[Senate Hearing 114-367]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 114-367

 
                EVALUATING THE FINANCIAL RISKS OF CHINA

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXPLORING THE CURRENT STATE OF THE CHINESE ECONOMY AND THE POTENTIAL 
            FINANCIAL RISKS IT MAY POSE TO THE UNITED STATES

                               __________

                             JULY 14, 2016

                               __________

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             U.S. GOVERNMENT PUBLISHING OFFICE 
 45-417 PDF          WASHINGTON : 2023
              
                 


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho                    SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                    Dana Wade, Deputy Staff Director

    John V. O'Hara, Senior Counsel for Illicit Finance and National 
                            Security Policy

                     Thomas Hogan, Chief Economist

                Kristine John, Professional Staff Member

               Shelby Begany,  Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 14, 2016

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                               WITNESSES

Dennis C. Shea, Chairman, U.S.-China Economic and Security Review 
  Commission.....................................................     4
    Prepared statement...........................................    26
    Responses to written questions of:
        Chairman Shelby..........................................    57
        Senator Toomey...........................................    58
Desmond Lachman, Ph.D., Resident Fellow, American Enterprise 
  Institute......................................................     6
    Prepared statement...........................................    35
Thomas J. Gibson, President and CEO, American Iron and Steel 
  Institute......................................................     7
    Prepared statement...........................................    40
William T. Wilson, Ph.D., Senior Research Fellow, The Heritage 
  Foundation.....................................................     9
    Prepared statement...........................................    54

                                 (iii)


