[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                      INCREASING MARKET ACCESS FOR

                     U.S. FINANCIAL FIRMS IN CHINA:

                       UPDATE ON PROGRESS OF THE

                     STRATEGIC & ECONOMIC DIALOGUE

=======================================================================


                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                         INTERNATIONAL MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 16, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-126



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
        Subcommittee on International Monetary Policy and Trade

                  GARY G. MILLER, California, Chairman

ROBERT J. DOLD, Illinois, Vice       CAROLYN McCARTHY, New York, 
    Chairman                             Ranking Member
RON PAUL, Texas                      GWEN MOORE, Wisconsin
DONALD A. MANZULLO, Illinois         ANDRE CARSON, Indiana
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 16, 2012.................................................     1
Appendix:
    May 16, 2012.................................................    33

                               WITNESSES
                        Wednesday, May 16, 2012

Brainard, Hon. Lael, Under Secretary for International Affairs, 
  U.S. Department of the Treasury................................     5
Lardy, Nicholas, Anthony M. Solomon Senior Fellow, Peterson 
  Institute for International Economics..........................    24
Lowery, Hon. Clay, Vice President, Rock Creek Global Advisors LLC    22
Nichols, Hon. Robert S., Chairman, Engage China Coalition........    19
Strongin, David, Managing Director, the Securities Industry and 
  Financial Markets Association (SIFMA)..........................    21

                                APPENDIX

Prepared statements:
    Brainard, Hon. Lael..........................................    34
    Lardy, Nicholas..............................................    38
    Lowery, Hon. Clay............................................    42
    Nichols, Hon. Robert S.......................................    47
    Strongin, David..............................................    55


                      INCREASING MARKET ACCESS FOR


                     U.S. FINANCIAL FIRMS IN CHINA:


                       UPDATE ON PROGRESS OF THE


                     STRATEGIC & ECONOMIC DIALOGUE

                              ----------                              


                        Wednesday, May 16, 2012

             U.S. House of Representatives,
                      Subcommittee on International
                         Monetary Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 1:45 p.m., in 
room 2128, Rayburn House Office Building, Hon. Gary G. Miller 
[chairman of the subcommittee] presiding.
    Members present: Representatives Miller of California, 
Dold, Manzullo, Huizenga; McCarthy of New York, Carson, and 
Scott.
    Also present: Representatives Hayworth and Green.
    Chairman Miller of California. Without objection, all 
Members' opening statements will be made a part of the record. 
I ask unanimous consent that Ms. Hayworth of New York and Mr. 
Green of Texas be allowed to sit with the members of the 
Subcommittee on International Monetary Policy and Trade for the 
purposes of delivering an opening statement, hearing testimony, 
and questioning the witnesses.
    Without objection, it is so ordered.
    We are going to limit the opening statements to 10 minutes 
per side.
    I yield myself as much time as I may consume.
    Today's hearing is entitled, ``Increasing Market Access for 
U.S. Financial Firms in China: Update on Progress of the 
Strategic & Economic Dialogue.'' This hearing follows the 
fourth meeting of the U.S.-China Strategic and Economic 
Dialogue--we will call it S&ED--which was held at the beginning 
of the month in Beijing. We want to receive an update on 
progress made at this meeting.
    The week after the meeting in China the Federal Reserve 
voted to approve the application of three Chinese firms to 
operate as banks in the United States. We are here to discuss 
today what is happening on the other side of the coin. How is 
the Administration fighting for our U.S. financial firms who 
are seeking to do business in China? What has the 
Administration been able to accomplish to level the playing 
field to ensure fair access to U.S. companies? That is a huge 
issue for us.
    We have a very open market in the United States. As long as 
investments don't threaten national security, we welcome 
investment, because we know it creates jobs. To create jobs for 
U.S. companies, it is also critical that we understand the many 
issues that continue to create barriers to financial services 
in China, which have to be resolved through this debate.
    China continues to impose restrictions on foreign financial 
institutions with regard to market access, licensing, type of 
corporate ownership, branching, third party auto liability, and 
permitted products and services. There are also numerous 
examples of discriminatory treatment by Chinese regulators. 
While China might be meeting the letter of the WTO obligations, 
U.S. firms have complained that China is not meeting the spirit 
of those obligations. It is heartening to hear about the 
progress made at the recent S&ED on some of these fronts, but I 
want to make sure the Administration understands that China 
needs to communicate and be held open and held responsible for 
that communication.
    Today, we want to hear more about the actions the United 
States is taking and needs to take to support U.S. financial 
firms which seek to do business in China. I am pleased that the 
United States and China continue to come together to discuss 
issues of mutual importance to our countries and to global 
economies. The U.S.-China economic relationship is one of the 
most important bilateral economic relationships in the world, 
and how this relationship evolves will be critical in 
determining the growth and stability of global economies in the 
21st Century. I fully believe that both countries will benefit 
if we continue to encourage open communication, mutual respect, 
and equal access.
    While progress to help China to modernize its financial 
systems is critical for China to be able to develop its economy 
and create opportunities for its people, it is also 
competitiveness for U.S. companies. China is now America's 
third largest export market. Fair and competitive access to 
China's fast-growing middle-class and business sector 
represents an enormous opportunity for American manufacturers 
and service providers.
    Better access by U.S. companies to a Chinese market, 
especially for financial services, would create millions of 
jobs here at home. By helping to provide the financial products 
and services that China's citizens need and businesses need to 
save, invest, insure against risk, and consume at higher 
levels, U.S. financial institutions can play a role in China's 
developing an economy that is less dependent on exports and 
more dependent on their own consumption in the future. This is 
beneficial for the U.S. economy and good for global growth and 
stability.
    While progress is being made, it is really being made 
slowly, and I know the Administration agrees with that.
    The American market is open. If you are an American company 
and you want to invest in China, but the investment you take is 
excluded from the catalogue, then you are just basically out of 
luck. This is not equal access and this is not a level playing 
field. This is what the S&ED is all about. We need to create a 
level playing field in China for American companies. It is in 
America's interest to do this, and it is in China's interest to 
work with us on this issue. Equal access and free markets will 
benefit both China and the United States, and make both 
countries stronger. It is time for economic uncertainty to end. 
The two largest economies in the world simply do not have a 
choice. We must engage in productive dialogue, we must deepen 
our relationship, and we must find ways to get both economies 
growing again at a healthy level.
    I will yield back the balance of my time, and yield to 
Ranking Member McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. Thank 
you for having this hearing. And welcome to all of you.
    As the United States continues to recover and rebuild our 
economy, we must focus our efforts on markets that provide a 
solid foundation for growth and sustained global 
competitiveness. China's is the fastest growing major economy 
and the third largest export market for American companies 
looking to grow and create local jobs by selling goods and 
services abroad. That is why the U.S.-China bilateral economic 
relationship is so important.
    As two of the largest trading nations and economies, it is 
vital to maintain a global trading system. This system should 
enable U.S. companies and workers to compete on a level playing 
field. The U.S.-China Strategic and Economic Dialogue provides 
a forum to encourage the Chinese to increase market access 
through economic and overall reforms as a means to expand 
growth opportunities for American businesses and local job 
creation through the sale of goods and services to Chinese 
markets.
    The financial services industry is one of the most 
important industries in the United States. Prior to the fourth 
Strategic and Economic Dialogue held earlier this month, I 
joined several of my committee colleagues in sending a 
bipartisan letter to the President encouraging a robust 
discussion on reform and modernization of China's undeveloped 
financial sector that imposes severe restrictions on foreign 
financial firms, including U.S. firms.
    I want to thank the Under Secretary for being here today, 
and I look forward to your detailed update on the progress 
achieved during the recent dialogue meetings, especially in the 
area of financial sector reform and market access.
    As China begins to move towards a more balanced economic 
model that relies more on internal consumer demand, America's 
policy regarding China should ensure that China acts as a 
responsible stakeholder in the economy. This should include 
ways to ensure that trade with China is fair and profitable for 
American businesses and its workers, open market access for 
U.S. companies, and the elimination of discriminatory treatment 
of foreign investors.
    I would like to thank all of the witnesses for being here 
today, and I look forward to hearing your views on areas of 
improvement still necessary for China market access as well as 
how progress made thus far will help American businesses and 
workers.
    Thank you, and I yield back the balance of my time.
    Chairman Miller of California. I yield the balance of our 
time to Vice Chairman Dold.
    Mr. Dold. Thank you, Mr. Chairman, and certainly Secretary 
Brainard, I am so happy to have you here today. I appreciate 
you taking the time to be here.
    Today, when capital is so mobile internationally and global 
markets are so interrelated, an open and efficient financial 
industry is a necessary component of any stable and growing 
modern economy. And while there is no question that China's 
growth has been remarkable over the past 20 years, my 
colleagues and I have real concerns about the Chinese financial 
sector.
    Today, U.S. firms face meaningful market access barriers 
that significantly limit the efficient flow of private foreign 
capital into the Chinese economy.
    For example, the Chinese financial sector restricts the 
kinds of services that U.S. firms can provide, the corporate 
structure U.S. firms can utilize, and the licenses that U.S. 
firms can obtain. Additionally, the Chinese Government caps 
foreign investment on Chinese financial institutions at 20 
percent, which has had the effect of keeping foreign ownership 
in the Chinese banking industry to below 2 percent.
    In addition to these severe equity ownership limitations, 
U.S. firms are also subject to discriminatory supervision and 
regulatory requirements which I think are inconsistent with WTO 
standards. But recent reports indicate the Chinese Government 
is willing to work with the United States to create a highly 
developed Chinese financial sector that can function in an 
advanced global economy.
    As we help move China towards that highly developed 
financial sector, we must keep in mind some of the necessary 
components that I believe are important.
    First, a highly developed financial sector must operate 
under a fair and predictable legal system that is consistent 
with international legal standards, including intellectual 
property protection, contract enforcement, and impartial 
regulations and proceedings.
    Second, markets must obtain open and transparent and driven 
by market forces instead of political considerations.
    Finally, the financial services industry must be supported 
by government policy that encourages both domestic and foreign 
investment on an equal basis. When we have a level playing 
field for financial services in China, I am confident that U.S. 
firms will perform very well there, to the benefit of both the 
United States and China, and our respective economies, 
consumers, employees, and investors.
    Secretary Brainard, thank you so much for your time.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Miller of California. Thank you.
    It is my honor to introduce the witness on our first panel. 
The Honorable Lael Brainard is the U.S. Department of the 
Treasury's Under Secretary for International Affairs. She has 
been very helpful over the years, very cooperative, and she has 
really benefited this committee tremendously by her time, and I 
want to thank her for that. She served as the Deputy National 
Economic Adviser and Deputy Assistant to the President of the 
National Economic Council during the Clinton Administration, 
addressing challenges such as the Asian financial crisis and 
China's access to the World Trade Organization. Secretary 
Brainard was Vice President and Founding Director of the Global 
Economy and Development Program at the Brookings Institution, 
and was an associate professor of applied economics at MIT.
    Secretary Brainard, thank you for being here. We always 
appreciate your appearance. It is really helpful. Without 
objection, your written statement will be made a part of the 
record. You are recognized for a 5-minute summary of your 
testimony.

