their retirement 
nest egg relatively growing and secured, they consume more 
freely and they are less precautionary, putting less money 
under the mattress, so to speak.
    Mr. Bachus. Most Americans do not realize that they save a 
lot of money, well, there is no social security, there is no 
pension, there is no Medicaid, there is Medicare, there is no 
social net. Now, one thing they need to do, and if they do it 
they are even going to be more efficient, is to not model 
themselves after some of the things that we have done. Our 
social security system is not the most efficient in the world.
    But they basically can put it in the bank and draw 2 
percent interest or they can put in the stock market and they 
do not know what they are investing in and it is going to turn 
out very badly for them in many cases. They are going to lose a 
lot of money. And it is going to be a real political problem 
for the country. If their leaders do not allow their people to 
efficiently and effectively invest their money, I think you are 
going to see 300 or 400 million Chinese--I think I said billion 
before and I should have said million, but you are going to 
see--I think you are going to see the Chinese people demand 
that their government allow them to--
    Mr. Sorensen. Precisely, Congressman, we know the exact 
number. There are 165 million Chinese over the age of 65. We do 
this every year. By 2020, which is very, very close by, the 
population is aging so quickly, they will have 320 million 
Chinese over the age of 65 and most of those people will not 
have retirement funds to retire on. This is why the government 
has established this enterprise annuity system and other 
systems, which need to be established in that area.
    Mr. Bachus. Thank you.
    The Chairman. The gentlewoman from California?
    Ms. Waters. Thank you very much, Mr. Chairman. I appreciate 
this hearing. We need to do more hearings and have more 
discussions about China because China is emerging as not only a 
very, very powerful country but there are many concerns that 
are circulating and being discussed about China. It is very 
hard for me to even talk about what is happening in the 
financial services community when in fact we have so many other 
issues with China.
    First of all, we have never resolved our concerns about 
human rights issues. The Congressional Black Caucus is leading 
a fight about their relationship with Darfur and trying to 
encourage them to use their power in the U.N. to help us end 
genocide there, which they do not appear to be willing to do. I 
cannot even begin to talk about intellectual property concerns 
that we all must have about them. They produce more fake and 
phony goods than I guess any other country on earth.
    We have to be concerned about the bilateral trade surplus, 
the currency manipulation, where do we begin? There are those, 
and I suppose in an article that was just given to me from the 
Economist about China-bashing, those of us who have some of the 
concerns I have alluded to just do not understand that we 
should not be concerned about the currency manipulation and 
other kinds of actions. I guess they think it will all work 
itself out. But all I can say is that my hat is off to 
Secretary Paulson for meeting and having the dialogue, and I 
suppose that will continue. But they make his job very hard 
because of all of these other issues to which I have alluded.
    I guess my only question to the panel is, are they aware 
that we do not like our pets killed by contaminated pet food? 
Are they aware that there are real concerns about their 
continued support of the government in Sudan, the killing of so 
many people? Are they aware of all these other issues that we 
have? Anybody can answer that.
    Mr. Decker. I cannot speak to all the important issues that 
you have raised, Congresswoman, but I can tell you with regard 
to financial services there are many influential people in 
China that recognize the weaknesses in their own financial 
system and recognize that a corporate lending system that is 
based too heavily on bank lending and inefficient allocation of 
credit is a two-legged or one-legged stool that is just waiting 
to topple. And there are a number of influential people in 
China who are internally pushing reforms and trying to build 
alternatives to the existing capital system to better be able 
to serve both investors and users of capital. They are worried, 
I think in part, with regard to opening their markets to 
foreign firms. They are worried in part that U.S. and European 
and Japanese firms will come in and dominate the local market 
and crowd out the local firms with expertise and capital and 
other benefits that they bring to the market.
    Ms. Waters. I suppose I should ask you, should we continue 
to have a policy that will allow China to buy up as many firms 
and whatever they want to buy in the United States, and invest 
as much money as they want to, while we still have limits 
imposed by them on our ability to be involved in their 
financial services sectors? As I look at what has just been 
given to me, those limits include a 49 percent ownership cap on 
fund management joint ventures, a 20 percent ownership cap on 
single investors in the banking sector, and perhaps most 
crucially, a 33 percent cap on ownership of securities joint 
ventures. Thus, should we continue to be as liberal as we are, 
given all of those restraints?
    Mr. Decker. Yes, they are worried about big foreign firms 
coming in and dominating, but when you look at some other 
emerging market countries, like India, Brazil, Russia, Mexico, 
Korea, and Taiwan, they all allow 100 percent ownership of 
financial services firms and there is still plenty of room for 
local firms to be able to compete. If you look at the U.S. 
market, there are over 5,000 registered broker-dealers in the 
United States; they are not all Goldman Sachs.
    Ms. Waters. So what do we have to do to convince them?
    Mr. Decker. I think we are confident that the SED process 
is going to result in meaningful change. We have seen some 
incremental benefits from that process already. And I agree 
with what Mr. Sorensen said a few minutes ago, that ensuring 
the message to the Chinese that the entire U.S. Government, 
both sides of the aisle and both branches, are fully behind the 
points the Treasury has been making, I think, will go far.
    Ms. Waters. Thank you very much.
    The Chairman. If the gentlewoman would yield me just 30 
seconds because I was negligent and should have said what she 
said. And you are right, we should let the Chinese know what we 
think and we are for economic encouragement but the Darfur 
issue is one of the most deeply felt in America. If the Chinese 
continue to be an obstacle to an international effort to 
relieve the people of Darfur from this genocide, they will pay 
a significant price in America. And all of the rational 
calculations about economic self-interest could come crashing 
down if we were go to the U.N., if there were to be a Chinese 
veto of a resolution, so the Chinese, if you want them to 
understand what Congress thinks, to understand that Congress is 
reflecting the views of the American people who care very 
deeply about this Darfur situation, and they put a great deal 
at risk if they continue to be an obstacle to a resolution. I 
thank the gentlewoman for reminding us of this issue.
    The gentleman from Louisiana?
    Mr. Baker. I thank the chairman. I wish to return to the 
initial economic focus that is a cause for concern. Not in this 
body at least, but on the Senate side in prior sessions, there 
have been suggestions as a result of the view that there is 
under-valuation of the yuan, that certain economic 
congressionally-driven sanctions, a 20 percent tariff for 
example, should be imposed in order to re-balance the 
international equities. I find that to be somewhat short-
sighted in the consequences of that in a global economic view.
    Mr. Secretary, I want to just make a few observations, some 
of which are based on the article that was previously mentioned 
in The Economist and some of which is U.S. Treasury and Federal 
Reserve data and get your learned opinion about whether these 
are consistent with your overall view of our China imbalance. 
It is pointed out in that article that since 2004, almost the 
entirety of the trade surplus occurred in heavy industrials and 
equipment.
    In the build-up internally in China, in an enormous 
explosion of economic activity, there were internal assets 
built up until 2004 when the Chinese government began to 
tighten policy a bit while continued investment continued in 
metals equipment, creating substantial excess capacity, much of 
which found its way to the United States, so that much of the 
imbalance can be attributed to that specific economic 
abnormality in the Chinese market.
    Secondly, that excluding food, their internal inflation 
rate has been less than 1 percent and that has been brought on 
by extraordinary excess liquidity. Others have referenced the 
personal savings rate, which is abnormally high within China, 
that surplus of funds has driven abnormally low interest rates, 
which is now causing households not to invest in bank product 
but to speculate in the markets, which only further fuels the 
potential for an economic overheating.
    The conclusion of those observations is to get China back 
on a solid monetary platform, letting its currency rise is 
really--value to the dollar--is really to its own economic best 
interest going forward. But any action that is viewed, 
excluding the human rights issues previously mentioned, any 
economic adverse action by this Congress comes at our own 
significant peril. I go to now the Treasury data as of May 7th 
and in looking at debt held, U.S. Treasuries by Mainland China, 
they are second only to Japan, and making the top 20 list now 
for the first time is the City of Hong Kong, which held only 
$11 billion a year ago, and is at $110 billion now, as of this 
report, demonstrating a $100 billion growth just in Hong Kong 
and a similar $100 billion growth in Mainland China, now 
exceeding over $800 billion.