                EVALUATING THE FINANCIAL RISKS OF CHINA

                              ----------                              


                        THURSDAY, JULY 14, 2016

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard C. Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The Committee will come to order.
    Today the Committee will hear testimony on the Chinese 
economy and the risks it may pose to the United States. This 
hearing comes at a pivotal time, following last month's 
Strategic and Economic Dialogue between the United States and 
China and prior to the G-20 Summit in September.
    China is currently seeking recognition by the World Trade 
Organization as a ``market'' economy rather than as a 
``nonmarket'' economy. China is the United States' largest 
trading partner, and it has the largest banking sector in the 
world. An economic downturn in China could have a serious 
negative impact on American jobs and businesses.
    The numbers speak for themselves: In 2015, the United 
States imported $482 billion of total goods from China, and 
China imported more than $116 billion in total goods from the 
United States. In 2014, Americans invested almost $66 billion 
in China, compared to just $9.5 billion of Chinese direct 
investment in the United States.
    And, of course, China is the largest foreign holder of U.S. 
debt. And although our economic relationship with China is 
significant, experts argue that China has not followed through 
on its commitments to the United States, such as enhancing fair 
trade policies, providing greater investor protections, and 
securing intellectual property rights.
    Rather than encouraging free trade and competition, China's 
recent reforms appear to protect industries it considers to be 
strategically important.
    On the one hand, China's tilt toward free market capitalism 
has lifted many millions of its citizens out of poverty. In 
addition, since China began its free market reforms in 1978, 
the economy has grown 70 times larger.
    On the other hand, China still has a long way to go. And 
despite the success of some free market reforms, the Chinese 
government still plays a dominant role in the economy, either 
through its direct management of state-owned enterprises or its 
dictates from the central government.
    In its Third Plenum of 2013, the Chinese government 
committed to allowing the free market to play a greater role in 
the economy in order to ``rebalance'' away from investment and 
export-driven growth and toward greater domestic consumption.
    Many question the Chinese government's commitment to 
change, however. American businesses and investors recognize a 
variety of risks in the Chinese economy such as its slowing 
growth, volatile financial markets, currency policies, 
potential capital outflows, and aggressive pursuit of U.S. 
intellectual property.
    Some believe that China's economic stimulus following the 
2008 financial crisis has left the financial system with an 
unusually high percentage of bad debts. China's total public 
and private debt has almost doubled from 150 percent of GDP in 
2007 to nearly 300 percent today.
    Last year, the imbalances created by China's debt-fueled 
economic stimulus resulted in a stock market crash and an 
overnight devaluation, which caused many to rethink China's 
ability to maintain its high economic growth rates.
    These are just a few illustrations of China's risky 
policies that could lead to future crises. I look forward today 
to hearing from our panel of experts regarding the current 
state of the Chinese economy and the potential risks it may 
pose to the United States.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, for holding today's 
important hearing.
    China's economy by some measures is larger than the U.S. 
economy and is very influential in global markets. But China's 
economic growth is slowing. As a result, China continues to 
make decisions to boost its economy, even when those decisions 
are not good for long-term stability and even when they violate 
international trade rules. American businesses and American 
workers suffer as a result.
    Implicit in this discussion is an acknowledgment that the 
promises made 15 years ago by the People's Republic of China 
and supporters of that country joining the World Trade 
Organization, majorities in both Houses, in this body and 
across the hall, have gone unfulfilled. China has not 
transitioned to a market economy; it has not lived up to the 
commitments it made when it joined the World Trade 
Organization.
    Instead of pursuing industrial policies that boost the 
Communist Party, China needs to make structural economic 
reforms that are good for domestic and global economic 
stability.
    For example, China needs to ``rebalance'' its economy. 
Instead of adding more production capacity, which has triggered 
massive overcapacity problems in the global markets--we know 
what that does to us--the Chinese government needs to increase 
domestic consumption and move to a more service-based economy 
to allow for more sustainable growth for their country.
    China should also reduce state ownership and state control 
in its economy. China has used state-owned enterprises to 
implement its industrial policies, but the consequences are 
sectors defined by overcapacity, by inefficiencies, by 
corruption, and in far too many cases by excess.
    A presumption of government support has allowed 
unprofitable and poorly managed Chinese companies to issue debt 
cheaply and add industrial capacity. Servicing this debt is 
getting harder as profits decline and defaults rise. According 
to the International Monetary Fund, total loans potentially at 
risk on Chinese commercial banks' balance sheets at the end of 
2015 were estimated to be about $1.3 trillion, some 15.5 
percent of the total.
    These loans are not just a risk for the Chinese government. 
They present a risk to global financial stability as well.
    We need to watch for an uptick in acquisitions of U.S. 
firms by Chinese state-owned enterprises that could pose 
national security concerns for our country. And we cannot 
ignore the fact that China has regularly intervened in its 
currency exchange rate to boost exports to the detriment of 
American manufacturers. While the yuan has appreciated in value 
recently, we know that we are just one decision away from a 
currency intervention that will hurt our business and workers. 
We know what that does, especially to States like Indiana, 
Pennsylvania, and Ohio.
    It is very difficult for American companies to compete with 
a nonmarket economy that undervalues its currency when it 
wants, uses state ownership to support companies that would 
otherwise fail, contributes to global overcapacity in major 
sectors, and follows the rules only when it suits its 
interests.
    It is also hard to compete against a country with 
persistent human rights abuses. A group of Ohioans came to see 
me at my office today from Falun Gong, talked about all the 
issues and human rights abuses that have been aimed at them and 
others. It is hard to compete against a country with 
discrimination like that against religious minorities, with 
weak labor and environmental standards, with state-sponsored 
cyber espionage, and intellectual property theft.
    If any industry knows the harm that China's nonmarket 
economy and policies can pose to our country, it is the steel 
industry and Senator Donnelly's Indiana and Senator Toomey's 
Pennsylvania and my State of Ohio. Our steel sector has 
experienced firsthand the consequences of China's industrial 
policies and competing against that country's state-owned 
enterprises.
    There is a crisis among U.S. steel manufacturers, some 
14,000 steel workers have been laid off. The crisis gets worse 
as China attempts yet again to export its way out of its 
problems, out of a slowdown.
    This is why I invited Tom Gibson, President and CEO of the 
American Iron and Steel Institute, to testify today. Steel 
workers understand the impact, his companies understand the 
impact, their workers understand the impact and risks of 
China's policies.
    That is why this hearing is so important. American 
companies and workers need a level playing field, not 
xenophobia and not cynical China-bashing. I will never do that. 
Finding real solutions to push China to change its economic 
policies, in fact, is the key.
    Thank you.
    Chairman Shelby. First, we will receive testimony from the 
Honorable Dennis Shea, who is the Chairman of the U.S.-China 
Economic and Security Review Commission and who is no stranger 
to this Committee.
    Next, we will hear from Dr. Desmond Lachman, who is a 
Resident Fellow at the American Enterprise Institute.
    Then we will hear from Mr. Thomas Gibson, who is the 
President and Chief Executive Officer of the American Iron and 
Steel Institute.
    Last, we will receive testimony from Dr. William Wilson, 
who is a Senior Research Fellow at the Heritage Foundation.
    All of your written testimonies will be made part of the 
record in its entirety. We will start with you, Mr. Shea.