 STATEMENT OF THE HONORABLE LAEL BRAINARD, UNDER SECRETARY FOR 
     INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY

    Ms. Brainard. Thank you, Chairman Miller, Ranking Member 
McCarthy, and members of the subcommittee. It is a pleasure as 
always to be with you here today.
    Before I turn to China, let me just take this opportunity 
to thank you for the very important work you and the committee 
undertook on laying the groundwork for the reauthorization of 
EX-IM, which we think is going to be extraordinarily important 
for helping America's workers and exporters to compete on a 
level playing field.
    With respect to China, no other country presents as many 
opportunities and challenges. We have been working to achieve a 
more balanced economic relationship with China, a relationship 
in which U.S. companies and workers benefit more from the 
opportunities China presents.
    Since early 2009, U.S. exports of goods to China have 
almost doubled, and last year we exported around $130 billion 
of goods and services supporting well over 600,000 jobs here at 
home.
    China's exchange rate has appreciated by 13 percent against 
the dollar in real terms over a similar time period, and we 
have seen a large reduction in China's current account surplus, 
from 9 percent to under 3 percent today.
    As you noted, we are just returning from the fourth 
Strategic and Economic Dialogue in Beijing. We made important 
progress but, of course, many challenges remain. We made 
progress on leveling the playing field. China confirmed its 
intention to participate in negotiations for new rules on 
official export financing with the United States and other 
major exporters with the goal of reaching agreement over the 
next 2 years.
    As one of the world's largest, perhaps the world's largest 
providers of export financing, China's export credit program 
has been a longstanding competitive impediment. U.S. exports 
must not be undercut by subsidized foreign government 
financing.
    We also made progress on rebalancing global demand, which 
is critical if we are to sustain strong and sustainable growth.
    As we reorient our growth strategy here at home to focus on 
exports and competitiveness, with European demand expected to 
be weak for some time, sustaining growth will necessarily 
require stronger domestic consumption in China. That will mean 
more demand for U.S. goods and services, more exports for U.S. 
companies, and more jobs here at home.
    Fortunately, China has ample capacity for boosting domestic 
consumption. At the Strategic and Economic Dialogue, China 
pledged to reduce tariffs on consumer goods imports by the end 
of the year, and to reduce the high tax burden on services 
industries, which will both promote consumption and 
opportunities for our competitive services providers.
    And we made progress on securing a more open and market-
based financial system, which is central to our other 
objectives with China.
    China's financial sector remains dominated by government-
owned banks and subject to extensive government controls. 
Chinese households get low returns on their savings, and they 
have very few savings, investment, and insurance products, 
forcing them to save more, consume less, and with few 
opportunities to ensure against life's risks.
    With controls that keep deposit rates and interest rates 
artificially low, China relies on limiting the quantity of 
loans to control inflation, so banks ration credit to favor 
politically connected state-owned enterprises. Thus, we 
continue pressing on financial opening. We have made some 
progress. Moving to a market-determined exchange rate is a key 
part of both changing China's pattern of growth and reforming 
its financial system.
    In April, China widened the daily R&B trading ban and is 
diminishing intervention. If it is implemented in a way that 
fully reflects market forces, this could contribute to 
rebalancing China's pattern of growth and reforming its 
financial system.
    We secured new financial sector commitments that improve 
market access, boost consumption, reduce the unfair competitive 
advantage of state-owned enterprises, and begin to loosen the 
chokehold that state-owned banks have on China's financial 
sector.
    China announced it will move beyond its WTO commitments in 
securities to permit foreign investors to take up to 49 percent 
equity stakes in joint ventures and to allow securities joint 
ventures to expand business activities more quickly. China also 
committed to allow U.S. and other foreign investors to 
establish and hold up to 49 percent stakes in joint venture 
futures brokerages.
    On auto financing, our companies will now be able to issue 
local bonds to fund their operations, helping our auto 
producers in the world's largest automobile market.
    China amended regulations to allow foreign insurers to sell 
mandatory auto liability insurance, opening a large and growing 
market to our producers. And China committed to applying credit 
taxation and regulatory policies on a nondiscriminatory basis 
across state-owned enterprises and other enterprises, and going 
forward, it will increase dividend payments by listed state-
owned enterprises to be commensurate with publicly listed 
firms.
    These are tangible, significant gains that will benefit the 
United States.
    Going forward, we are committed to continuing to work 
closely with Congress and with domestic stakeholders to make 
sure that our relationship with China is more balanced and 
yields greater benefits for our workers and for the American 
people.
    Thank you.
    [The prepared statement of Under Secretary Brainard can be 
found on page 34 of the appendix.]
    Chairman Miller of California. Thank you very much.
    I recently sent you a letter about American bond holders in 
China and their inability to collect, and hopefully you will 
have an opportunity to respond to that at your convenience in 
the future.
    I guess the big concern I have is that three Chinese 
government-controlled corporations have become bank holding 
companies--to become bank holding companies in the United 
States was approved and the acquisition is going to be up to 80 
percent of the voting share of the bank of East Asia (USA), 
National Association. This is the first time we have really had 
this kind of an approval in the past. How do we make sure that 
American investors and businesses have the same opportunity in 
China?
    Ms. Brainard. We are working very hard to persuade China to 
move beyond the commitments it made in the WTO and to provide 
greater market access in key financial services sectors. We 
were pleased by the move they made, the very substantial move 
they made beyond their WTO commitments in the securities areas 
to allow joint ventures to move up to 49 percent equity shares.
    In the banking sector, as you say, currently we actually 
have--our firms have a large number of branches, affiliates, 
and subsidiaries operating in China, but under the WTO 
commitment China made, they are restricted to a minority 
shareholding. And so, we have raised these issues with China in 
the past, and we will continue working. As they work on 
reforming their financial sector, we are going to press very 
hard and use the leverage that we have to ensure they do so in 
a way that gives our firms the same kind of access and 
opportunities in their markets that we generally offer across 
foreign countries to be afforded national treatment in the U.S. 
market.
    Chairman Miller of California. This country believes in 
free trade and open markets, and we have, I believe, 
demonstrated that to China over the years. But they use 
discriminatory regulations and lack of transparency in the 
process when American companies apply to do business in China. 
I guess my concern is that they continually make gestures of 
how they are going to accomplish certain things, but they never 
seem to accomplish them in a reasonable span of time, if they 
are accomplished at all.
    How can you better hold their feet to the fire on this 
issue, because we understand that doing business creates jobs, 
and the more business we do in China, the more jobs it creates 
here? But we don't want to have the reality occur where it is 
just a one-sided event where they are coming here and we are 
not going there.
    Ms. Brainard. Yes, I fully share the priority that you 
place on making sure that China moves forward to provide better 
access and then follows through on its commitments. Where China 
has made WTO commitments, we obviously use the WTO dispute 
settlement to the greatest extent possible. We have taken six 
cases, we have had a number of very important successes, and we 
are building on those successes.
    In other areas, such as the securities equity holding that 
I mentioned earlier, where China's WTO commitments do not go 
far enough, we have been using our bilateral engagement to 
press China to move beyond its WTO commitments and to make 
greater access available. And in cases where they make a 
commitment, we use the machinery of the Strategic and Economic 
Dialogue, the very frequent opportunities for very deep 
engagement that it affords to push forward for actual 
implementation of those commitments.
    So if you look in the area of, for instance, indigenous 
innovation, where President Hu made a very important commitment 
to President Obama to dismantle the set of policies that they 
were going to put in place that would have favored Chinese 
innovators over U.S. innovators, we used the machinery of the 
Strategic and Economic Dialogue across the Administration to 
ensure that regulations were actually rescinded that would have 
applied not just at the central government level but all the 
way down to the provincial level.
    Similarly, in the case of third party auto liability 
insurance, we got a commitment from China that it would move to 
open its markets to U.S. providers. We have now followed 
through and have seen that they have issued this regulation, 
and we will continue to press them as our firms apply for 
licenses.
    And so in each area, we need to be very vigilant and work 
together with you here as well as with domestic stakeholders to 
ensure that when commitments are made, there is follow-through, 
and in areas where we feel that commitments are inadequate, we 
continue pushing for more market opening as we have now seen in 
the securities area.
    Chairman Miller of California. My concern is, and I am 
going to close with this, in many cases you have made 
commitments which is dealing in good faith, and they have made 
comments. And enforcing comments can be very difficult.
    My time is up, so I yield to the ranking member.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I agree 
with you and, as I said in my opening statement, the Strategic 
and Economic Dialogue has been a formula that does allow us to 
encourage China to adopt various reforms, but it is not a 
binding forum, which we had talked about or you had talked 
about.
    So you mentioned a little bit about how the Administration 
will continue to encourage and urge China to follow through on 
the commitments they made during the recent dialogue, but as 
you press ahead, we have seen them not live up to those 
particular agreements, and I find that as we are trying to get 
our financial markets especially into China the risks that our 
companies might take by going in, setting up, and then getting 
pulled back on, and they are left there.
    China car insurance--as you have said, they have passed the 