    Then when you look at the portfolio that is constructed by 
this $800 billion investment, it is principally a long-term 
debt, which goes directly to the stability of our interest 
rates and our housing markets. So if we were to see as a result 
of congressional actions precipitous increases or tariffs or 
actions resulting in a currency readjustment, it could have 
consequential and significant adverse impact on one of the big 
concerns of many on this committee, the dream of homeownership, 
and having our own rates precipitously climb as our ability to 
market our securities in international markets becomes 
impaired.
    In other words, sure, we need to get these folks to open 
their doors and let smart people in and help them build their 
pension plans, their governmental services, move to consumer-
oriented commerce, but all the while we need to make sure we 
are viewed as being helpful partners in this process because 
they are enormously invested in our economic stability at this 
time.
    Mr. Evans. Well, Congressman, I think you have hit on a 
very important point. First, let me say who I am one that is on 
the side of they need to move at a quicker pace toward a market 
exchange for their currency. They need to pick up the pace. 
They are not getting there quickly enough, and they need to do 
it in their own self-interest. They need to get their system 
structured in a way to where they can use monetary policy tools 
in an effective way, which they are really not able to do now 
because they have to worry about administratively controlling 
their currency.
    So I am one who falls on the side of, let's pick up the 
pace of moving toward a free market exchange of their currency. 
But when we start moving down the path, and moving toward 
protectionist kinds of policies or isolationist kinds of 
policies or trying to push it too quickly, you are exactly 
right, we might find in our economy--we can say right now, 
guess what, this economy in America is strong. It is very 
strong, we have a 4.5 percent unemployment rate, it is showing 
great strength, the global economy is strong, the China economy 
is stable and growing.
    So when you start moving things around too quickly, then 
does it create some instability in the system in their own 
economy that winds up kind of spilling over into our economy, 
as you suggest. If all of a sudden the currency goes up too 
quickly, well, guess what, they do not need to buy as many 
dollars and so guess what, our interest rates go up. And guess 
what, maybe it also means inflation starts to creep up in this 
country.
    And my experience in Commerce was that all the times we 
tried to use some of our tools, which I support, but would tell 
you that when we put anti-dumping kind of tariffs in countries 
here and there on their products, their product would come from 
someplace else. And so the idea that if we try and shut off 
China, well it is going to come from Thailand or Malaysia or 
Vietnam or somewhere else.
    And so I think we have to be very careful in how we deal 
with the issue. And I would go back to I think the most 
important issue to focus on for them is open up your financial 
services industry. All of us--to me, sometimes we put the yuan 
out there as a kind of quick fix, silver bullet, solve all the 
problems, we are losing jobs here and there, that will stop 
that, I do not think so. And I really think the focus really 
needs to be laser-focused on open up your financial services 
industry. Thank you.
    Mr. Aldonas. Congressman?
    The Chairman. I am afraid the time has expired for the 
gentleman, I am sorry. The gentlewoman from New York?
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Aldonas, in 
your written testimony, you discuss some of the risks inherent 
to China's liberalization of its financial markets. Could you 
please comment on how these risks could affect U.S. firms?
    Mr. Aldonas. What you worry most about is that there is 
something catastrophic that comes about in China's capital 
markets. You are seeing an asset bubble. Alan Greenspan has 
referred to that--some discontinuity on the financial side that 
drives Chinese growth down and American companies with it. It 
is what I was referring to earlier, Congresswoman. I was saying 
that we have a very large stake in China's success. It is one 
of the main engines of growth in the world economy from which 
we benefit and we participate in.
    And China's absence from that would have negative effects 
on the U.S. economy as well as U.S. firms, both those invested 
in China and those invested in the United States. So what you 
worry about is that discontinuity. But the tonic, and the 
reason why the hearing is so important, the tonic is capital 
market reform.
    The more that you see the liberalization of China's capital 
markets, the more that you see U.S. firms with the discipline 
of their credit practices operating in a Chinese market, the 
less risk there is of that catastrophic sort of boiling down of 
the Chinese economy. And so one of the great reasons to try and 
ensure that our firms are on the ground doing what they do best 
is to make sure that it is a buffer against that sort of 
problem.
    Ms. Velazquez. Thank you. Mr. Aldonas, many have expressed 
concerns that enactment of reforms that strengthen the review 
process for the Committee on Foreign Investment in the United 
States could result in similar changes in other countries that 
will have the effect of deterring the ability of U.S. firms to 
enter overseas markets. Do you believe that CFIUS reform could 
indirectly impact the ability of U.S. financial services firms 
to enter foreign markets in China?
    Mr. Aldonas. I cannot say that specifically but certainly 
the issue of Dubai ports, the issue of China National Overseas 
Oil, an offshore oil company investing--trying to invest in the 
United States, have generated--and the response in Congress and 
the Administration, have created a backlash against U.S. 
investment in the form of similar sorts of procedures that have 
been introduced abroad. China is certainly looking at it. 
Russia has already introduced one.
    You see this mirror-image legislation going on. The problem 
is that the process in these other countries is nowhere near as 
transparent as what would go on in the United States, the 
opportunities to state your case in front of the Treasury 
Department, to get a reasoned judgment does not always exist. 
And so that is a much greater barrier than the CFIUS review 
process that you are grappling with here in the Congress but 
that is the risk.
    Ms. Velazquez. Thank you. Mr. Evans, in 2004, during a 
Senate Finance Committee hearing, then-U.S. Trade 
Representative Robert Zolak stated that he did not support 
pursuing a World Trade Organization dispute settlement case 
against China over concerns of currency manipulation in part 
because it could be difficult to prove that China is in 
violation of WTO laws. In your opinion, would this argument 
change if reforms were instituted that increased the ability of 
U.S. financial firms to participate in the Chinese financial 
system?
    Mr. Evans. Ask the question again, Congresswoman, I am 
sorry, the very last part?
    Ms. Velazquez. Can a case for currency manipulation be made 
without the reforms to the financial systems that have been 
discussed today?
    Mr. Evans. I am not that familiar with the facts of it. I 
would say this though, you raise a very important point about 
China being a member of the WTO and it is very important to use 
that and all the tools available to us through that rule-based 
system to do exactly what the chairman pointed to earlier and 
that is a level playing field. So I am not the expert on 
whether or not we would have what the position should be with 
respect to taking that case to WTO, but I would tell you we 
ought to use the WTO every time we can if we think it helps 
level the playing field with our economy and the China economy.
    Ms. Velazquez. Mr. Aldonas?
    Mr. Aldonas. Just by way of background, I spent most of my 
life working in the international trade arena and teaching WTO 
law at Georgetown University and at least on the basis of the 
petition the United States faced, I would say that, no, that 
was not a case you could make under WTO law. It remains to be 
seen whether you could craft a case that you could actually 
pursue under Section 301.
    But the important thing is what would that lead to? It 
would lead to the potential for retaliation in the form of 
tariff sanctions or withdrawal of other trade benefits. The 
important thing to focus on is what needs to change that has a 
negative impact on our economy, and those are the distortions 
in the Chinese economy, not the currency peg.
    There is nothing about changing the currency peg or 
necessarily about slapping a 27 percent tariff on Chinese goods 
that will do anything to end the practice of non-performing 
loans that are in fact at zero cost of capital, that favor 
capital-intensive investment, that lead to this burst in 
manufacturing that Congressman Baker referred to and that 
metastasize into trade problems when those imports come to our 
shores. The answer to that is financial market reform.
    Ms. Velazquez. Yes, thank you very much.
    The Chairman. The gentleman from Illinois.