STATEMENT OF DENNIS C. SHEA, CHAIRMAN, U.S.-CHINA ECONOMIC AND 
                   SECURITY REVIEW COMMISSION

    Mr. Shea. Well, thank you, Mr. Chairman, Ranking Member 
Brown, and Members of the Committee, for this opportunity to 
testify today. Before I begin, I would like to make a 
disclaimer that this testimony reflects my personal views and 
not necessarily the judgments of the U.S.-China Commission.
    Today I will focus my remarks on state control in China's 
economy and implications for the United States. Since I will be 
summarizing the key points of my written testimony, I refer it 
to you for fuller treatment of these issues.
    First, it is important to understand the extent of the 
state's role in China's economy. The Chinese government props 
up its state-owned enterprises, also called ``SOEs,'' and 
designated private firms while limiting market access for U.S. 
and other foreign firms through strict market entry criteria, 
opaque regulations, compulsory joint ventures, and China-
specific technical standards. These policies create an uneven 
playing field that disadvantages U.S. companies both in China 
and abroad.
    Under President Xi Jinping, the government is redoubling 
efforts to increase its control over private and public 
companies in key industries. Despite repeated pledges to let 
the market play a ``decisive role'' in resource allocation, 
Beijing continues to use SOEs as a tool to pursue social, 
industrial, and foreign policy objectives. These efforts are 
evident in China's economic reform plans, which seek to help 
SOEs become ``bigger and stronger,'' not reduce the size of the 
state sector.
    The government's influence extends not just to SOEs but 
also to private companies. This is an important point. In 
testimony before the Commission earlier this year, University 
of Florida professor Wentong Zheng stated that ``the hallmark 
of Chinese state capitalism is an ecosystem in which the 
government is at the center of the economy and everybody else 
caters to the government's needs.'' In this ecosystem, public 
and private managers alike are incentivized to foster close 
ties with the government.
    Beijing primarily seeks to maintain control of strategic 
sectors that advance the state's political and economic 
interests. Economically strategic sectors, such as industrial 
producers, enable the government to support short-term economic 
growth, while politically sensitive sectors, such as 
telecommunications, are essential to the government's goals of 
advancing and controlling China's technology infrastructure and 
disseminating information.
    With Beijing's policies creating an unfair competitive 
environment both inside and outside of China, the relationship 
between SOEs and foreign companies in China has become 
particularly tense. One challenge U.S. businesses face in China 
is navigating the country's regulatory environment. U.S. 
investors have little to no recourse to protect their rights or 
fairly resolve disputes under China's opaque legal system.
    The regulatory challenges U.S. businesses face in China 
appear to be getting worse. According to a 2016 American 
Chamber of Commerce survey, 77 percent of U.S. companies 
reported they felt foreign businesses are less welcome in China 
than before.
    Market access restrictions also continue to limit the 
ability of U.S. companies to invest in China. China restricts 
foreign investment in many sectors where the United States 
maintains a competitive advantage in order to protect domestic 
companies and industry. In general, fluctuations in China's 
foreign investment restrictions follow a pattern where, at 
first, the government welcomes FDI into sectors deemed 
strategic for its national economic development in order to 
extract technology, IP, and know-how from foreign firms. 
However, after the domestic industry is judged sufficiently 
developed, Beijing issues new policies restricting investment 
to push out foreign companies and free up the market for 
domestic firms.
    Furthermore, China's government is introducing policies 
aimed to replace established market leaders with domestic 
firms. The Chinese government's latest blueprint for the 
economy, the 13th Five-Year Plan, designates sectors such as 
semiconductors, biomedicines, cloud computing, mobile Internet, 
and ecommerce for additional government support. These policies 
seek to break China's dependence on imports from foreign 
producers in sectors where the United States currently enjoys a 
technical advantage.
    Beijing, as you mentioned, Mr. Chairman, is pursuing a 
``going out'' policy which encourages domestic companies to 
invest abroad through policy directives and subsidization. As a 
result, Chinese investment abroad, and particularly in the 
United States, has spiked. Many Chinese companies investing 
abroad receive support from state banks and capital markets in 
return for advancing state goals. And overall Chinese foreign 
investment is focused primarily in strategic sectors.
    I know my time is running out. If you give me 30 seconds, I 
will finish up.
    China has benefited tremendously from past economic 
liberalization and its close trading relationship with the 
United States. These are not abstract concepts: Witness China's 
massive trade surpluses, rising outward FDI, and burgeoning 
soft power. Several decades of economic prosperity have also 
fueled China's rapid military modernization and growing 
strategic assertiveness, most evident in the territorial 
disputes in the South China Sea and East China Sea.
    Today China's leadership seems to have forgotten the 
critical role economic reform has played in China's own success 
story, and,
unfortunately, it seems that the Xi administration is 
tightening the grip on the Chinese economy, not letting market 
forces play a more significant role.
    I thank you for the opportunity to testify.
    Chairman Shelby. Dr. Lachman.