legislation that everybody, it is mandatory to buy insurance, 
car insurance. The last time I was in China, I think 30 percent 
of people, middle-income families were now buying cars. How are 
we going to be able to protect our business people if they go 
in there on this venture, and was there any discussions of 
timing for implementing these commitments when they were agreed 
upon?
    Ms. Brainard. Generally, we try to be as specific as we 
possibly can, and as you know, we negotiate a joint document 
coming out of each Strategic and Economic Dialogue with the 
Chinese which we then use as a document for tracking actual 
implementation of outcomes. So, we have a pretty precise 
mechanism, and we go through quite regularly with our Chinese 
counterparts as well as soliciting input from U.S. stakeholders 
to work through on each commitment whether they are on time in 
implementing the commitments they have made to us.
    And, again, in some areas we really have seen explicit 
follow-through on commitments--not across-the-board, and we 
share very much the sense of frustration that China needs to 
move forward. But we have used to a very great extent all the 
mechanisms that we have available to us. We used Section 421 to 
provide relief to our tire producers. Again, we have taken six 
enforcement cases in the WTO. We have had some very important 
strategic successes on those cases that go beyond the specific 
matter at hand to really try to drive systemic change in the 
Chinese economy more broadly.
    And we will continue to use trade remedies, for instance, 
to protect our industries where we think Chinese companies are 
not playing by the rules.
    So, as you know, the President talked in the State of the 
Union and has put forward in his budget a proposal to create an 
interagency trade enforcement center, which would bring 
together staff from across the interagency so that we can be 
very proactive in finding areas where our firms are not getting 
the access that they deserve and then following through with 
the tools that we have.
    So we are going to use all of those mechanisms and the 
Strategic and Economic Dialogue has been useful in that 
context. Again, we have had a set of commitments negotiated and 
then timelines that we have been trying to follow through on, 
and we will use the WTO when we can, we will use our domestic 
remedies where we must, and we will use these bilateral 
negotiations through the S&ED wherever possible to get follow-
through.
    Mrs. McCarthy of New York. Just out of curiosity, are other 
nations also having dialogue with the Chinese as far as 
bringing their products in? Are we going to have competition 
also with, say, Germany, the U.K., France?
    Ms. Brainard. China has, as we do, a number of major 
economic dialogues on a bilateral basis with other major 
economies. I would say that we have made more progress through 
the Strategic and Economic Dialogue with China than we have 
seen in some of the other, in all of the other dialogues that 
China has held, and I think that speaks in part to the very 
substantial engagement and priority that the entire 
Administration has placed on breaking down these barriers, 
leveling the playing field, achieving rebalancing, and opening 
up the financial sector.
    So when I look across the set of engagements China is 
having, and we of course examine them very closely because we 
want to build on progress wherever it has been made, I would 
say that the U.S. discussions with China under the S&ED have 
made much more concrete progress again in areas like market 
access for securities firms, like indigenous innovation, 
intellectual property, things that matter to American companies 
and American workers.
    Mrs. McCarthy of New York. I yield back.
    Chairman Miller of California. Vice Chairman Dold is 
recognized for 5 minutes.
    Mr. Dold. Thank you, Mr. Chairman.
    Secretary Brainard, thank you so much for being here.
    In 2009, the United States exported approximately $15.7 
billion in services to China, a surplus of about $7\1/2\ 
billion. In my view, I think that sales should be higher, but 
access to the Chinese service markets remain severely 
constrained. China imposes foreign equity limitations in many 
key sectors, including banking, insurance, rail, express 
delivery, and telecom, just to name a few. Chinese investment 
restrictions have a significant effect on services companies 
which often requires a local presence in order to do business. 
Other Chinese regulatory barriers, including limitations on 
licenses, a lack of transparency, discriminatory or overly 
burdensome regulatory requirements, and other restrictions, 
also prevent service companies from gaining market share.
    What is this Administration doing to create new 
opportunities for U.S. service companies that wish to export to 
China and continue to expand the trade surplus and services?
    Ms. Brainard. As you say, China has numerous restrictions 
in its services sector. I should say that China, for the size 
of its economy, has a services sector that really is not in 
keeping with its being the second largest economy and with its 
aspiration to be a major center for high-value production. So 
that it is not just restrictions on foreign participation of 
services but in fact services sectors have traditionally 
received much less favorable treatment in Chinese domestic 
policies as well.
    We are beginning to see a shift and a recognition that as 
China rebalances its economy, it needs a much more robust 
services sector, and we are trying to use that shift in 
thinking among China's policymakers to make inroads on services 
access, which, as you say, we agree this is an area of major 
competitive advantage for U.S. producers. It is an area of 
major potential export expansion. We have seen very strong 
export expansion, but we think it still is well short of 
potential, and it is an area where China's commitment under the 
WTO reflected a much earlier stage of development in terms of 
the kinds of services sector they should have.
    So we have raised issues associated with equity on 
ownership restrictions, market presence restrictions, and 
investment restrictions. We have raised those in the Strategic 
and Economic Dialogue. I know that Commerce and USTR raise 
these issues in their JCCT, and we also made this a major focus 
of the investment forum that we held earlier this year with 
China, pushing in particular on the restrictions in their 
foreign direct investment catalogue in many of these sectors.
    We are starting to see some changes. They moved some 
services sectors out from their restricted into the encouraged 
sector. We are seeing them shift their taxation system so that 
they will, we hope, start to reduce the burdens on the services 
sector, and we are going to push industry by industry, whether 
it be auto liability insurance, life insurance, express 
delivery, across-the-board as you--of the services you 
mentioned.
    Mr. Dold. I appreciate that. If I can, I am going to move 
from the services sector over to financial and even 
manufacturing. The Tenth District of Illinois, which I 
represent, is actually one of the largest manufacturing 
districts in the Nation, and I had an opportunity to talk with 
someone yesterday who was doing a significant amount of 
business with China and actually was competing also with 
Chinese companies. Honestly, the thing he told me was that he 
can't even compete now with the Chinese companies because of, 
in essence, the backing that the Chinese Government is giving 
to their companies. So, the same thing is going to happen with 
the financial institutions that have the explicit backing of 
the government as the state-operated enterprises, and therefore 
their cost of capital is going to be significantly lower, 
putting the United States businesses and manufacturers at a 
tremendous disadvantage.
    The gentleman I was talking to, again manufacturing in the 
Tenth District in Illinois, was talking about how he can't even 
compete with the Chinese companies. His costs of raw goods were 
going to be greater than what the Chinese companies were going 
to be able to put out.
    What is this Administration--what are you seeing in terms 
of leveling the playing field? How are we able to try to level 
the playing field so that American workers can not only 
manufacture here but can compete effectively with China?
    Ms. Brainard. We spent a great deal of time at the 
Strategic and Economic Dialogue putting high priority on the 
competitive advantage that we think state-owned enterprises in 
China unfairly enjoy and pressing for very specific changes for 
China to dismantle the set of preferences that we think 
unfairly benefit their state-owned enterprises. This is an area 
where previously we had seen almost no willingness to discuss 
and certainly no willingness to put any commitments into a 
public document.
    For the first time, China did say that it would move 
forward to ensure that credit policies, regulatory policies, 
and broader sets of policies would be applied on a 
nondiscriminatory basis across state-owned and other 
enterprises. That is a very important commitment but now we are 
going to need to work to find ways of seeing through 
implementation on very specific fronts.
    The preferential credit terms is a very particular set of 
problems that are closely intertwined with the set of 
restrictions in the financial sector more generally. You have 
caps on deposit rates which lead to lower interest rates, and 
then they have to ration credit because they are worried about 
inflation and generally we believe, we think that we see a 
pattern whereby state-owned banks ration that credit on a 
favorable basis to state-owned enterprises. So they are 
starving their own private enterprises and they are also 
unfairly advantaging our companies, which is what matters to 
us. We think that system has to go, and we are pushing really 
hard on it.
    For the first time, China said that they would ensure that 
state-owned enterprises pay dividends at a level that is 
comparable to publicly listed companies. If they actually move 
forward on that, that is a huge change, and we believe that if 
they make that funding available, it will also help to 
strengthen domestic consumption and contribute to rebalancing.
    I think this is an area that is going to take a lot of 
effort to start to disentangle. So I don't want to suggest that 
we feel like we are done, quite the contrary; this is the 
beginning. But it is an area of very high priority for us for 
the reasons you said.
    Chairman Miller of California. Thank you.
    Mr. Scott, you are recognized for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. We understand that 
China may have been much less amenable to arguments about 
opening up their financial sector to U.S. firms during the 
financial crisis that we have had. But they seem to have come 
around on that because they have been impressed with the 
resilience of our financial system and also have seemed 
interested in some of the reforms that we have subsequently put 
into place, Dodd-Frank, Wall Street reforms, some of the other 
things we have done.
    What is your view on China's willingness to engage with the 
United States and with different segments of our financial 
sector during and since our financial crisis?
    Ms. Brainard. I think your characterization is very much 
consistent with our experience, which is that when I first 
started in this job, which was in the early days of responding 
