[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
U.S. GOVERNMENT PRINTING OFFICE
75-732 WASHINGTON : 2012
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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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