STATEMENT OF DESMOND LACHMAN, Ph.D., RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Lachman. Thank you, Chairman Shelby, Ranking Member 
Brown, and Members of the Committee, for affording me the honor 
of testifying before you today. I would like to make two basic 
points.
    The first is that China's economic growth model appears to 
have run its course, and China would now seem to be headed for 
many years of very slow economic growth, much as occurred to 
Japan before it.
    The second point I would like to make is that developments 
in the Chinese economy can have a material impact on the United 
States' economic outlook. This would not be so much directly 
through China's impact on U.S. exports; rather, it would be 
indirectly through the impact that China could have on the 
global economy and on global financial markets.
    Allow me to elaborate on these two points.
    There are several reasons for concern right now about the 
Chinese economic outlook. The first is that since 2008 China 
has had a massive credit bubble that has been among the fastest 
on historical record. This has seen credit increase at a faster 
pace than that occurred before Japan's lost decade in the 1990s 
and before the U.S. housing bust in 2007. This has given rise 
to a massive degree of excess capacity in steel and 
construction as well as to bubbles in Chinese equity and 
property markets. This heightens the risk that the Chinese 
banking system will become increasingly clogged with 
nonperforming loans and with loans to zombie public sector 
enterprises, very much along the lines that occurred in Japan 
over the past two decades.
    Second, the unwinding of China's credit and asset price 
bubbles will be occurring at a highly inauspicious time for the 
global economy. Major economies like that of the United 
Kingdom, Italy, Brazil, and Japan are all likely to experience 
meaningful economic slowdowns in the period ahead, and it is 
important that we do not just look at China in isolation.
    Third, China has very poor long-run demographics as a 
result of its one-child policy, and its government appears to 
be stalling on the long-run reforms that the country so 
desperately needs to increase productivity.
    Finally, any further appreciation of the U.S. dollar could 
induce the Chinese to resort to currency depreciation. This 
risks again precipitating capital outflows out of China and 
harming trade relations with the United States. As far as the 
implications for the United States economy, as I mentioned, the 
direct impact of a slowing in the Chinese economy would not 
have a material effect on the U.S. economy. After all, China 
only accounts for around 7 percent of total U.S. exports or 
less than 1 percent of U.S. GDP. The way in which the U.S. 
economy could be materially affected by further slowing of the 
Chinese economy is indirectly through the effect that such a 
slowing might have on the rest of the world economy and on 
global financial markets. This might occur through three 
distinct channels.
    First, a slowing in the Chinese economy would have a 
significant impact on the exports of China's Asian trading 
partners and of countries like Germany, which are very much 
more dependent than is the United States on the Chinese export 
market.
    Second, China might be forced to make use of the exchange 
rate to bolster its flagging economy, especially if it 
continues to suffer from capital outflows. This could result in 
tensions in global currency markets where all too many 
countries are today seeking to cheapen their currencies through 
unorthodox monetary policy. That would risk unsettling global 
financial markets.
    Finally, a slowing of the Chinese economy must be expected 
to keep international commodity prices low for a protracted 
period of time. This has the potential to deepen the political 
and economic crisis already being experienced in commodity-
exporting emerging market countries like Brazil, Russia, and 
South Africa.
    For these reasons, it would appear to me to be a mistake 
for U.S. policymakers to minimize the impact that a setback in 
the Chinese economy could have for the U.S. economy.
    Chairman Shelby. Thank you.
    Mr. Gibson.