    Mr. Roskam. Thank you, Mr. Chairman. As I have been 
listening to the testimony, one of the things that occurs to me 
is the different foundations upon which these two economies 
that we are talking about are actually premised. Our economy 
and our economic growth and success is based on the premise 
that the individual matters and that freedom is a glorious 
thing and private property rights are to be upheld, free 
markets and free people and you know the sound bite but it 
actually works.
    We are trying to translate that or we are casting that, 
sort of with hopeful eyes, upon a system that really does not 
share that premise. And so the question is now, as we are 
having this discussion about the financial marketplace and the 
maturity of it, as you look forward 10 or 20 years, what is it 
that animates your hope that the Chinese will see this in a 
self-interested point of view and how do we shake off the 
things that they have done in the past that do not give us that 
hope?
    And here is what I mean by that, let's take the 
conversation that we have had as a country over the past 
several years about the manufacturing sector. We have talked a 
lot about it. I represent a district that I have characterized 
before, the west and northwest suburbs of Chicago, that feels 
really conflicted in some ways about China, in some ways, great 
opportunities, in some ways, a lot of pain.
    But if you look at what the Chinese have done in the past, 
they have manipulated currency; I think there is a consensus 
there. They, as Ms. Waters mentioned earlier, abused 
intellectual property rights and so forth. So what is it that 
animates the hope that they are going to do the right thing as 
it relates to the financial marketplace and that we will not be 
having this same conversation in 6 or 7 years about the 
financial markets being abused by the Chinese the way that we 
have been having that conversation about our manufacturing 
folks feeling abused. Do you have some insight on that?
    And also maybe just commenting on the premise that the 
Chinese--I think it was an earlier witness, but basically 
laying out the notion that the Chinese Government is very 
patient, very control-oriented, casting a long view and do they 
get eclipsed at the end of the day, do the Chinese officials 
get eclipsed and does freedom come raining down in China 
because of the economic growth and they have to translate that 
into political freedom? I would just be interested in your 
observations on that.
    Mr. Prasad. How the politics will play off is very 
difficult to predict, Congressman, but I think a case can be 
made that in terms of pure economic self-interest, the Chinese 
are very concerned about what is happening with the financial 
sector because, as Mr. Aldonas said, there is a two-speed 
economy in China right now and there are implications of that 
for social stability.
    In addition, if China continues to grow at 10 to 12 percent 
as it has been for the last 2 years, but does it in this very 
inefficient way, in a manner that the benefits do not reach 
down to the households, then again I think social stability 
becomes a very important issue. So I think in terms of the 
narrow question about whether financial services that are 
formed, and liberalization more broadly, is something that the 
Chinese care deeply about. They care about it deeply.
    Now, why they care about it, whether it is for the 
perpetuation of the existing political system or to lead to 
something bigger or different is a little hard to tell. But I 
think on the narrow question, especially as it affects the 
interest of the United States, is whether in terms of the 
economic dimension, China is doing the right thing. And I think 
we can guide them towards doing the right thing, which will be 
ultimately in the best interest of the United States as well.
    Mr. Aldonas. If I could, Congressman, they are communists 
and they want to stay in power, and it has dawned on them that 
the only way they can stay in power is by meeting the rising 
expectations of the people. They understand that further 
liberalization is essential to meet those rising expectations, 
but they have no experience with how far and how deep that 
freedom has to run to actually meet those expectations. And so 
they hedge in terms of their liberalizations, thinking that 
maybe one part more will make a difference. They just do not 
realize you really need to blow the whole thing open. It goes 
to your point about operating off of very different premises.
    The interesting thing looked at is China's trade policy is 
not that different than during the Imperial Age, they granted a 
silk concession to Marco Polo in Shanghai, what does that sound 
like to the financial services firms? You get the life 
insurance thing in Qiang Jo but nowhere else, right? It is not 
that different. They really lack the experience with the 
ultimate freedom it would require, but that is one of the 
reasons why I think we have to articulate why this works in 
their interest.
    And then if I could, I have a little story I have to tell 
about traveling in China where we were very close to the 
Straits of Taiwan. We were in a cab in one of those causeways 
that go out on the street, and I am with a friend of mine who 
speaks Chinese. And we go by a sign on the Chinese side that 
says, ``One Party, Two Systems,'' right, and it is so large you 
can see it in Taiwan. And I noticed there is a sign on the 
closest Taiwanese island so I asked my friend to ask the cab 
driver what that says, and in much more colorful language, what 
the cab driver said was the sign in Taiwan says, ``Get Bent.''
    Well, that is a story about the cab driver's freedom, not 
the story about Taiwan, right. There are these indicia that 
what we are seeing evolving in China is a very different 
society and it is one that frankly the folks in Beijing do not 
control, and I think it scares them to death. But they need to 
understand that the only way they are going to achieve their 
ultimate goal, even under the best of circumstances, is to blow 
that freedom through their system.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. We were trying to figure 
out what ``get bent'' meant, but I think we figured it out.
    The Chairman. You could check with the Vice President.
    Mr. Watt. Say it again?
    The Chairman. Check with Vice President Cheney.
    Mr. Watt. Oh, okay. All right.
    Well, that's the third interpretation of it, but anyway. As 
Members of Congress, it seems to me that we approach this on 
two different levels. And there's going to be a question at the 
end of this, so you can be assured of that.
    One is the micro level that we experience in our own 
congressional districts. At that level, obviously being from 
North Carolina I've seen my textiles decimated, my furniture in 
the process of being decimated. In exchange for that 
decimation, I've seen people argue when I walk into Wal-Mart 
and Target, lower prices for my consumers.
    I've seen my constituent corporation, Bank of America, 
become a small part owner of a bank in China. For the life of 
me I can't figure out why anybody would want to own a bank if 
you have 50 percent nonperforming loans. But you know, I 
chalked that up, they understand, there's a reason for them to 
be there. And so I chalk that up as a positive.
    On the macro basis up here, everybody in the room, 
Republicans, Democrats, everybody on the panel has agreed that 
this transition, transformation is not taking place as quickly 
as they would like. I heard the chairman's first question, what 
should the Administration be doing that it's not doing, which I 
never heard a real good satisfactory answer to other than let's 
keep doing the same things we've been doing, keeping the 
pressure on.
    And somebody mentioned that there was a role for Congress 
here, but I'm still not clear what that is. So my question is, 
given these micro impacts in our congressional districts and 
the macro imperative of quicker change, what is the role of 
Congress here? What should we be doing as a financial services 
committee other than sending shots over the bow like we're 
doing today at this hearing, assume the Chinese financial 
services elite will read what we've done here, and maybe the 
government personnel will read what we've done here, maybe 
they'll hear the message that we've sent to them over and over 
again through the Congressional Black Caucus that if they don't 
do something to humanize their response in the Sudan it's not 
at all a foregone conclusion that there won't be a growing 
momentum toward a boycott of the Olympics that are about to 
take place in China.
    I reminded the Ambassador myself that it was black folks 
who stood with their fists on the winning podium in the middle 
of our own transition, so this notion that the Olympics is 
sports and politics is politics is something that we never have 
quite bought into.
    My ultimate question here, and maybe whoever mentioned the 
possibility of congressional involvement can really answer 
this, what should we be doing other than sending these shots 
over the bow as Congress now, as this Financial Services 
Committee? If somebody can, respond to that in the time that I 
have left.
    Mr. Sorensen seems like a willing participant here.
    Mr. Sorensen. Thank you, Congressman. Very well put, a 
specific question, which I like to delve into. I yield to my 
colleagues here who are probably above my pay scale on this but 
my sense of things is very simple.
    Congress can and should work very, very closely and 
aggressively and insistently with the Administration's efforts 
to open up the financial services area. Congress in my opinion 
with respect to the chairman and everyone on the committee has 
probably not worked as hard with the Administration in constant 
communication and constant insistence in this work.
    The devil is in the details unfortunately. For example, the 
commitments to open up the insurance section in the branch two 
subsidiary, the commitments to open up in the securities 
sector, the commitments to open up in the banking. Those are 
commitments. They have to be delivered.