to the financial crisis, China was really most interested in 
whether we had the capacity to really fix our problems, reform 
our system, try to retain the innovation and dynamism that 
comes with the U.S. financial system is really the hallmark of 
it, while putting in place reforms that would fundamentally 
strengthen safety and soundness, and we have seen that they 
have responded, and I think this is true more generally of our 
foreign partners, in response to the very strong reforms we put 
in place with Dodd-Frank, the very strong increases in capital 
that we forced our firms to take on, we have seen a much more 
sort of heightened interest again in having our financial 
services firms participate in the financial market opening that 
China's reformers are pushing forward.
    At the same time, China's regulators also moved to put in 
place some of the same safeguards that we put in place, so they 
increased capital buffers in their banking system at the same 
time, and they are moving in a lot of consistent areas to come 
forward with a set of regulations that are in many respects 
convergent with some of the things we did in Dodd-Frank. So, I 
think it has been positive for our financial services firms as 
they seek to expand their participation in China's market.
    Mr. Scott. Let me ask you something else. China is the 
second largest economy in the world. Is that a safe assumption?
    Ms. Brainard. Yes.
    Mr. Scott. And we are the first, we are the number one 
economy in the world. Is that a safe assumption?
    Ms. Brainard. Yes.
    Mr. Scott. And China has nearly a trillion or over a 
trillion dollars of our debt. They purchased it. Is that a safe 
assumption, too?
    Ms. Brainard. I don't know the exact numbers.
    Mr. Scott. It hovers around a trillion. But they are our 
largest investors. So it just seems to me with all of this 
infrastructure in place, I find it difficult to see why China 
has such restrictive policies in place that make it difficult 
for our firms to set up operations in China.
    How do you assess that? We are number one, number two in 
the economies. They have invested in our debt. But yet, we have 
this other thing here.
    Ms. Brainard. I think the relationship between China and 
the United States is fairly extensive in both directions. So 
our firms have much greater foreign direct investment into 
China, for instance, particularly in areas in which we are very 
competitive than Chinese firms have had in the U.S. market, and 
they are only now starting to increase their investments.
    While it is true that China's WTO commitments have 
restrictions so that, for instance, in the banking sector, our 
investors are limited to minority shareholdings, nonetheless, 
we have a much larger number of branches and subsidiaries from 
U.S. banks operating in China than China does in the United 
States. So moving forward, I think there is enormous 
opportunity for the number one and number two economies in the 
world to greatly expand opportunities for our workers and our 
businesses. But we do want to make sure that when that 
expansion takes place, it does so in a more balanced way.
    Mr. Scott. My final point that I wanted to get out, is 
there any differentiation, are there more restrictions on 
American companies based upon what kind of companies they are, 
whether they are financial services companies or they are 
manufacturing companies or they are distribution companies, 
electronic companies, computers? Is there any differentiation 
where the restrictions are greater or less depending upon the 
nature of the American firm's businesses?
    Ms. Brainard. China has differential commitments on equity 
ownership, for instance, permitted by all foreign investors, 
including U.S. foreign investors by sector. So they have, for 
instance, a foreign direct investment catalogue. This is an 
approach that is just very different from the one we have here. 
We think our approach is a much better approach, which is a 
general presumption in favor of openness as long as those 
investments are consistent with national security. So we are 
going to continue to push for a broad opening of foreign direct 
investment, and we have seen some progress but not near enough 
to have a fully balanced relationship.
    Mr. Scott. Thank you very much.
    Chairman Miller of California. Mr. Manzullo, you are 
recognized for 5 minutes.
    Mr. Manzullo. Thank you.
    I noted in your testimony, on the last page, it says, 
``China committed to submit a revised comprehensive offer this 
year to join the WTO Agreement on Government Procurement that 
is responsive to the requests of the U.S. and other GPA 
parties.''
    Do you really expect that we will get a document that the 
United States will agree to from the Chinese?
    Ms. Brainard. I do expect them to submit an offer because 
they have committed to do so. We have been very frustrated, as 
I am sure you have, that China committed to come into the 
Government Procurement Agreement 2 years ago, and they have yet 
to submit an offer that we think provides commiserate access 
into its government procurement market to that provided by 
other large economies. Now, in this area, of course, countries 
don't automatically get benefits. So, for instance, as you 
know, here in the United States, our ``Buy American'' policies 
apply to countries that are not full members in the Government 
Procurement Agreement.
    Mr. Manzullo. I understand. China has a lousy record of 
intellectual property protections. They still continue to 
manipulate the currency even though it has appreciated 13 
percent in the last couple of years. But I think Americans 
would be aghast to know that if a State or municipality or the 
Federal Government, especially the latter, is opening up this 
bidding process to the Chinese when their record of IP 
protection is becoming worse.
    Ms. Brainard. So, again, I think on the Government 
Procurement Agreement we are going to continue pressing hard 
for China to come into that agreement with an offer that is 
commensurate to what we have--
    Mr. Manzullo. I understand.
    Ms. Brainard. --demanded from other countries. And until 
they do, they simply won't have access to those parts of our 
procurement market that are governed by ``Buy American.'' And 
that is a very important, I think, consideration for them that 
I hope will persuade them to move forward with an offer.
    Mr. Manzullo. Look at where we are with minerals and 
holding that hostage. I just don't think Americans are ready, 
nor is China ready, when you have somebody actively bidding to 
do a public works project or a major purchase that they are 
ready to have the Chinese come in with a government that is 
still far from open, with a continuous violation of ethics and 
business.
    We had a hearing before my Asia Subcommittee on what China 
did to Fellowes Shredder. It was absolutely outrageous how they 
literally stole $185 million worth of intellectual property, 
forced out their partner, closed the operations, but then 
opened it up with 100 percent Chinese ownership.
    But let me ask you a question. Last week, the Fed approved 
the Commercial Bank of China purchasing the Bank of East Asia's 
U.S. banking subsidiary, the Bank of China's application to 
expand its U.S. operations to Chicago, the application by the 
Agricultural Bank of China to establish a branch in New York. 
Can the Chinese purchase 100 percent of a company in the United 
States or of a bank and operate here? Is that correct.
    Ms. Brainard. In terms of our market access commitments, as 
you know, the U.S. provides for international treatment and 
does not have equity ownership restrictions.
    Mr. Manzullo. So the answer is yes?
    Ms. Brainard. However, companies' foreign financial 
institutions do need to undergo a process of--
    Mr. Manzullo. I understand. What I am saying is, we don't 
have anything mutual going on here. American companies can't 
buy or have 100 percent of a business ownership in a Chinese 
company or actual ownership but the Chinese are allowed that in 
the United States. Isn't that correct?
    Ms. Brainard. Under the WTO commitments, China came in with 
a WTO commitment which at the time was more commensurate with--
    Mr. Manzullo. The answer is yes, isn't it?
    Ms. Brainard. Which is much--which does not allow a 
controlling shareholding, whereas yes, we do here in the United 
States.
    Mr. Manzullo. So we offer the Chinese more than what they 
are offering us?
    Ms. Brainard. And we are trying very hard to get them to 
move forward on--
    Mr. Manzullo. I understand that. My question is, why didn't 
the Federal Reserve, if possible, take that opportunity or the 
government take the opportunity to say, I think it is time to 
talk about the same access to Chinese financial or operating 
U.S. operations if China can operate in the United States? We 
allow them to do that but they don't allow us to do that. Is 
there a problem there? Something intrinsically wrong?
    Ms. Brainard. The Federal Reserve has an independent 
regulatory proceeding which is designed to ensure that 
prudential requirements are met. The Administration has ongoing 
discussions with China about market access, and we fully agree 
with you that China should provide access that is commensurate 
with the access that we provide to them. So we agree with you 
very much that it should be commensurate.
    Mr. Manzullo. If I may, please, it is my time.
    Why didn't we take that opportunity? I am looking at the 
testimony of the panel that will follow you, from Rob Nichols.
    Chairman Miller of California. The gentleman's time has 
expired. You need to wrap it up. We have votes coming in, and I 
have two more Members with questions. I have tried to be 
generous, but we have votes coming, and I have two more Members 
I have to let go through the process.
    The gentleman from Michigan, Mr. Huizenga, is recognized 
for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman, and with that, 
actually, I am willing to grant some time to my friend from 
Illinois. I will give him some of my time, and let him pursue 
that line of questioning, because I am interested in that as 
well.
    Mr. Manzullo. The question was, why didn't the 
Administration at the time that these applications were pending 
with the Fed for these three purchases tell the Chinese 
Government that now is the time for you to give us 100 percent 
ownership opportunities just as we give to the Chinese? Why 
didn't the Administration do something at that point?
    Ms. Brainard. I will just say that the Administration has 
consistently raised with our Chinese interlocutors--
    Mr. Manzullo. That doesn't answer the question.
    Ms. Brainard. --the ownership restrictions, and we saw some 
progress on market access in the securities sector which we 
think is important progress, but we are going to continue to 
push.
    Mr. Manzullo. But why didn't they take the opportunity at 
that point to demand market access?
    Ms. Brainard. We do take every opportunity to demand market 
access, and we saw, again, a very important step forward by 
China, a step forward that will expand meaningfully our market 
access in the securities area, and we will push for China to 
move beyond its WTO commitments in the banking area as well. We 
agree with you, it is important they provide access 
commensurate to the access we provide into our market.
    Mr. Huizenga. Reclaiming my time, I appreciate you pursuing 
that line of questioning, because I think the frustration that 