STATEMENT OF THOMAS J. GIBSON, PRESIDENT AND CEO, AMERICAN IRON 
                      AND STEEL INSTITUTE

    Mr. Gibson. Thank you, Mr. Chairman, Ranking Member Brown, 
for having me here. AISI represents integrated and electric arc 
furnace steelmakers with facilities in 41 States, Canada, and 
Mexico.
    I am not going to talk so much about the macroeconomic 
risks--those are going to be well covered by others--as much as 
consequences. The American steel industry has been severely 
impacted by the surge in dumped and subsidized imports into our 
markets. Finished steel imports took a record 29 percent of the 
U.S. market in 2015, while domestic steel shipments declined by 
over 12 percent, and capacity utilization averaged just 70 
percent for the year. Several steelmakers have been forced to 
temporarily close facilities, including mills in Fairfield, 
Alabama; Ashland, Kentucky; Granite City, Illinois; as well as 
iron ore mines in Minnesota. BLS data indicates that the steel 
industry employment has declined by nearly 14,000 jobs since 
January 2015.
    This import surge results from foreign government 
interventionist policies, chiefly China, that have fueled 
massive global overcapacity in steel. That is estimated by OECD 
to be about 700 million metric tons today. More than half of 
that, 425 million metric tons, is located in China where 
government market-distorting policies have dramatically 
increased the size of its industry so that today it represents 
half of all global steel production.
    After many years of growth, Chinese steel demand has 
declined over the last 2 years and is expected to drop further 
over the coming decade. As a result, China's steel industry has 
increasingly relied on exports to consume its surplus, with 
Chinese steel exports rising to 112 million metric tons in 
2015. That is more than the 96 million metric tons of steel 
consumed in the United States last year. This has led to 
increased imports of dumped and subsidized Chinese steel in the 
United States and elsewhere. In addition, Chinese steel exports 
to third countries are being processed into steel products that 
are then exported to the United States.
    China's dramatic increase in capacity has occurred despite 
financial returns that are well below those returned by other 
global steel industries and, in fact, even other industries in 
China. China's major steel firms reportedly lost more than 
$15.5 billion last year alone, and many believe the actual 
figures are much greater.
    Nine of the 10 largest steel producers in China are state-
owned, and the top two producers produced more steel in 2014 
than the entire U.S. steel industry. Unlike market-based 
companies, Chinese companies can run these massive debts 
because the Chinese government will often direct state-owned 
banks to continually refinance the debt and ultimately sweep it 
off the books and into asset management companies or other 
state-created financial devices or firms designed to absorb bad 
corporate debts and cover the losses.
    As we have already heard, another way China distorts 
international trade is by controlling the exchange rate between 
its currency and the dollar, and I think the other testimony 
has covered the risk of renewed depreciation of China's 
currency vis-a-vis the dollar in the future.
    We appreciate the changes that Congress made in the 
recently enacted Trade Facilitation and Trade Enforcement Act 
on currency reporting, but AISI believes the U.S. Government 
can and should take much more aggressive action on currency. 
Congress should act now on the Currency Undervaluation 
Investigation Act, which would explicitly treat currency 
manipulation as actionable under U.S. trade laws, and it has 
been championed by Senators Brown, Schumer, Sessions, Portman, 
and others.
    We also recommend the following policy actions to address 
the global steel overcapacity crisis:
    First, vigorously enforce the trade laws. It is essential 
that the U.S. Government use all means available under the 
trade laws, including fully utilizing the improvements made to 
these laws by Congress last year in the Leveling the Playing 
Field Act. Customs and Border Protection should also use all 
the tools made available to it under the recently enacted 
ENFORCE Act to prevent evasion of AD/CVD orders on steel 
products.
    Second, the Administration must also continue to treat 
China as a nonmarket economy for antidumping purposes. 
Prematurely granting China market economy status would 
completely undermine the effectiveness of our trade laws.
    Third, the Administration should seek binding commitments 
by all major steelmaking nations to eliminate current market-
distorting subsidy programs specific to the steel sector and 
refrain from introducing new subsidy programs in the future.
    Fourth, the Administration should press for binding 
commitments from China and other countries to eliminate excess 
capacity resulting from government market-distorting policies 
and practices.
    And, finally, Congress should impose a strict prohibition 
on multilateral and export bank lending on steel projects, 
which has been a significant source of funding for unnecessary 
capacity survival and expansions.
    Thank you, Mr. Chairman, for your attention, and I look 
forward to answering your questions.
    Chairman Shelby. Dr. Wilson.