    So on a very specific basis over the next 6 to 9 months as 
the new--the strategic economic dialogue third session gets 
going and started, and the dialogues with China, those are very 
specific items in which the committee could work with the 
Administration, directly with Secretary Paulson or all of his 
staff at that level.
    And then the second thing is to become acquainted a bit 
more with the actual issues on the ground in China. If we agree 
that the opening of the financial sector could yield to lots of 
household aspirations and investments that will eventually free 
up the currency to the levels where it should be, if that 
premise is correct then the second premise is, ``Let's get it 
done faster.''
    I don't think the Chinese understand, as Mr. Evans had 
earlier said, that the Congress has such a tremendous interest 
and such an influence. And the congressional process is not 
very well understood in China because there is no such thing 
there.
    Mr. Aldonas. Congressman, you know, it's the old trade 
negotiator in me, but things work best when there is unity in 
Congress behind a set of negotiating objectives and a very 
clear message about what the outcome is going to be if those 
results aren't met.
    And again it's probably my instinct as a trade negotiator 
to say I think what you really ought to do is add an 
authorization to the President to negotiate. It doesn't have to 
be trade promotion authority, but an authorization to negotiate 
on these issues, and then say with the outcome is going to be. 
We're not going to pull the trigger on 27 percent tariffs in 
response to a pegged currency if we actually see the underlying 
reforms that would eliminate many of the distortions.
    I recall working on textiles and working on furniture when 
I was at the Commerce Department. And I'll tell you, when I 
looked at that problem economically a lot of the unfair 
competition I saw wasn't from a pegged currency. What I saw was 
this problem in the financial markets that created a zero cost 
of capital for Chinese firms.
    It wasn't labor costs. This just blew a hole through an 
industry because it favored those manufacturing interests that 
now have productive capacity that isn't going to go away until 
there are reforms in the capital market sector. But what I 
would want to do is rather than focusing on the peg, identify 
those items that are critical for American companies to open 
the market for this committee in the financial services arena, 
and then lay out what the outcome is if those instances aren't 
met, give the President the authority and tell him to get after 
it.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman, and I would like 
to welcome my fellow Texan and neighbor to the south, Mr. 
Evans. It's good to have you here.
    As I was listening to this testimony, and by the way, Mr. 
Chairman, I think this has been a great panel and great 
discussion--we know that China has been basically financing 
their industrial revolution through their banking system and 
that they have these high savings rates, and what we want them 
to do is to open up new opportunities in the financial markets 
in their own country.
    I guess the question I have is, is the reluctance of the 
Chinese to do that because, well, this is the mechanism where 
if we force all this money to either go to the banks--this is 
where we have control over that money, this is how we can 
finance our infrastructure and our industrial agenda. If we 
open up other investment opportunities to the Chinese people, 
say, 401(k)s or just other financial vehicles, is there a 
concern on the Chinese people then that takes the control out 
of how that money is invested and does that money leave their 
country or does it stay and continue to be reinvested in their 
country?
    For example, if American companies come in there and they 
start collecting money from Chinese people, where does the 
money go and is that a concern of theirs? And I think secondly, 
if we introduce those new financial vehicles and the ability to 
borrow and to do some of those other kinds of things in that, 
does that begin to take some of that money out from under the 
mattress because maybe they don't trust the bank?
    Could you kind of just--I think that may be the premise of 
what the dynamics in China are doing. Now Mr. Decker, do you 
want to start, lead off on that?
    Mr. Decker. Sure. I think that concern may have been in 
place in the past. I think it's less so now. I think that many 
in China want to build a more robust, more efficient capital 
market so that companies that need capital don't have only one 
source through bank lending. They have other sources. They can 
issue bonds, they can issue stock.
    We're contacted regularly by people in China who want 
advice and help and technical support in how to build a bond 
market or how to improve the efficiency of the stock market, 
how to build a clearance and settlement system, issues like 
that.
    The hurdle is that they recognize the need to build an 
internal market; they're much less willing to open a more 
robust market up to non-Chinese companies to come in and 
compete.
    Mr. Prasad. To make one point, they are very concerned 
about broad financial market reform, but again the order that 
they are thinking about things may be a little complicated 
because the banking system again is very dominant and 
households have a tremendous amount of deposits in the banking 
system. So their concern is that allowing more financial 
opportunities for households to put money in places other than 
banks or to take money out of the country could have a negative 
impact on the banking system.
    So their approach is, let's fix the banking system and then 
move forward, but the problem is that it's very difficult to 
fix the banking system unless it has competition, unless there 
are incentives to improve its efficiency, including importing 
expertise from abroad.
    And the other point I'd like to make is that in terms of 
their opening, there is a serious concern that they have about 
their regulatory and supervisory capability because in the past 
it was the case that this was not an issue. The government told 
banks who to lend to and the government was going to step in 
and take care of things.
    If the banks need to run as commercial institutions, they 
don't have the expertise yet. This is why U.S. firms could help 
them. But even though one might argue that U.S. firms are 
paragons of virtue, there is a concern among the Chinese that 
they have a difficult enough prudential problem on their hands. 
If foreign firms enter with their expertise, do they have the 
expertise to be able to regulate them effectively?
    And this is where I think in terms of the dialogue and in 
terms of the expertise that the United States can transfer to 
them, not just through the private financial sector but also in 
terms of regulational supervision the United States could make 
a difference.
    Mr. Neugebauer. Mr. Aldonas.
    Mr. Aldonas. It's about political power. Ultimately they're 
concerned that market-based reforms would siphon capital away 
that is going to be lent to underperforming state-owned 
enterprises that will result in the displacement of workers. 
They'll face social unrest.
    They don't want to change the capital controls because that 
siphons money out of the state-owned banks that fund the state-
owned enterprises that would lead to job displacements and 
social unrest. So what they need to be convinced is that there 
is actually far more to gain from eliminating these things than 
the risk that flows from those state-owned enterprises.
    Now the problem is right now bank lending goes about 75 
percent to those state-owned enterprises. It's only about 27 
percent roughly to private enterprises, and they're horribly 
inefficient, so it's a dead weight. The problem is growing, not 
declining as a practical matter, and so it's a tax they're 
imposing both on themselves and as their society ages.
    That's where you have to point to the risk because if 
you're really trying to persuade them, look, all right, you 
want to stay in power, you want to avoid that longer term 
problem. You know, in politics it's much easier to deal with 
the short term than the longer term, and I think that's what 
they're facing, frankly. But it's about the politics as far as 
I'm concerned.
    Mr. Neugebauer. My friend, Mr. Evans.
    Mr. Evans. Well, Congressman, my view is that China is 
amazed at our economy, and they've been moving into a free 
market economy for about the last 25 years. We've been in it 
for a couple hundred years, and it takes time to get these 
systems in place.
    And look at what they've recently done to their banking 
system. They just separated out the People's Bank of China that 
now can be the one body that acts as their federal reserve, 
that conducts monetary policy.
    My experience over there is that the leadership understands 
they need to continue to move away from administrative kinds of 
controls toward market-based forces. And the debate gets to be 
the pace of that and how fast does that happen.
    But it seems like--my judgment anyway is that they are 
continuing to try to move--their intention is to move toward 
more market-based reform. And they have the Central Banking 
Regulatory Commission now in place that they didn't have a few 
years ago, the China Insurance Regulatory Commission, the China 
Securities Regulatory Commission. All of these regulatory 
bodies are being put in place, so my judgment is that they're 
trying to continue to move toward market-based economy.
    Mr. Neugebauer. Mr. Sorensen.
    Mr. Sorensen. Very briefly, Congressman, in the interest of 
your time, I'll give you a specific example.
    We are partners with the same bank that Bank of America 
actually bought a 9.9 percent share of for about $4 billion. 
Their investment has tripled in value. Their $4 billion 
investment has become about $12 billion because of the stock 
market increase in China. That was a good play on the part of 
Bank of America, and a good play on the part of Principal 
Financial Group and our asset management company.