I have had, and probably you are hearing here, is it seems that 
we take two or three steps forward, China will take one step 
forward, and we declare it a tie, somehow that we have made 
equal progress as we are moving along, and that I think is sort 
of the concern and the frustration that I have. And I 
apologize, I came in a little late, but I was curious--and we 
are hearing the vote bell go off right now. But with this 
approval going in, what impact do we really see this happening 
on our domestic banks as well? I am sure you are quickly 
covering some territory that you may have touched on already, 
but how are we seeing what these Chinese banks coming in may do 
to our own banks?
    Ms. Brainard. Again, these are--this is a regulatory 
process that is undertaken by the Fed on an independent basis 
and it is on the basis of prudential requirements. As you know, 
we already have extensive market access into our banking sector 
for foreign companies, and generally speaking, we believe we 
have a more competitive, more vibrant, more dynamic financial 
services sector as a result of having an open financial 
services sector. We think China should undertake the same 
policies, that it would be only fair for us and very beneficial 
for the dynamism of their economy.
    Mr. Huizenga. But it seems to me that would be a little 
different having Deutsche Bank here or somebody else that we 
have a--or a Canadian bank, TD Bank, which is huge down here, 
those are countries that we have parity on whether it is trade 
or any of the--patent protection and all of these other things 
that have been addressed in various treaties where they have 
stepped up and actually done that. That is the concern you are 
probably hearing, is aren't we again putting ourselves at a 
competitive disadvantage when we say well, they have made 
positive steps forward but haven't crossed the finish line, yet 
we somehow say the race is done and so therefore we are going 
to grant this.
    Ms. Brainard. Let me just be very clear. We don't think 
there is anybody who should be saying the race is done. We are 
working very hard because we think that it is important to our 
workers and to our businesses that the relationship with China 
be more fair, be more balanced, and that we need to see greater 
market access into the Chinese market. So, we are using the 
tools that we have. We are very aggressive in taking WTO cases. 
We have been quite successful so far. We used Section 421 for 
the first time ever. The Bush Administration had not used this 
tool at all. It is a very important tool and we have been very 
aggressive on using trade remedies as well.
    So, we completely agree that this relationship is one that 
needs to be more balanced. That is why the President has put 
forward in his budget a proposal to create a trade enforcement 
center that would bring together resources across the 
interagency that would allow us to be more effective in 
bringing cases on behalf of our companies. We very much agree 
with you, and you know we made some progress at the Strategic 
and Economic Dialogue, but by no means are we satisfied with 
that and we are going to go right back at it, and we look 
forward to working with you and your constituents to make sure 
that we are aware of all of the areas where we need to keep 
pushing.
    Mr. Huizenga. Mr. Chairman, my time has expired. I know we 
have a vote as well. So thank you.
    Chairman Miller of California. I think the Under Secretary 
is hearing from this committee that we understand the United 
States is making commitments and the Chinese are making 
comments. And that is of great concern.
    Do you have time for one more questioner?
    Ms. Brainard. Sure.
    Chairman Miller of California. I yield to the gentlelady 
from New York, Ms. Hayworth, for 5 minutes.
    Dr. Hayworth. Thank you, Mr. Chairman, and Under Secretary 
Brainard, it is a pleasure to see you again. As you are aware, 
I believe we sent a letter, I worked with our chairman, 
Chairman Bachus, and with Ranking Member McCarthy, to encourage 
greater access to the financial markets by our U.S. 
institutions, and I note that you made some progress in the 
Strategic and Economic Dialogue. I wonder if you could comment 
briefly and specifically on issues like licensing, the forum in 
which our institutions might join Chinese markets, product 
services, and of course discriminatory practices, we are going 
to address those, by the Chinese Government. And more 
fundamentally, what kind of leverage can we bring to bear, 
particularly given that we are in rather large debt to China at 
this point?
    Ms. Brainard. As you say, we made some important progress 
in financial services opening, and frankly, these are 
commitments that our companies, and indeed the United States, 
had been seeking for many years. It predated the 
Administration. So, it was good to see China move forward. 
Again, there are a whole host of areas where we need to see 
much greater progress. So while we welcome these steps, we are 
going to continue pushing very hard for broader access in 
financial services across-the-board. We have seen some progress 
on mandatory third party auto liability insurance. We have seen 
some important progress on futures brokers, on securities. But 
we need to see more progress in other insurance sectors, on the 
banking sector, and I think we can continue pushing hard.
    We have leverage with China. We are the largest market in 
the world. We have some of the most innovative dynamic 
companies in the world. As Chinese authorities look to 
transform their economy, I think we all tend to forget here 
that China is facing incredible challenges. They are facing a 
very steep demographic cliff. Wages are rising very fast. Costs 
are rising very fast. They have maxed out on resource-
intensive, very heavy investment, export-oriented policies and 
need to have a domestic consumer that is going to sustain their 
growth.
    We have leverage. They want what we have. They want an 
environment that produces innovation, they want a dynamic 
private sector, they want an economy that channels capital to 
companies on the basis of their good ideas and good management, 
not on the basis of rationing by state-owned banks. So, we do 
actually have leverage. And we are seeking to use, where 
necessary and where we can, dispute settlement at the WTO and 
leverage in that form, but we also have a lot of leverage by 
virtue of the strength of our private sector and the depth of 
our engagement. And so, we are trying to use all of those 
things to make progress, again recognizing the huge interest 
here and we should not be satisfied. We have a lot of work 
ahead of us.
    Dr. Hayworth. I appreciate your comments and your 
dedication to this task, Secretary. No question.
    We just passed a bill through the House for--CSPA to help 
our institutions to fight the challenging battle against 
hacking by those who seek to harm our institutions or our 
country. And unfortunately, of course, much of the challenge 
seems to come from China. Is there any--are we addressing on an 
official level China's policies toward--I realize this would be 
a delicate subject--but toward industrial espionage, if you 
will, all the ways in which our fundamental code of ethics, if 
you will, is different seemingly from theirs?
    Ms. Brainard. Yes. I share very much the priority that you 
put on the cybersecurity issue. We do see this area of 
cybersecurity as a major risk to the competitiveness of our 
companies and their ability to compete on a level playing field 
internationally.
    It is an area which has been included in the Strategic and 
Economic Dialogue. The State Department has taken the lead in 
conversations on cybersecurity, so I would suggest that they 
could give you more information there, but it is a priority for 
the Administration, and the State Department has held 
discussions on this topic in the context of the S&ED.
    Dr. Hayworth. Thank you, Madam Secretary. And I yield back, 
Mr. Chairman. Thank you.
    Chairman Miller of California. Thank you. I want to thank 
Madam Secretary for her testimony. You have always been very 
candid and thorough in your thoughts.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to this 
witness and to place her responses in the record.
    Madam Secretary, I have a letter I would like to give to 
you on Chinese bonds that I sent to Secretary Geithner on April 
6th. I thank you for your time.
    I would encourage all the Members to come back for the 
second panel.
    The subcommittee is in recess.
    [recess]
    Chairman Miller of California. The hearing is called back 
to order.
    I would like to introduce our second panel.
    First, the Honorable Rob Nichols has been chairman of the 
Engage China Coalition since its creation in 2006. He is also 
the president and CEO of the Financial Services Forum, a 
nonpartisan financial and economic policy organization 
comprised of CEOs of 20 of the largest and most diversified 
financial services institutions doing business in the United 
States.
    Before joining the Forum, Mr. Nichols served as the 
Assistant Secretary of Public Affairs at the U.S. Treasury. He 
also held positions in the House, Senate, and White House. Mr. 
Nichols was recognized as one of the most effective trade 
association leaders in Washington, D.C., in 2009, 2010, and 
2011.
    Welcome.
    Second, Mr. David Strongin is managing director of 
international policy at the Securities Industry and Financial 
Markets Association, SIFMA, which brings together the shared 
interests of more than 650 security firms, banks, and asset 
managers. Mr. Strongin is SIFMA's expert in U.S.-China policy.
    Third, the Honorable Clay Lowery is vice president of Rock 
Creek Global Advisors. He previously served as the Assistant 
Secretary of International Affairs at the U.S. Treasury 
Department, where he was involved in the first Strategic and 
Economic Dialogue with China headed by former Secretary of the 
Treasury Henry Paulson.
    Mr. Lowery has chaired the Committee on Foreign Investment 
in the United States, CFIUS, and served as the Financial Deputy 
to the G-20, G-7, International Monetary Fund, and Financial 
Stability Forum. At various times, Mr. Lowery has been 
appointed to be the U.S. representative on the board of the 
World Bank, the African Development Bank, the European Bank for 
Reconstruction and Development, and the Inter-American 
Development Bank.
    After his government service, Mr. Lowery was vice president 
of international government affairs with Cisco Systems and the 
managing director of Glover Park Group.
    It is good to have you here today.
    Finally, Mr. Nicholas R. Lardy is the Anthony M. Solomon 
senior fellow at the Peterson Institute for International 
Economics. Mr. Lardy joined the Peterson Institute from the 
Brookings Institution where he was the senior fellow in the 
Foreign Policy Studies Program and served as the interim 
director of Foreign Policy Studies.
    Before Brookings, he served at the University of 
Washington, where he was the director of the Henry M. Jackson 
School of International Studies from 1991 to 1995. He was also 
the Frederick Frank Adjunct Professor of International Trade 
and Finance at the Yale University School of Management. Mr. 
Lardy is an expert in Asia, especially in Chinese economy.
    I want to thank you all for being here today.
    I would like to recognize the witnesses in order, for 5 
minutes each.
    Mr. Nichols, you are recognized for 5 minutes.