STATEMENT OF WILLIAM T. WILSON, Ph.D., SENIOR RESEARCH FELLOW, 
                    THE HERITAGE FOUNDATION

    Mr. Wilson. Good morning. My name is Bill Wilson. I am an 
Economist, a Senior Research Fellow at the Heritage Foundation. 
And although I have spoken many times in public over the past 
quarter century, this is my first time in front of a 
congressional Committee. I appreciate the Chairman for inviting 
me today.
    I lived abroad for 7 years. I lived for 4 years recently in 
Beijing. And when I arrived last year, my colleagues asked me 
whether I had ever testified on the Hill, and I replied, ``What 
hill?''
    [Laughter.]
    Mr. Wilson. And they laughed, not knowing that I did not 
actually know. But it is a pleasure to be here.
    Again, the views I may express may not necessarily reflect 
the official position of the Heritage Foundation. I am going to 
keep my comments extremely brief, maybe about 3 minutes, 
keeping time for questions.
    In short, China, in my opinion, is in trouble. There is a 
cancer in the economy, and it has metastasized. Recently, 
headline figures have conveniently matched Beijing's target 
figures of 6.5 to 7 percent. Here is an economy with 1.4 
billion people, and they released GDP figures 14 days after the 
end of the quarter, and there are no revisions.
    There are plenty of inconsistencies. While GDP was reported 
as 6.8 percent in 2015, electricity consumption rose by only a 
half a percent. These two figures are simply not consistent.
    As Chairman Shelby had mentioned in his earlier comments, 
if you look at China's total debt--I am talking about 
household, corporate, government debt, including provincial 
debate--it is now much higher than in other developing 
economies and actually comparable to levels in the United 
States and the eurozone which have much higher levels of a 
stock of wealth.
    Where the concern, though, is, what is more troubling is 
the speed at which debt has accumulated. It was approximately 
150 percent of GDP in 2007, a year before the crisis, and now 
it ranges between close to 300 percent of GDP. These are 
enormous figures.
    Since the 2008-09 global recession, China has accounted for 
roughly one-third of global economic growth, by far the highest 
in the world. With a gross domestic product of roughly $100 
trillion, measured at market prices, the second largest economy 
in the world after the United States, any economic slowdown in 
this Asian juggernaut is bound to have global economic 
consequences.
    Since 2010, the rate of economic growth in China has 
decelerated from 9.3 percent in 2011 to a reported 6.8 percent 
in 2015. And the accuracy of this latest figure is in serious 
question.
    I will finish by saying the question is: What is the impact 
of a further slowdown in China on the U.S. economy? There are 
three primary channels in which a significant slowdown in China 
could impact the U.S. economy. The first, of course, is through 
trade. In 2015, China was America's third largest export market 
after Canada and Mexico, respectively. The value was $116 
billion. Exports to China accounted for about 7.7 percent of 
total U.S. exports in 2015, not an inconsequential figure but 
not devastating to U.S. export revenue in the event of a 
further stall in Chinese growth.
    The second, of course, is financial. As also Chairman 
Shelby mentioned, the Chinese, as of the latest figure, April 
2016, replaced the Japanese as the largest holder of U.S. debt, 
at $1.2 trillion.
    In the event of a further slowdown in the Chinese economy, 
the government may want to sell some of these securities for 
economic stimulus. This could lead to a fall, of course, in 
U.S. bond prices--i.e., a rise in U.S. interest rates. This 
impact has been discussed extensively and largely exaggerated 
for two reasons. First, the Chinese are unlikely to liquidate a 
large portion of their U.S. Treasury holdings because it might 
lead to a capital loss on their existing holdings. Second, U.S. 
Treasuries are the most liquid and most coveted securities in 
the world.
    I know I am running out of time. Give me 15 more seconds.
    Chairman Shelby. Take your time.
    Mr. Wilson. And the last channel is largely a positive one. 
The slowdown in the Chinese economy has significantly depressed 
global commodity prices. Despite the shale revolution that we 
have witnessed the past 5 years, the United States imported 9.4 
million barrels of petroleum per day in 2015. So the net impact 
for the U.S. economy was positive.
    I will finish here.
    Chairman Shelby. Thank you.
    I will start with you, Dr. Lachman. In your testimony, you 
say that China's pace of credit expansion in recent years, 
which you refer to as a ``credit bubble,'' exceeds those that 
have preceded other major crises like the Asian financial 
crisis and the U.S. housing crisis. A couple of questions here.
    Is it possible that this credit bubble will lead to a 
financial crisis in China? And what would be the potential 
impact on the U.S. economy? Dr. Wilson alluded to it a minute 
ago.
    Mr. Lachman. The credit bubble in China has no precedent 
elsewhere. This is far larger than it has been in many other 
countries, and those countries that have had those sort of 
bubbles have all run into deep trouble.
    Now, there are two kinds of trouble that countries can run 
into. One is you can have a financial crisis like we had in the 
United States with Lehman spreading through the global economy. 
The other--and that I think is the more likely outcome--is you 
can have a Japanese situation in which, because you have got 
real problems in the financial sector, the economy becomes 