    The specific reason is that the Chinese regulator insisted 
on an American partner for the bank in asset management. They 
did not allow the bank, China Construction Bank, our partner in 
joint venture, to enter the asset management field without an 
American company as an equity partner. The same happened to the 
other three pilot banks.
    So it is by sector. There is some reluctance, but the 
regulators actually know that without a foreign technical 
partner, an equity partner that owns part of the business, that 
bank or that institution will not do as well.
    Mr. Neugebauer. Thank you.
    The Chairman. Let me just ask unanimous consent, if I 
could, to follow up on that.
    Is that a danger then that that's--they got B of A to come 
in for 9.9 percent to get that technical expertise, so is there 
a danger then that they'll let us in enough to help them but 
not enough to really benefit and profit? I mean that's a kind 
of very limited role and it could be an exploitative one. And 
that seems to me to be a great danger that they need the 
expertise, so they buy all the expertise for a very small piece 
of the equity, and that's trouble.
    Mr. Sorensen. Sir, with great respect, I would argue the 
opposite. China gets it. The regulators and the government get 
it. They understand that they will soon be a market economy. 
And soon to them means 15 to 20 years. They will be absolutely 
freely interchangeable in the markets within 20 years, in fact 
probably earlier than that because they need their companies to 
be global companies.
    So this bank, China Construction Bank that has a partner, a 
10 percent partner in Bank of America, whose investment, by the 
way as I said, just tripled in value in the last year-and-a-
half, that 9 percent does not need to stay at 9 percent.
    The bank will have and probably does have--
    The Chairman. But isn't the policy the other way around, 
they get the expertise, it doesn't need to expand? If they buy 
the expertise and they earn, they're smart people and you say 
they get it. It just seems to me they did get it; they buy the 
expertise and if they have that then there's no need to expand.
    The other thing I would have to say is that we're dealing 
with Americans who have current needs and concerns. 15 to 20 
years is a long time and it's a long time to expect people on 
our side that we represent to continue to forebear.
    But to go back to the specific point, I don't see how there 
is any necessity for them, having bought all the expertise--
they didn't buy 10 percent of the expertise. They get 100 
percent of the expertise for 10 percent of the equity, and if 
they learn and know--because we run into this in the 
technological area. There isn't anything automatic that says 
they will then have to open up more. Maybe they get the 
expertise and say, ``No, we don't need you as much.''
    Mr. Sorensen. There is obviously that possibility, and of 
course that depends on business relationships. I don't know the 
terms of the agreement that this specific equity purchase 
entailed. There are a number of other requirements from Bank of 
America to enter the credit card business. I believe that they 
have over 500--this is the information that I have from my 
partners who have shared this--actual Bank of America technical 
experts putting in a credit card system that is partly owned by 
Bank of America and the China Construction Bank, whose profits 
actually are revenue split with Bank of America.
    The Chairman. In what proportion?
    Mr. Sorensen. I'm sorry?
    The Chairman. In what proportion, 90/10?
    Mr. Sorensen. I really don't know, but I know that the 
intent of Bank of America, in that particular situation was not 
only to own equity in the bank, but to actually create a credit 
card business--
    The Chairman. For the Chinese owner who may then not need 
them in the future.
    Mr. Sorensen. Well, I would say for both, for both, sir.
    The Chairman. At 90/10?
    Mr. Sorensen. Well, maybe not necessarily at 90/10.
    The Chairman. You're right. I don't want to exaggerate it, 
at 90.1 to 9.9.
    The gentlewoman from New York.
    Mrs. Maloney. I thank you. A fascinating--I'm sorry I 
missed the testimony, but I was on the Floor mainly because we 
on the Education Committee have been trying to push science, 
math, and engineering for our young students, which fits into 
the global economy that we're facing. So we finally got 
something that we've been trying to do for 5 years now.
    I had the privilege of being over in China with the 
Education Committee last year. I'm not going to say that my 
knowledge on the financial services issues is as sharp as some 
of the others, but the questions that were brought up I have a 
curiosity about.
    Meeting some of the younger communist leaders who mostly 
have gone to school here, they are looking to the future. And 
then dealing with the older ministers who have been there for a 
long time, you can see they're concerned about moving forward 
too fast. And with us here, you know, we're a fast moving 
country; we want to go, go, go, go, go.
    Understanding the culture is something that the United 
States has not done a good job with; we need to work on 
understanding the cultures of different countries. Are we 
pushing them too fast?
    They know they have to change their finance service 
outlook, but one of the questions that was just answered--Bank 
of America, does the money come back here to America or does it 
stay in China? When you were talking about that the profits, 
where does that money go?
    Mr. Sorensen. From my understanding of the capital market 
system--and by the way, I'm not an economist, so I'm not an 
expert in this area, China Construction Bank is a publicly 
traded company. It is 51 percent owned by the government, 
however 49 percent of the shares are actually in the public 
hands; 10 percent of those shares are Bank of America's, so any 
dividends that the China Construction Bank pays do come back to 
America from those shares.
    Mrs. Maloney. They do come back. And I guess the other 
question that I had--Mr. Evans, we talked about being 
protectionists and everything else and yet, with the 
conversations that we've heard, China is doing the same thing. 
They're afraid of discourse because their laborers will be laid 
off. So we're fighting the same thing here. That's what a lot 
of Members of Congress are dealing with as far as our people 
losing jobs.
    And again, I do believe over the last 20 years we have not 
done the right thing on retraining workers for the future. You 
know, everyone keeps talking about that even with some of the 
trade deals that we're looking at now with Peru. Where is the 
educational force coming in, not for a job that's going to last 
for 2 years, but where are the jobs going to come from that 
will be there in the future? And that's where the 
businesspeople in my opinion should have a voice in this 
because the more people that are laid off in this country, 
which I understand is going to happen, it has always happened--
but we have not been prepared for it. In the past it has been a 
slow movement.
    Now we're seeing it with the automobile industry. It is 
something that is happening. You know, we're losing that. And 
we're going to be seeing--you know, you wonder why we're going 
to have Korean cars, Chinese cars. I toured their plants. 
They're way ahead of us on the technology, the forms. So I can 
understand why the Chinese are afraid of their people losing 
jobs in discourse. We have that going on here.
    So until we start settling some of our own problems here in 
this country, how do you expect us as Members of Congress, who 
all know global economy is there, how do you expect us to 
handle that when we should be protecting our people too? It's 
all part of the global economy, but you can't tell that to a 
lot of people who are being laid off. I mean that's just my 
common sense talking.
    Mr. Evans. Yes, I think you raise the central issue. What 
do we do to make all Americans ready for globalization, ready 
for this rapidly changing economy that we all find ourselves in 
now? I think it's important to put it in perspective. Remember 
that in 1975 we had about 30 free market economies in the world 
and about 400 million workers. Now we have 135 free market 
economies in the world and over 2 billion workers that we're 
competing with. We have to train our people, educate our 
people, and get our people ready for this rapidly changing 
global economy that we are in today.
    And I would be one who would be a very strong advocate for 
increasing the support for training programs and education 
programs and supporting people who are in transition from one 
job to another job. It used to be you'd go to work for a 
company and that was your career at that one company. Now you 
may have 4 or 5 different careers, not to mention 10 or 15 
different jobs. And we ought to make sure people understand 
that's the economy we live in today, so as American workers 
you'd better have yourself ready and trained and have the 
skills to compete in this rapidly changing economy.
    And I think as you said, I think the private sector has a 
very important role to play there. I think government has a 
very important role to play there.
    Mrs. Maloney. I'm not concerned about the younger workers; 
I'm talking about the workers who are 55 years old. You know, 
yes, you can retrain them, but they're being retrained for a 
job where they're not making as much money. That has a lifelong 
effect on them because that deals with their pension. That 
deals with social security. That deals with their healthcare 
benefits.