STATEMENT OF THE HONORABLE ROBERT S. NICHOLS, CHAIRMAN, ENGAGE 
                        CHINA COALITION

    Mr. Nichols. Thank you, Chairman Miller and Ranking Member 
McCarthy, for the opportunity to participate in this very 
important hearing regarding the need to expand access to 
China's financial sector for U.S. institutions.
    Today's hearing is both timely, given the recent round of 
the Strategic and Economic Dialogue in Beijing, and it is 
enormously important. China's economic emergence and the impact 
of its integration into the global economy are unprecedented in 
the history of the world's economy with profound implications 
for U.S. economic growth and job creation.
    Today, I would like to use my appearance to help connect 
the dots and shed light on why a more consumption-based Chinese 
economy is very much in the interests of the United States, how 
a more active Chinese consumer will dramatically expand demand 
for U.S.-made products and services, and, finally, what role a 
more modern and sophisticated financial sector plays towards 
the acceleration of a more consumption-based Chinese economy. 
So I am really going to focus on jobs today.
    As you all know, China's economy has grown at an annual 
rate of nearly 10 percent over the last 2 decades. It was the 
world's seventh-largest economy in 1999. It recently surpassed 
Japan to become the world's second-largest economy. Since China 
joined the WTO in 2001, our exports to China have increased 
more than six-fold, growing 7 times the pace of U.S. exports to 
the rest of the world. China is now America's third-largest 
export market and the largest market for U.S. products outside 
of North America.
    According to a recent article in the Washington Post, 
exports to China from almost every U.S. State and congressional 
district have grown exponentially in recent years. So clearly, 
fair and competitive access to China's fast-growing middle-
class and business sector represents an enormous commercial 
opportunity for American manufacturers, service providers, 
farmers, and our ranchers.
    So let me give you a quick sense of what an expanding China 
can mean for U.S. economic growth and job creation.
    Last year, for example, our exports to Japan totaled about 
$66 billion. Our exports to China were about $104 billion. 
China's population, of course, is about 10 times the size of 
Japan's population, so about 130 million people in Japan, about 
1.3 billion in China.
    If China's citizens were eventually--not overnight but 
eventually--able to consume American-made goods and services at 
the same rate as her neighbor, Japan, U.S. exports to China 
could, over time, grow to $660 billion. That is 7 times what 
America exported to China last year and an amount equivalent to 
nearly 5 percent of U.S. GDP and nearly twice what we imported 
from China last year, potentially turning a $300 billion trade 
deficit into a $300 billion surplus.
    More importantly, if we apply the Commerce Department's 
metric that there are 5,000 new American jobs for every $1 
billion in additional exports--that is a Commerce Department 
figure--increasing exports to China $660 billion a year would 
amount to somewhere in the vicinity of 2.8 million new jobs 
here. That won't happen overnight, but with the right reforms 
and with the right access to their markets, it will happen over 
time.
    Now, for that remarkable transformation to occur, clearly, 
many things need to happen inside of China--I will be the first 
to acknowledge that--to change their culture from one more 
towards consumption and less saving. There needs to be 
infrastructure changes, cultural changes, societal changes. But 
first among equals is her citizens need the tools found in 
developed nations to save, to invest, and to insure against 
risk; and those are the tools that are offered in an open 
financial services sector.
    So by providing the financial products and services that 
China's citizens and businesses need to save, invest, and 
insure against risk, raise standards of living, and consume at 
higher levels, foreign institutions will help China develop an 
economy that is less dependent on exports, more consumption-
driven, and therefore an enormous and important and expanding 
market for American-made products and services.
    I look forward to answering your questions. Thank you for 
hosting this important hearing, which I, frankly, think is 
about jobs in America.
    [The prepared statement of Mr. Nichols can be found on page 
47 of the appendix.]
    Chairman Miller of California. That was very timely. I am 
impressed.
    Mr. Strongin, you are recognized for 5 minutes.

STATEMENT OF DAVID STRONGIN, MANAGING DIRECTOR, THE SECURITIES 
       INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Strongin. Thank you.
    Chairman Miller, Ranking Member McCarthy, I thank you for 
the opportunity to testify today on behalf of the Securities 
Industry and Financial Markets Association on the importance of 
improved market access for financial services firms in China.
    I would also like to take this opportunity to reiterate our 
support for the Strategic and Economic Dialogue and the efforts 
of Treasury Secretary Geithner, Under Secretary Brainard, and 
the rest of the Administration.
    With the conclusion of the most recent S&ED, this hearing 
is especially timely and provides us with the opportunity to 
assess the progress made and the need for continued reform in 
China.
    My testimony will cover three areas: priorities that are 
necessary to allow U.S. firms to compete on a level playing 
field; the significance of the commitments made at the S&ED 
and the growth of China's financial services firms and their 
implication for a level playing field.
    Despite progress at the most recent S&ED in raising 
ownership share and for securing joint ventures, full market 
access and national treatment for financial service firms in 
China remains an industry priority.
    We have identified five key interconnected priorities: 
first, permit 100 percent ownership and the right to establish 
in a corporate form of choice; two, allow the same scope of 
business; three, further develop the Qualified Foreign 
Institutional Investor Program; four, improve the bond market; 
and, five, promote regulatory transparency.
    This year's S&ED yielded commitments from which further 
progress must be made. This includes some of the things 
Secretary Brainard discussed:
    One, raising ownership on security joint ventures from 33 
to 49 percent. This is a notable development, but we believe a 
roadmap toward full ownership should be developed and 
implemented as quickly as possible.
    Two, reducing the seasoning period from 5 years to 2 years. 
This will provide U.S. joint ventures with expanded access for 
different activities in China. However, the length of the 
season period of 2 years remains. We believe that is a 
significant obstacle, and there are also a number of opaque 
requirements that restrict access for U.S. firms in China 
related to this.
    We also believe while increasing the qualified foreign 
institutional investor quota at $80 billion again is a step 
forward, we need those quotas to be eliminated and allow free 
investment.
    We believe that it is essential that these commitments are 
implemented expeditiously and that this committee is well 
placed to ensure these obligations are met.
    The S&ED remains the primary forum in which to discuss 
financial services' issues on a bilateral basis. Ongoing 
engagement and continued dialogue is vital for pushing forward 
with further reform of China's markets.
    SIFMA has consistently urged both the Bush and Obama 
Administrations to engage in results-oriented discussions that 
lead to the reduction and elimination of these barriers. 
Despite these commitments, more work needs to be done to ensure 
U.S. financial services firms are able to operate on a level 
playing field, and monitoring implementation of China's S&ED 
commitments will be critical.
    While the United States continues to advocate for improved 
market access and the reduction of regulatory barriers, China 
has increased its global profile considerably. Chinese 
regulatory authorities are now full participants in the G-20, 
the Financial Stability Board, and the International 
Organization of Securities Commissions. As China becomes a more 
active participant in these institutions, it is imperative they 
reduce restrictions and eliminate discriminatory barriers in 
order to meet these global commitments and responsibilities.
    We look forward to working with the committee, Congress, 
and the Administration to further expand the industry's access 
to China. We believe the committee has a central role in 
helping ensure the rapid implementation of China's S&ED 
commitments while at the same time pursuing a level playing 
field for U.S. firms.
    Finally, to ensure these goals are met, we offer two 
recommendations: first, that an annual report from Treasury to 
Congress is provided demonstrating China's implementation of 
commitments agreed to at each S&ED and second, increasing the 
frequency of the economic portion of the Dialogue to perhaps 
twice a year, as was done during the original S&ED.
    I very much appreciate the committee's interest in this 
issue and the opportunity to testify today. Thank you very 
much.
    [The prepared statement of Mr. Strongin can be found on 
page 55 of the appendix.]
    Chairman Miller of California. Thank you.
    Mr. Lowery, you are recognized for 5 minutes.

 STATEMENT OF THE HONORABLE CLAY LOWERY, VICE PRESIDENT, ROCK 
                   CREEK GLOBAL ADVISORS LLC

    Mr. Lowery. Chairman Miller, Ranking Member McCarthy, thank 
you very much for the opportunity to testify today on 
increasing market access for U.S. financial firms in China.
    I think Mr. Nichols covered the jobs issue very well, and 
Mr. Strongin covered some of the specific areas, and Mr. Lardy, 
I know, is a complete expert on China. So I figured my area 
that I could help you with is what is it like to be in a 
government position doing financial liberalization negotiations 
with China, no longer being in that position.
    In my experience working with Chinese financial officials, 
China makes changes when it believes it is in China's 
interests. This probably does not come as much of a surprise to 
you, and I don't mean to diminish the impact of external 
pressure, but that pressure is mitigated by China's size, its 
unprecedented speed of economic growth over the last 30 years, 
and its ability to attract investors from around the world. 
That is why financial liberalization should be thought of as 
more than just increasing market access for U.S. companies. It 
is also about rebalancing China's internal economy.
    For a few years, various observers have noted that China's 
export-led, production-heavy growth model could not last 
forever. Two major questions were asked: one, when is the 
turning point at which China needs to transform its economy; 
and two, can China actually accomplish this transformation?
    With regard to the first question, the timing of this 
hearing is excellent. China appears to be on the verge of 
significant changes. The leadership is scheduled to change in 
China over the next 10 months or so; and these leaders will be 
the ones responsible for taking China through what I believe is 
an even more important transition, the vital changes to its 
economy that are going to be made necessary by the long-term 
unsustainability of its current economic model.
    You have heard from Under Secretary Brainard and others on 
this rebalancing of its internal economy, but the challenges in 
China cannot be underestimated. Entrenched interests, whether 
they are state-owned enterprises or captured regulatory 
agencies, there is just inertia; and, frankly, pure politics 
will fight for the status quo.
    While the jury is out whether China can make this 
transition, the last 30 years suggests that China at times does 
use external pressure to advance internal reforms. Therefore, I 
see the S&ED and the negotiation of a Bilateral Investment 
Treaty as opportunities for the United States to provide input 
and maybe even influence the way China addresses these 
challenges.
    The difference between when I was working on these issues a 
few years ago and today is that U.S. officials and observers 
are not the only ones emphasizing that China is bumping up 
against the limits of its existing growth model. As your letter 
and many members of this committee's letter to President Obama 
points out, Chinese leadership and respected international 
organizations like the World Bank have joined the chorus, and 
perhaps most importantly we are actually starting to see some 
of that transformational change.
    In many ways, financial sector development is the key to 
this transition. The current system is influenced heavily by 
the state, capital markets are woefully underdeveloped, and 
households suffer from a form of financial repression due to 
interest rate caps on deposits. This system leaves small- and 
medium-sized enterprises with little access to capital, stifles 
consumption, and leads to a banking system with growing 
nonperforming loans. As is well-recognized and mentioned 
earlier, financial sector development depends on various 
factors, but a key one is opening the market to global 
competition.
    I want to conclude my testimony by respectfully suggesting 
areas where Congress can play a role. Mr. Strongin suggested a 
couple. Let me add one. This committee should bring the same 
intensity and oversight of pushing for strong deliverables at 
the S&ED and in the Bilateral Investment Treaty negotiations 
that Members of Congress have shown on the exchange rate issue. 
Putting pressure on the Executive Branch to continue to work 
with the financial services industry to push for market access, 
to work with China to regulate in a fair and transparent 
manner, and to assist China in building out its capital markets 
are all good steps that should be taken.
    If China breaks the rules, then by all means hold them 
accountable and enforce the rules. But we also should be open 
to working with China, engaging in vigorous but productive 
discussion with them, and finding solutions that are clearly in 
the interests of both of our countries.
    Thank you very much. I will be happy to answer any 
questions.
    [The prepared statement of Mr. Lowery can be found on page 
42 of the appendix.]
    Chairman Miller of California. Thank you very much.
    Mr. Lardy, you are recognized for 5 minutes.