highly sclerotic. It gets clogged with loans who prop up some 
big companies, and it really just loses its dynamism.
    My belief is that China is going to go the second course, 
the Japanese course, mainly because China's economy is very 
different from that of a regular economy in that the state 
controls both the banks and it controls the state enterprises. 
So what it is likely to do in the event that there is somewhat 
of a meltdown is they will instruct the banks, as they seem to 
be doing now, to continue lending to these companies, to 
continue piling up the debt.
    So I do not expect to see a sharp disruption in China, but 
I do expect to see China's economy slowing. And as I mentioned, 
one has to be viewing that in the context of the rest of the 
world. Europe does not look healthy. Japan does not look 
healthy. A number of major commodity-producing countries do not 
look healthy. To have China slowing could just add to a global 
environment that is not very helpful to the United States.
    Chairman Shelby. Thank you.
    Dr. Wilson, you described China's level of debt as 
``unprecedented and unsustainable.'' Explain that. And what are 
the potential dangers of such high levels of debt?
    Mr. Wilson. Yes, if the last 7 or 8 years have taught us 
anything in the United States, it is, you know, the 
consequences of excessive leverage. If you look at the U.S. GDP 
numbers, the U.S. economy, because of the excess leverage that 
we experienced over the last 15 years, has grown--the U.S. 
economy has grown less than 3 percent for 9 consecutive years 
as a result of deleveraging. If you go back to the Bureau of 
Economic Analysis and look at the numbers and go way back to 
the Great Depression, you will not find a period of such slow 
protracted growth.
    I know this: I worked as a banker, as a bank economist, for 
9 years, and the economic stimulus package that Beijing passed 
in 2009 was a mother of all stimulus packages. It amounted to 
20 percent of gross domestic product. I know this as a banker: 
If you lend out that much capital over a short period of time, 
most of the loans will go sour. There is no doubt about it.
    Chairman Shelby. It is throwing money at a problem, isn't 
it?
    Mr. Wilson. Exactly. That is what you do. The CCP, the 
Chinese Communist Party, their major concern, of course, is 
maintaining power. There is a quid pro quo. They deliver the 
goods--that is, growth in excess of 7 percent, full employment, 
in excess. The Chinese give up, you know, political freedom. 
That contract could expire very shortly.
    How fast is the Chinese economy growing? I do not know 
exactly. We do not have reliable figures. But it is not 6.8 
percent. It is probably more in the range of 4.5, 5 percent. 
And so this is not a sustainable equilibrium.
    Do the Chinese have further room to add debt? They do. They 
do. They could leverage up to 400 percent of GDP over the next 
2 to 3 years. But after that, time expires. It is not a 
sustainable equilibrium.
    Chairman Shelby. How do you deleverage something like that? 
Isn't that a question? If you are up to 400 percent, if you got 
that high, then you are going to have to deleverage that 
someday, aren't you?
    Mr. Wilson. Yeah, as a former banker, people say, well you 
just write off debt. Well, if you write off--you simply do not 
write off debt. Someone pays for it. Either the lender or the 
borrower or, increasingly, the taxpayer pays for that writeoff. 
It does not disappear. It does not disappear from the balance 
sheet.
    Chairman Shelby. It is consequences, isn't it?
    Mr. Wilson. Exactly.
    Chairman Shelby. Currency devaluation, we have talked about 
that here, too. A recent article in The Economist magazine 
noted, and I will quote, that ``A mere 2 percent devaluation of 
the yuan last summer sent global stock markets crashing; a 
bigger bust would do far worse.''
    Is it possible that an economic downturn in China could 
lead to similar events in the future? And what would be the 
impact on the United States? Dr. Lachman, I will pose that to 
you. I know I am not picking on you.
    Mr. Lachman. I think that the risk of another currency move 
in China is very real. That is not simply because what you are 
getting in terms of a slowing Chinese economy, that they might 
need to use that to get a further leg up on the export 
competition that they are so good at. But it is rather because 
what another devaluation can do, is it can really cause capital 
to leave China.
    Now, the reason that one has to be concerned that China 
might resort to this is that the dollar could very well 
appreciate, as it is doing right now, because you have had 
Brexit and stuff of that sort. As the dollar appreciates, the 
Chinese might want to depreciate their currency against the 
dollar, and that is, in fact, what we have been seeing the last 
couple of weeks.
    So one really cannot exclude that China is again going to 
be depreciating its currency, not necessarily against a basket 
of all currencies but certainly against the U.S. dollar in the 
context of the U.S. dollar strengthening, and that can have 
consequences like The Economist noted. Last August, we saw 
ripples going right through the global financial system because 
of a 2-percent move in the Chinese currency. So one really 
cannot exclude that from occurring again going forward.
    Chairman Shelby. Chairman Shea, the National Strategy for 
Critical Infrastructures and Key Assets adopted following the 
9/11 attacks emphasized that the fundamental need for food as 
well as great public sensitivity to food safety makes assuring 
the security of food production and processing a high priority. 
In your opinion, can the concerns regarding U.S. food security 