    I mean we, as the Federal Government, in my opinion, know 
that we're going forward. We will go forward, but we still have 
to do a better job of taking care of people who are going to be 
disrupted by this economy that is changing rapidly.
    The Chairman. I'm afraid we have to move on. Mr. Manzullo.
    Mr. Manzullo. Thank you very much for coming. I recall 
reading an article by Bob Vestine years ago that when financial 
services--and I'm wondering why he's not on the panel, but--
    The Chairman. If the gentleman would yield, in part because 
the Republicans didn't suggest him.
    Mr. Manzullo. Yes. That's okay. I'm sure we'll have lots of 
hearings, a lot more hearings on this. Anyway, the article 
talked about manufacturing will follow--manufacturing exports 
into underdeveloped countries will follow the development of 
financial services because you have to find a way to buy the 
stuff and pay for it, etc. And I've always believed that to 
this date, the more penetration we have into China's financial 
services, the greater opportunities we'll have to sell U.S.-
manufactured items there.
    Some people disagree with that, but I think what happens is 
that the maturity of the financial markets really is a forced 
springboard into economic maturity. The Chinese have--to them, 
``soon'' could be 5,000 years. That is the length of recorded 
history.
    Secretary Evans, the last time you were here the press said 
that I gave you a very difficult time. I didn't think that I 
had, and I just want to let you know that I think you're doing 
a great job over there as you did in Congress. And Under 
Secretary Aldonas, you came to Rockford and held one of the 
manufacturing seminars that improved everything.
    The problem that we have, and I agree with everything that 
everybody says, it's a very scholarly presentation, and it 
makes a lot of sense. The problem is, I think, joined by what 
Chairman Frank said, and that is, how long are the American 
people going to have to wait for this?
    I believe that it could be sooner than 15 or 20 years and 
you cannot have the hemorrhaging that's going on, but I know 
that what you're saying is factual based on two things. I mean 
your word would be enough, but when I was in Shanghai, I ran 
into Mr. Shang He, who was the president of the Shanghai stock 
exchange. He's 30 years old. And I said, ``Mr. Shang He, how is 
it somebody your age is the president of the stock exchange?'' 
And he said, ``Anybody over my age does not know what a stock 
exchange is.''
    And when I was in Macao, there was this incredible festival 
going on and there were balloons and clowns and I had no idea 
what it was. It was an insurance festival. I mean people were 
just excited that all of the vendors were selling insurance. 
And I said, ``Why are the Chinese excited?''
    It was like an outdoor circus or a carnival. People were 
excited, and lined up, and getting balloons and pins--Made in 
America--and everything. And the issue there, the issue with 
the fact is that there is no real social security system. The 
Asians do invest a fourth to a third of their money for 
retirement.
    So I mean no one can say that what you gentlemen are 
stating is without factual basis. I've seen it for myself, and 
you really have to be there to see what's going on in the 
country.
    My question is this. And Grant, if you want to take a stab 
at it, and Don, and anybody else, what will it take to go from 
an undeveloped to a developed state? What incentive do the 
Chinese need? And the third thing is that now they have a very 
aggressive federal government that is slapping countervailing 
duties on glossy paper, which is the first time that's been 
done in a non-market economy.
    Madame Wu Yi has gone wild over that. She's extremely 
excited. That caught her attention. What do we need to get this 
thing moving?
    Secretary Evans, maybe you could take a stab at that, 
because I feel I owe that to you after what that newspaper 
article said.
    Mr. Evans. No, I thank you, Rob. Look, I think we're doing 
what we should be doing and just I would pick up the volume 
probably a little bit. As I said earlier, Congressman, I think 
this committee has a vital role to play, a critical role to 
play. And if we should be heard, you make the absolute point 
that, you know, they're starting to understand countervailing 
duty tariff.
    Where did that come from? Well, that came from a trade law 
that was passed by Congress. That's where it came from. And so 
Congress plays a critical role in this whole process. The 
Administration has set out, under Secretary Paulson's 
leadership, the strategic economic dialogue, which has enhanced 
the engagement, increased the engagement with China, and I just 
think that Congress must play a big role in that engagement.
    It comes from doing what you did, going over there and 
seeing them and sitting down and talking to them. You know--in 
terms of I'm not here to propose any specific policy. Here is 
my belief of how this works. My belief is that when you conduct 
commerce or trade with somebody, you have to communicate with 
them. You talk to them. When you talk to them, you begin to 
understand them better, and they understand you better, and 
then you develop respect for one another. Once you develop the 
respect, all of a sudden you have some friendships and 
partnerships, and so I think that's what it's about. I think it 
is about continuing to enhance the communication between our 
two countries, so they clearly understand where we're coming 
from, and we get them to respect that view, as we should 
respect their own views.
    But I don't have any silver bullet, other than just keeping 
the pressure on through dialogue and I think it's perfectly 
appropriate obviously that Congress is talking about different 
kinds of legislation. I think it's perfectly appropriate that 
the Administration continues to enforce the trade laws, like 
anti-dumping, on glossy paper, or taking them to the WTO.
    The Chairman. Briefly, Mr. Aldonas.
    Mr. Aldonas. It's a wonderful question, Congressman, and 
I'd make one concrete suggestion just to add what the Secretary 
said. We deem them to be a non-market economy under the dumping 
laws. Why not go to them and say, we're more than happy to call 
you market economy, but you have to have a function in capital 
market before we can do that.
    And what we want to have is complete liberalization in the 
financial market. Put it on the table. See if they bite. You 
know, the reality is if these people have full access to their 
market, you will find it will be a market economy. It will 
drive change.
    But why not go ahead and sit down and have that 
conversation rather than shooting at it? And Congress can lead 
on that score. Congress can put that issue out there as a 
possibility so that the Chinese know there's a successful 
outcome as well as a potentially negative outcome.
    The Chairman. I'm going to recognize the gentleman from 
Georgia. I'm going to take 30 seconds of his time just to say, 
Mr. Secretary, I was delighted to hear you say, and I'm 
serious, that there's a rule for the private sector but also 
for government in responding to the important social concerns 
of the gentleman from New York, retraining, education, yes.
    The problem we have is this. There has been for a decade or 
more a relentless and unfortunately successful assault on the 
revenues of government, and the fact is that neither the 
Federal Government nor most state governments today have the 
money to do this important job training. I've heard from 
Chairman Bernanke and Chairman Greenspan. Education is the way 
you deal with diminishing inequality. The fact is that in 
America today, the way we finance higher education reinforces 
inequality. It does not diminish it.
    And so I welcome that, but you know it's important to 
recognize the role of government. It's unimportant to make sure 
that government has the revenues to do that and until we have 
that, the situation will get worse and worse.
    I thank the gentleman from Georgia and I recognize him.
    Mr. Scott. Thank you, Mr. Chairman. I find this to be a 
very, very interesting and provocative hearing. China presents 
a dilemma for us, in effect. It's sort of like a yin and a 
yang. It's like a threat and a big one, but it's also an 
opportunity and a big one. And we have here a growing private 
capitalistic economy: globalization, and yet at the same time 
it's tied within the secretive constraints of communism. And I 
think within--that gives this tug and pull that we're faced 
with here, particularly in the area of currency reform, in 
which all of our manufacturers are saying that they need to 
raise their currency and value.
    At the same time all of this is going on, we're in debt to 
China for nearly $400 billion. At the same time, our trade 
deficits are huge. And at the same time, there is this 
reluctance to increase the level of foreign ownership in 
Chinese banks and other financial institutions. So, one of the 
first questions I'd like to kind of get at in all of this is, 
could you give me an assessment of something that we haven't 
mentioned. We're dealing with a communist country still, are we 
not?
    And could you tell us in your own opinion, very quickly, 
because I have a series of other questions I wanted to ask, of 
what significance is this now. What role does China being a 
communist country play in particularly the issue that we're 
facing today, trying to get market-determined currency exchange 
rates, trying to get the currency reform, trying to do the 
issues we do. What problematic situations are we faced with 
with, that being within the constraints of this still being a 
communist country?