STATEMENT OF NICHOLAS LARDY, ANTHONY M. SOLOMON SENIOR FELLOW, 
         PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

    Mr. Lardy. Chairman Miller and Ranking Member McCarthy, 
thank you very much for inviting me to participate in this 
hearing today.
    I believe that the Strategic and Economic Dialogue has made 
some progress in addressing issues in the bilateral economic 
relationship. These range from the big picture, like China's 
commitment in principle to rebalance the sources of its 
economic growth away from investment and exports towards 
domestic consumption demand, to small points like concrete 
steps, concrete commitments on more specific issues, for 
example, increased access for U.S. financial firms.
    I would say further that since China joined the WTO, it has 
partially liberalized its financial services industry, but I 
think U.S. and other foreign firms have been disappointed that 
they have not been able to expand their activities in China 
more rapidly. I attribute this to three factors, and I would be 
happy to expand on that in the question period.
    First, I think in the bilateral negotiations that we 
entered into with China in the 1990s, we did not press very 
hard for market opening in financial services. All these 
ownership caps that are in place today were agreed to in that 
bilateral negotiation, and the Chinese by and large have found 
it relatively easy to live up to their commitments because they 
were not very demanding, and now we are in the position of 
having to kind of renegotiate.
    So my second point would be, in this renegotiation, I think 
both the U.S. and the Chinese side negotiators are very 
constrained in their ability to make reciprocal concessions in 
order to get further market-opening measures in the U.S.-China 
Strategic and Economic Dialogue or in other bilateral fora.
    Third, I would say that the U.S. argument, which I think is 
increasingly heard and has an element of truth to it, this 
argument that China would benefit from further unilateral 
opening of its market to U.S. and other foreign financial 
services firms, quite frankly is just far less compelling today 
than it was prior to the onset of the global financial crisis 
in the United States.
    Let me just expand on one or two of these points.
    First, with respect to what concessions each side can make, 
U.S. negotiators, I think, are very constrained. China's number 
one request is to have a relaxation on controls of exports of 
U.S. high-technology products to China, and negotiators can't 
relax these standards unilaterally.
    Congressional action is required to move this forward, and 
I am sure Members of Congress would be quite upset if they read 
in the newspapers that the Executive Branch had decided to 
unilaterally liberalize this regime along the lines that might 
ultimately be appropriate.
    So what commitment did we make in the most recent S&ED? The 
United States commits to give full consideration to China's 
request that it be treated fairly as the United States reforms 
its export control system. Commitment to give the other side 
top priority involves no concrete commitment on the part of the 
United States to do anything at any specific time.
    The Chinese have the same problem. They are talking about 
rebalancing their economy in ways that would be very beneficial 
to us, but they have been talking about it for years. But 
vested interests within China, I think, have stalled the very 
important financial and fiscal reforms that are necessary to 
undertake this rebalancing.
    For example, market-oriented interest rate liberalization, 
which Secretary Geithner has correctly said would increase 
household income, reduce their need to save, and thus lead to 
substantially more private consumption expenditure. This has 
been on the agenda for years, but no progress has been made on 
this since 2004 because basically the vested interests that 
have blocked this and other reforms, even when them are being 
promoted by the top Chinese leadership.
    So my view is when each side is very constrained in what 
concessions it can offer to the other, it is not surprising 
that the incremental steps are indeed very incremental. Moving 
insurance from 33 to 49 percent is important, but I wouldn't 
classify it as a breakthrough; and it is very hard to see how 
we are going to get breakthroughs, given the limitations that I 
have outlined today.
    [The prepared statement of Mr. Lardy can be found on page 
38 of the appendix.]
    Chairman Miller of California. Thank you very much.
    I look back to the late 1960s when we were looking at 
Germany selling cheap cars we thought of in the United States, 
and everything you bought said, ``Made in Japan'' on it. Kids 
today don't know that. You thought Japan was going to control 
it forever. Then wages started increasing, the cost of living 
started increasing, and the Japanese people started to see what 
was available in the West and started wanting it. Now today, 
you see very few products that say, ``Made in Japan'' on them 
anymore.
    Do you see that same trend occurring in China? Any one of 
you?
    Mr. Lardy. I would say it is a long way off. China is 
starting at a level of per capita income and then obviously 
wage levels that are far, far below the level that Japan had in 
the 1960s when we were very worried about Japanese imports. So 
I think it is a process that will take effect over a long 
period of time, but I think we are very far from reaching the 
kind of turning point that you alluded to that we experienced 
with respect to Japan.
    Chairman Miller of California. My concern is as I look at a 
restrictiveness in financial markets paper that OECD put out in 
a 2010 update with zero percent being the best and 10 percent 
being most restrictive--China was about 6.1; Russia was about 
5.4; Mexico was about 4.3; the United States was about four-
tenths of one percent; and surprisingly, Japan was zero 
percent.
    But at these types of numbers, how can the pace of that 
growth be accelerated through financial services reform of the 
markets when, as you said, you talked about the Chinese just 
talking, and my comment to the Under Secretary was that they 
make comments, and we make commitments? How do you see that 
changing in the near future, unless we change the way we are 
dealing with them?
    Mr. Nichols. I will start, Mr. Chairman.
    I would say that how it can change over time is there is a 
huge group of folks in China who do not have access to the 
global financial services marketplace, the things that you 
would find in other developed nations. So we need to continue 
to stay both at the table bilaterally, multilaterally, and 
then, most importantly, to underscore to them that it is in 
their best interests to change the economy, their economy, from 
one of manufacturing to export into one based on domestic 
demand and consumption. Ultimately, that is how we will get 
them there.
    I would say, just as a general observation, we are not 
satisfied. We are not satisfied. We have plenty of concerns. 
There is more to do. Has there been some incremental progress? 
Absolutely. Is it positive? Absolutely. But we are not 
satisfied. There is much more to do to get them to open their 
markets.
    But as that huge, what I call silent, majority of her 
citizenry does begin to participate in the global marketplace, 
it will I think, as I indicated earlier, be a huge export 
opportunity for our manufacturers and our ranchers and our 
farmers, but we just need to continue to point out why they 
need to do that.
    Mr. Strongin. I also wouldn't discount the importance of 
continued outside pressure. So I think the S&ED, this 
committee, and even the China-U.S. commitment to restart BIT 
negotiations all provide us with both pressure and some 
leverage, not all the leverage we would like to have, but I 
think we have to sort of see what is in our toolbox and use 
whatever is appropriate.
    Mr. Lowery. The only other thing I would add is, if you 
took that same index 25 years ago, China probably would have 
scored a perfect 10. And then if you took it probably 5 or 6 
years ago, they probably would have been about an 8. So I think 
the point is that they are making progress. It is not nearly at 
the pace, as Rob said, that we would like.
    But I think that with outside pressure, with potentially 
internal reform being driven more by Chinese citizens than by 
Americans thinking that they want to do this, there are 
possibilities that we can make even more and more progress. But 
I agree with the premise that we need to keep the pressure on 
them.
    Chairman Miller of California. Do you believe the S&ED 
meetings are being fruitful? Are they benefiting this country? 
Are they moving in the right direction?
    Mr. Strongin. I think from the securities industry 
perspective, they have been helpful. They have moved the ball 
forward. Not nearly enough. We are talking about going from 33 
percent ownership in China to having U.S. firms now being able 
to own 49 percent. It still does not give them strategic 
control. That movement from 49 to 51 is in a sense much greater 
than from 33 to 49. So, I think it is helping the margins, but 
there is a lot left to do.
    Chairman Miller of California. I think the American people 
are having a real problem right now. Our markets are tough over 
here. We are getting out of a recession. Too many people are 
out of work. And they are looking at China as taking their jobs 
through fixed currencies.
    And then, when you hear on the news that the 
Administration, the Federal Reserve is talking about allowing 
more groups to come over here in banking industries when our 
companies are restricted from going over there and doing the 
same thing, that is a tough pill to swallow for the American 
people.
    What is your opinion? Some of you were in government 
before, but now you are representing the private sector. 
Something has to change. And if Congress standing up to the 
Administration or whomever and saying this is unacceptable, we 
believe in a fair and open marketplace--yet if you look at 
Germany and Japan today and China, they are still benefiting 
from trade agreements that were post-World War II because they 
were such a downward economy we were trying to help them get 
out. But some of those agreements are still in place today that 
they benefit from. What would your response be to the American 
people?
    Mr. Nichols. Mr. Chairman, I will start on that on this 
issue of the Fed licenses.
    Again, my initial position is we are not satisfied. This 
playing field is not level, and that is not good. That said, 
we, the United States, should lead by example. We have an open 
capital market. That is the right message to send to emerging 
markets. So I don't think that we should move backwards.
    That said, again, it is not a level playing field, so I am 
not happy about that at all. But I think it is important for 
the United States to lead by example and send the right message 
to these other emerging economies around the world about the 
right direction to go.
    Now, also, actually there is some positive aspect here that 
the reason the Fed--among the reasons the Fed granted these 
branch licenses that have been pending for some time there is 
because the home country supervision in China has improved, and 
it is starting to come into global norm. So, that is actually 
good, too. That is a good thing you can point to.
    So, acknowledging the playing field is not level, the fact 
that their home country supervision has improved up to some 
global norms, and the Fed has been sending teams over there to 
inspect, to talk to the regulators, to look at the way they are 