    Mr. Decker. I'll take a shot at it. Well, I think one of 
the most significant effects we see with regard to the process, 
the policymaking process in China is the relatively closed and 
opaque process that they have in place for rulemaking and for 
regulation. It's difficult for firms doing business in China to 
understand always what rules apply and how they apply, how 
they'll be enforced.
    When rule changes come about, it's not always possible. The 
process is not often interactive. Those being regulated don't 
really have a chance to make their views known to the 
regulators. There's not always sufficient time, once 
regulations are put in place, for firms to comply, to change 
their processes in order to comply. And one of the points we've 
tried to make through the SED, and independently in talking 
with China is that the regulatory process there needs to 
change.
    It needs to become more transparent. It needs to become 
more open. It needs to be the same kind of opportunities we 
have here, to file comment letters with regulators when new 
regulations are proposed or to have sufficient time to 
implement regulations or to know that enforcement of 
regulations will be uniform and fair. Those same kinds of 
processes need to be in place.
    Mr. Scott. You don't see the fact that they are still a 
communist country being problematic here?
    Mr. Aldonas. I think that the regulatory process stems in 
part from the broader system of government that's relatively 
closed and undemocratic.
    Mr. Scott. Particularly, would that be in terms of their 
managed control of the yen as currency?
    Mr. Aldonas. I think the desire to control the currency 
value and the other kinds of currency-related issues that we've 
talked to probably stem from a different motivation than trying 
to keep the regulatory process relatively closed.
    Mr. Scott. Do you see the influence of communism in the 
near future being lowered? Are we looking at a crystal ball 
ahead as we move forward with China becoming more open in terms 
of its markets, in terms of capitalism, in terms of all of the 
trade issues, all of the interplay and the globalization? Do we 
see communism then being marginal as something the old guise 
about to be had now and maybe in the next 10 to 15 years, 
communism will be a thing of the past in China?
    Mr. Aldonas. Congressman, first of all, you're right. It 
just builds in a very conservative, from their perspective 
about any kind of change that moves in the direction of a 
market. We have a tendency to think about this as a monolith, 
but it's not. There's politics in China and there is a backlash 
against liberalization going on in China right now.
    Mr. Scott. My time is up. But Mr. Chairman, I'd like to 
just ask one more question.
    The Chairman. I took a minute of your time.
    Mr. Scott. Thank you, sir. And while Secretary Paulson has 
stated his support for continuing dialogue with China and how 
it has allowed this country, our country, to achieve certain 
results, Mr. Secretary has also expressed disappointment that 
China has refused to make changes to its foreign ownership 
rules, especially in its financial services sector. I'd like to 
know your thoughts on ownership caps and furthermore do you 
believe that domestic Chinese interest groups have something to 
do with or a strong influence on blocking more extensive 
change?
    Mr. Prasad. As in any other country, there are interest 
groups that would prefer to keep things a little bit protected. 
But I think the Chinese authorities, and this is where the 
communist role that you brought up becomes very important, 
because it is true that there are issues about lack of 
accountability, lack of transparency, which is referred to. But 
there is also a strength in the sense of the communist party 
derives its legitimacy from economic development. And therefore 
they can focus on that, tamping down some of the short-term 
pressures that arise in the process of transition to a market 
economy.
    Again, with respect to the question that Chairman Frank had 
asked earlier about whether ownership should be opened up 
completely, I think the Chinese are fearful at the moment that 
opening up their financial system completely to foreign 
ownership could in fact lead to the domestic financial 
institutions, including the banks, essentially becoming non-
competitive. So they're taking it in stages, and I would like 
to echo the optimism of the other panelists, that they are 
taking this in a stage-by-stage process, and I do see this 
moving forward, once they feel that the domestic finances--
    The Chairman. You say they're afraid to open up because 
their people wouldn't be competitive. What do we say to 
American manufacturers who have been put out of business by the 
Chinese because they weren't competitive? Why does it become 
legitimate to say, we can't let you in because you'll be too 
good at it? Why is that a one-way ocean?
    Mr. Prasad. Other than legitimizing this, I think in terms 
of economic welfare, I think there is a consensus that opening 
up, either in terms of the financial services or trade, is 
ultimately beneficial to the economy.
    The Chairman. Except you've just accepted, or not accepted 
but put forward the Chinese reason for not doing it. And 
remember, again, not everybody benefits equally from this. But 
you've just come to the heart of it. We are talking about--you 
can't expect the Chinese to allow our banks to go in there. 
They would out-compete the Chinese banks. But why is that not 
an argument for restriction against Chinese coming in and 
putting Americans out of business. And, I mean, to tell 
Americans well, you shouldn't worry about it, but they're 
allowed to, they're not happy.
    Mr. Prasad. In a sense I think those restrictions hurt the 
country that impose the restrictions, and in the Chinese case, 
if they do not move fast, I think it will affect--
    The Chairman. Well, Dr. Prasad, let me say this. Now you 
say that because I brought it up, but I think if you go back 
and look at the transcript, you sounded much more sympathetic 
to that earlier. And it was oh, the Chinese don't want to open 
up because then their people will be at a disadvantage. And yet 
when I raised it, you say well, it's not in their interest. But 
they think it is and they're acting that way, and you have this 
fundamental contradiction, gentlemen, that you have to deal 
with.
    And then, I mean I know you did not explicitly say it was 
okay, but you said this is why they do it. What is it, to 
comprende, to pardonne; to understand is to accept and to 
pardon. And there is this theme, and you've heard this from 
some of my colleagues. It is a one-way ocean to some extent, 
and that is causing problems. Mr. Decker?
    Mr. Decker. I just want to respond by saying that some of 
the biggest financial services firms in this country are 
predominantly owned or headquartered outside the United States, 
companies like Credit Suisse, UBS, and Nomura.
    The Chairman. Deutsche Bank, yes.
    Mr. Decker. And of the 8 or so emerging markets countries 
with the biggest potential for growth and financial services, 6 
of them allow 100 percent ownership of financial services firms 
by foreigners.
    The Chairman. China and who else?
    Mr. Decker. China and Malaysia are the only two that don't.
    The Chairman. So that does not seem, I accept what you say, 
that does not bolster the case for letting the Chinese off the 
hook. The gentleman from Georgia?
    Mr. Scott. I want to conclude on this point. We're trying 
to find out--my follow-up was is there anybody who can give us 
any level of foreign ownership in Chinese banks or financial 
institutions? You know, I said earlier that China to me has 
really been the big elephant in the room for a long time, but 
we're going to have to deal with this. It's the biggest market.
    There are all kinds of problems going on over there in 
terms of their pollution, their environment, and their 
population. I mean, they're just--so we have to deal with it. 
The area that concerns me so much is the fact that this not 
allowing participation and ownership in getting involved with 
their financial institutions, we are an open area, yet we 
borrow $400 million, $400 billion a year from Chinese banks and 
their financial institutions. Just the interest alone on paying 
that is more than we put in to take care of our veterans. And 
yet this participation is only one way, and the most critical 
area of financial services rests within the banks and the 
financial institutions that--they're closed to us.
    So, I just wanted to, in conclusion, see if anybody had any 
information in terms of what is the current level of foreign 
participation in the Chinese banks or their foreign service, 
and specifically American--
    The Chairman. Let me do this, because I think these are 
useful figures. We would ask you to please respond to that in 
writing, but could we maybe get an ``off the top of your head'' 
estimate now. But if we could get that in writing that would be 
very helpful, and we'll leave the record open.
    Mr. Evans. Yes, Congressman, you articulate that very well, 
so keep it up. The numbers as I understand it are 25 percent 
total ownership, 20 percent by anyone from any one country, I 
think it is.
    The Chairman. Any one investor?
    Mr. Evans. Any one investor. So, it's 25 percent total and 
20 percent any one investor. The investor can't own more than 
20.