supervising and making sure they are doing it in a modern, 
efficient way, that is actually a good thing. All that being 
said, we are not level. We are not where we need to be.
    Chairman Miller of California. I agree, and I think we need 
to aggressively encourage them to do the right thing.
    I yield 5 minutes to the ranking member, Mrs. McCarthy.
    Mrs. McCarthy of New York. Thank you.
    Listening to all of you, and I think certainly the chairman 
and I at this point agree with everything that you are saying. 
We know that the markets are going to be opening down the road.
    The one thing I guess that just keeps going through my head 
is how are you going to market your products? Because China, 
the people of China, do not trust us. That was taught to them 
from their government: Do not talk to Americans.
    Now, they are trying to change that. I had about 44 
Chinese--I will call them students, but they were probably 
middle management from the banks from China--over here at 
Georgetown for 6 months learning our ways. But it is the 
people, when you go outside of the inner cities, who don't have 
the education yet, how are you going to sell your products? Why 
would they trust Americans to give them car insurance or life 
insurance or get into our banks versus their own?
    And this is really scary, because it is in the back of my 
mind. Supposing we are doing well, there and supposing people 
in China are buying your products and we are doing very well 
financially, and then China--because this is the way they were 
brought up--flips it and says, ``Get out.'' What do we do? How 
do we protect ourselves? How do you protect yourselves on the 
business issue going in?
    But that is the natural mistrust I would tend to think that 
certainly the Chinese people have been brought up with, and 
certainly the American people have been brought up with. Even 
though I have been to China--and I need to go back there again 
because it has been 10 years--those things to bother me when I 
think about it. And when I think about what is going on in the 
world, North Korea, what is going on in the Asian Sea. These 
are things that we are involved in.
    Anybody?
    Mr. Lardy. Let me just briefly make one comment, and that 
is we should recognize that American and other foreign firms 
have invested about 1.6 trillion U.S. dollars in China. There 
haven't been any expropriations that I have been aware of.
    And the other thing that is quite interesting is, even 
though the business environment could always be improved and we 
could come up with a long list of things to do, very, very few 
companies ever disinvest. They would like to have the 
regulation be more transparent. They would like this, that, and 
the other thing. But the environment is not so bad that very 
many firms are disinvesting. Only a handful of foreign firms 
have ever disinvested from their operations in China, and the 
money continues to go in there.
    So I think the chance of expropriation, if you look at the 
footprint that foreign firms have in China, they are not going 
to be removed. They are producing almost 25 percent of the 
manufactured goods produced in China. They are producing about 
30 percent, 40 percent of the exports. They are fully 
integrated into the Chinese economy in many respects, and the 
Chinese would be shooting themselves in the foot to push 
foreigners out.
    Mrs. McCarthy of New York. I agree, if they were shooting 
themselves in the foot, but I believe it was Mr. Nichols who 
said that China is only going to do what is good for them. I 
believe that was--I am sorry, Mr. Lowery--that they will only 
do what is good for them. And when things come to the point of 
where it would be very good for them to be more involved, to 
take over, they are just not mature enough yet. I guess that is 
my question.
    Mr. Lowery. I guess my argument would be that I do think 
China will do what is in China's interest, and I think a lot of 
people in China are recognizing that it is more and more in 
their interest to allow this type of investment or to allow the 
type of trade flows that we have seen. So if you look at just 
statistically the stock of trade from the United States to 
China is still not that big for as big an economy as it is, but 
the flow is quite good, which suggests that there are more and 
more Chinese who are liking American products and services.
    The second point which I wanted to make which is related to 
the discussion you and Mr. Lardy were having, this is why one 
of the good things we saw at a recent S&ED was an agreement to 
move forward on trying to get a Bilateral Investment Treaty 
(BIT).
    A Bilateral Investment Treaty does a few things.
    First, it basically helps provide market access, the way we 
do Bilateral Investment Treaties.
    Second, it provides protection for our companies against 
the type of issues you are talking about. It is a hard 
negotiation.
    Third, it provides a service, which is basically finding 
out where China is on some of these issues and actually having 
a real negotiation which becomes a binding legal agreement.
    I think that those are all very positive things.
    I think you raise some very good points. But we are 
chipping away at it, again, as I think all of us have said, 
although probably not at the pace we would like.
    Mr. Strongin. I would just like to support Mr. Lowery 
point. I think as businesses are in there and investors, legal 
certainty, predictability become incredibly important, 
particularly as you have longer-term investments. And I think 
what Clay was pointing out, that is why the BIT is critically 
important, to move forward on that. And also it is why we have 
in some cases the WTO, right, where we could actually take WTO, 
we could take them to dispute settlement.
    It is the problem with the S&ED that they are commitments 
of a sort, but they are not binding commitments. So that is 
somewhat problematic, not only getting the Chinese to live up 
to those commitments, but then they aren't what they call 
bound, so the Chinese could pull back. So we do have to find a 
mechanism where, once we achieve what they give us within the 
S&ED, they can't claw it back as you are suggesting.
    Mrs. McCarthy of New York. My time is up. Sorry. I have one 
more question.
    Chairman Miller of California. Mr. Carson, you are 
recognized for 5 minutes.
    Mr. Carson. Thank you, Mr. Chairman.
    Unlike the Federal Reserve, China's Central Bank often uses 
reserve requirements as a means of expanding or even 
contracting the money supply. According to CRS, China's Central 
Bank increased the reserve requirement ratio 6 times in 2010 
and another 6 times in the first half of 2011. As of last June, 
China's reserve requirement stood at around 21.5 percent. To 
what extent is this high capital reserve requirement a barrier 
to entry for U.S. firms that seek access to China's banking 
sector? And that is for anyone.
    Mr. Lardy. Maybe I can start on that.
    I don't think of it as a barrier. It is a restriction or a 
requirement that applies to all banks, foreign and domestic, so 
it doesn't tilt the regulatory environment in favor of domestic 
banks. The fact that they rely so heavily on the required 
reserve ratio reflects the fact that they do not have market-
determined interest rates for the most part, so their Central 
Bank does not rely on adjustments in interest rates to control 
the flow of credit but rather these quantitative restrictions 
like the requirement to put 21.5 percent of your deposits into 
the Central Bank.
    So it is a very quantity-oriented control mechanism, rather 
than a price-oriented control mechanism. They have talked about 
moving towards more of a price-oriented mechanism, but, quite 
frankly, I think they are still a long way from being able to 
do that.
    Mr. Strongin. I would just add a parenthetical that I think 
when you talk about restrictions in financial services, it is 
key to focus, though, I think on the ownership restrictions. I 
sound like a broken record, but I think whether you go through 
insurance, banking, securities, or other types of financial 
products, it always starts foremost with the inability to run 
your business the way you want to run it.
    I just wanted to add that.
    Mr. Lardy. Can I just make a footnote to that?
    I think that is certainly true in securities and asset 
management and insurance, but it is a little bit less clear in 
banking. Because there are hundreds of foreign banks that are 
running their own businesses in China, either as subsidiaries 
or as branch banks. They run their business. They can offer 
whatever range of products they are licensed for. They don't 
have to worry about talking their partner into doing something.
    And I don't think, quite frankly, very many foreign banks 
want to buy into existing Chinese banks. So I don't think the 
ownership cap--remember, the banks that have had ownership in 
China have been disinvesting in recent years for a number of 
reasons.
    So I don't think there is a big demand on the part of 
financial services for banks to come in and buy up 50 percent 
or have a transaction similar to the transaction that ICBC 
created with the U.S. branches of Bank of East Asia. I think 
banking businesses are trying to build up their domestic 
networks, and some of them have been quite successful. HSBC, 
for example, operates more than 100 branches in China. It is 
trying to develop the retail business. Over time, they are 
expanding their footprint. And they do control all of those 
businesses. They don't have a foreign partner.
    So I would say in that respect, banking is a little bit 
different from securities and insurance.
    Mr. Nichols. One observation, too, just building on that.
    What we are seeking ultimately is an entirely open capital 
market there, for banking, for securities, for insurance. The 
Chinese leadership says they would like, for example, to have 
Shanghai be a global financial sector. And one thing that we 
have reminded them is you are not going to be able to have a 
global financial center with a closed capital market that is 
punitive toward either insurance, banking, or securities firms. 
So our end goal is an entire open capital market like here in 
the United States.
    Mr. Carson. Thank you, gentleman.
    Thank you, Mr. Chairman. I yield back.
    Chairman Miller of California. Did the ranking member have 
one question she wanted to ask that I cut her off on? I would 
be happy to yield for that question.
    Mrs. McCarthy of New York. To very honest with you, I would 
ask a favor from each of you. I am sure you have briefing 
papers, and if you could give a briefing paper that would be 
not on your level, but maybe on my level, so that I could start 
reading and finding out and then ask follow-up questions to all 
of you in the future.
    Thank you. That is all.
    Chairman Miller of California. Thank you.
    The Chair notes that some Members may have additional 
questions for this panel, that they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit questions to these witnesses 
and to place their responses in the record.
    I want to thank you all for your time, for your talent, and 
for your expertise. Your information was very beneficial, and 
this is something I think we need to stay on top of and monitor 
and make sure the Administration is moving our economy in the 
right direction with the Chinese economy.
    This hearing is adjourned.
    [Whereupon, at 4:07 p.m., the hearing was adjourned.]

                            A P P E N D I X



                              May 16, 2012
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