    The Chairman. The gentleman from Missouri. Oh, I'm sorry. 
Mr. Sorensen, go ahead.
    Mr. Sorensen. That would be in the banking sector.
    The Chairman. Yes.
    Mr. Sorensen. Insurance is up to 50 percent, and that is 
due to the commitments that China made to the WTO. We have not 
been able to get them over that 50 percent range yet. In the 
enterprise annuities area, which is my specific area, which is 
just being born now, no particular percentages has yet been set 
up, because it is too new an industry, and we are pushing to 
have at least the same as the insurance industry, which is 50 
percent.
    The Chairman. Thank you. Mr. Cleaver?
    Mr. Cleaver. Thank you, Mr. Chairman. My concerns are a bit 
different than those that have been expressed, which were very 
enlightening. You are very enlightening. Thank you so much for 
being here. Doctor, perhaps my question should be directed to 
you. The Chinese began construction on a new coal-fired plant 
every week, one a week. Each coal-fired plant emits about 
10,200 tons of nitrogen oxide, NOx. That equals to about 500 
late-model cars.
    And in addition to that, they are essentially saying to the 
EU and to other 21st century companies, which I hope we join 
eventually, that ``yes, we are carbonizing the atmosphere. Yes, 
we are damaging the earth. But you did it for years, and now 
that we have our opportunity, now that we're into the 
industrial age, you're saying we need to stop.'' Our effort now 
is to stop.
    Now does not this create problems, particularly when the 27 
nations of the EU are already putting in place a carbon trading 
system and the European nations and almost all the nations in 
the world except the United States, Australia, China, and India 
are already trying to deal with this problem?
    But in a global economy when you have the EU and the 
companies there, and by the way there are American companies 
that are in Europe, like shale, that are also far ahead of the 
U.S. Government in dealing with this issue of climate change. 
But when you have China in bold disregard to the environment, 
trying to do business with Europe and the United States, does 
not this create some major problems for all of us down the 
road?
    I mean, I'm not suggesting that, you know, setting up a cap 
and trade system or the other things that we need to do, will 
by any means create economic problems for us. But at least 
we're going to be moving toward new technologies, and if China 
is and India--but let's deal with China now, is still going 
back doing what we did in the 1920's and 1930's, and refusing 
to even make any modest changes, aren't we headed for some 
major economic problems?
    Mr. Prasad. This is normal. But let me make two 
observations based on what I have heard from the Chinese 
authorities. One is that they are concerned, as you are, about 
the implications for the rest of the world. They are very 
concerned about implications with China itself, because again, 
when you go on the streets in Beijing, the effects of the 
pollution and the smog are very visible. So I think ultimately 
the pressure will come from within. But the problem is whether 
the accountability systems are there in place so they can 
actually control what individual enterprise system, especially 
the state-owned enterprises, which in principle are under the 
government's control.
    So I think ultimately the move towards market economy will, 
I hope--and this is more a hope than anything specific, that it 
will include aspects of environmental concern. But the 
government, I can tell you, is very seriously concerned about 
it. But again, the legitimacy of the government derives from a 
variety of things, including economic development, so they are 
facing this very difficult balance, which is what ends up 
coming out in the sort of statements that you referred to.
    Because, ultimately, the legitimacy does come from being 
able to deliver economic development to the people. So when the 
issue of the environment starts becoming something that the 
people demand, it's very difficult to tell.
    Mr. Cleaver. So, with Europe and as I said, I hope that the 
United States can join the 21st century during our lifetime, 
that we will also admit that there is a climate change. But as 
we're moving toward trying to establish new technologies, it 
appears that China is not trying to move at all. I mean, I 
realize that with some of the government sponsored companies, 
that does create a challenge, but there's going to eventually 
be even greater resentment. We have a resentment here, because 
of the balance of trade-in and a number of other issues. But 
there will be even greater resentment when we begin to alter 
economically how we produce goods and services and the Chinese 
are simply, you know, just building coal-fired plants, which is 
very inexpensive to operate, and we're using all kinds of new 
technologies.
    It seems to me that I'm saying we, I'm hoping that we'll 
join, but the problems that I foresee is the balance of trade 
increases, the imbalance rather of trade increases that we are 
going to import many, many more cheaply produced products into 
the United States, because the Chinese are not spending any 
money trying to clean up the environment, and the Europeans are 
already looking at what's going on over there and over here, 
for that matter.
    Hopefully, something will happen this week in the G8 
meeting. I don't think so, but the concern I have is we don't 
have time. I mean, time is not on our side in terms of the 
environment. You know, it's not like we can fix this in 2020. I 
mean, it's not on our time. Most of the scientists are saying 
that we need to move today in order to put in place whatever 
controls that are needed, you know, in the next 2 or 3 years. 
And I could go on. I don't want to start preaching, but Mr. 
Sorensen?
    Mr. Sorensen. Just a quick comment, Congressman, in the 
interest of your time. One of our partners in our joint venture 
with China Construction Bank is a minority partner, with a 
smaller stake than as a Chinese partner. It was Huadian Power 
Generation. It's a very large, I think the third largest power 
generation company in China. They have two things: one, they 
are building a number of coal plants, yes. They're also 
building nuclear plants. The concern that they have is that 
they don't have access to enough technology from the United 
States to actually reduce their carbon emissions, so there has 
been a lot of intensive dialogue. I sat at the head table with 
Mrs. Hu Yi and Mr. Dave Johnson, the Administrator of the EPA, 
whose counterpart was on the other side of the table, the 
Chinese counterpart.
    They are extremely worried. In fact, one of the things 
they're actually discussing is that during the Olympics in July 
2008, most industry in Beijing will have to shut down because 
they will not be able to, for the 2 or 3 weeks, deal with all 
of the pollution and will obviously wish to put a better face 
on the environment, because Beijing is becoming extremely 
polluted.
    So there's a lot of worry about their own environment, 
which transcends, basically, their economic concern about not 
having enough energy. So they're between a rock and a hard 
place on this and there's a huge concern. There's a huge 
opportunity for American technology in basically the 
sequestration or capture of these carbon emissions, for 
technology companies in the United States to actually provide 
this and sell it to the Chinese as best as we can.
    Mr. Cleaver. They're refusing any kind of cap and trade 
system, the Chinese have so far. They're saying no. We have 103 
nuclear plants here in the United States and we have some major 
problems, because as you know there's no way of storing the 
waste.
    The Chairman. We do. I mean, it's not our jurisdiction, so 
if you gentlemen could just wrap up, we could.
    Mr. Cleaver. Thank you.
    The Chairman. I thank the panel. I have one last question. 
Why are there two names for the Chinese currency and is either 
one the preferable one to use?
    Mr. Prasad. The reminbi is the name of the currency. It 
literally means the people's money. The yuan is the unit of 
accounts. It's sort of like pound sterling. You know, the 
sterling is the currency, but you say 10 pounds for something. 
So you would say that something costs a yuan or it is 8 yuan to 
the dollar.
    The Chairman. The reminbi is like the sterling and the yuan 
is like the pound.
    Mr. Sorensen. Well, on the actual currency, the actual term 
is printed.
    The Chairman. What does it say?
    Mr. Sorensen. Reminbi yuan, both.
    The Chairman. Oh, it says both?
    Mr. Sorensen. Yes.
    The Chairman. All right. Now, I know. Thank you. And I 
really appreciate this. I have been talking to staff members 
here, and I think we will probably take some further action. It 
does seem to me that frankly a resolution of the House might 
make some sense as a contribution to the dialogue, and so 
you've suggested it. Congress ought to speak out on this.
    And I would just say this: From the employment standpoint, 
we don't expect this to be a major source of American's going 
over to work there, but there is enormous concern about the 
balance of trade in that huge deficit and our ability to earn a 
lot more in China, if they would have reduced these 
restrictions, is a very important one. And I think you might 
see that in a resolution.
    Thank you, very much.
    [Whereupon, at 12:27 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              June 6, 2007

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