be adequately addressed by the current review processes, 
including those of the Committee on Foreign Investment in the 
United States?
    Mr. Shea. Well, I am reminded by what Senator Grassley 
says, we are nine meals away from a revolution here in the 
United States. If you do not get nine meals, people are going 
to be very unhappy. The Chinese obviously consider food----
    Chairman Shelby. Would it take nine meals?
    Mr. Shea. Nine meals, that is what Senator Grassley said, 
so I kind of stick with him. But, yes, I think food security 
should be an issue. I support efforts to include the Department 
of Agriculture as part of the CFIUS review of transactions 
affecting U.S. companies in the agricultural area. So I think 
that is a valid point. So I think food security is something we 
should pay attention to in the United States. I do not think 
any Chinese transaction currently threatens, or any other 
transaction from any other foreign company threatens, U.S. food 
security. But I think it definitely is a concern that should be 
taken into account in the CFIUS process, and the Department of 
Agriculture ought to have a seat at the table.
    Chairman Shelby. Thank you.
    Senator Brown?
    Senator Brown. I am still pondering what nine meals and 
revolution. That is something with the Great Leap Forward or 
something.
    Dr. Wilson, congratulations on your first testimony. Nice 
work so far.
    Mr. Wilson. Thank you.
    [Laughter.]
    Senator Brown. Mr. Gibson, I want to start with you. 
Witnesses have commented on the current state of the Chinese 
financial system. We make a mistake, I think we all know that, 
if we look at it as a system in the same sense of our own 
financial system or like that of other market economies since 
the most important element of the system, their system, is 
government.
    Discuss, if you would, Mr. Gibson, how much Chinese banks 
lend to the steel industry. Is it increasing? Do you know how 
many of these loans are at risk of default? Would China let 
their state-owned enterprises default on these loans? Talk that 
through so we understand better.
    Mr. Gibson. You know, as far as the risk, it is a little 
bit hard for me to evaluate. The borrower and the lender are 
the same entity eventually at the top. We have data that 
indicates among the largest Chinese steel companies, they have 
accumulated a debt ratio of about 71 percent and about a half 
trillion dollars of debt.
    We know from public sources that the reported losses last 
year for the Chinese steel industry were $15.5 billion. The 
financing is one of the advantages that the Chinese state-owned 
steel industry has, and it enables it to keep the zombie 
enterprises that have already been talked about in business. It 
allows these entities to keep operating, keep producing steel, 
and keep pumping that into the market. So the financing aspect 
of it, the public ownership of financing, the policies of the 
People's Bank of China with respect to the steel industry, 
which anyone can pull off the Web and read, which are to 
encourage, support, and promote the steel industry, including 
promoting the steel industry's directive from other parts of 
the Chinese government to seek capacity abroad to replace 
closed capacity in China, all those are part of the problem 
that are feeding this overcapacity issue.
    As far as the risk of the loans, I think I would let others 
talk about the risk of these loans. They would be highly risky 
loans in a market economy, but, again, since the lender and the 
borrower ultimately are the same person, pretty hard to 
quantify risk, what their risk tolerance is.
    Senator Brown. Let me take that further. You have obviously 
talked about overcapacity. What steps does China need to do to 
live up to its previous commitment to reduce overcapacity in 
the industry? And how do we get China to take these steps?
    Mr. Gibson. I think China needs to see resolve. In order to 
get China to act, China would probably rather not discuss 
overcapacity at a Strategic and Economic Dialogue or at a G-20 
Summit. They are being forced to. Why are they being forced to? 
Well, in the United States our industry is using the trade 
remedies available to it under the trade laws to bring trade 
cases. China in most cases is choosing not to defend those. So 
we are acting domestically using the laws, and the improvement 
in the laws has enhanced our
ability to make the cases in a timely way and to be able to get 
good margins in cases where the Chinese do not even supply 
data.
    So we have to use our laws. We have to engage in diplomacy, 
and I think you saw that coming out of the G-7 Summit where the 
issue of overcapacity in steel and other industries was one of 
the leading topics discussed. It was also one of the leading 
topics discussed at the S&ED. The Chinese were forced to 
confront that.
    Now, the Chinese have plans, and they have had plans 
before. I have got a list here I could supply for the record of 
the various Chinese steel capacity reduction plans. They have 
been aware of this problem since the middle of the last decade. 
They have repeatedly issued plans to address overcapacity. And 
at each step, capacity has increased. They claim credit 
sometimes for a capacity reduction due to one of their last 
plans, 90 million tons. The State Council claimed credit for 
that between 2011 and 2015. In fact, their capacity increased 
by over 300 million tons. They do not use the word ``net.'' 
They may have closed 90 million tons of obsolete capacity 
somewhere. Their net capacity has increased.
    So we just have to continue to use the trade remedies that 
are available to us. As we are using them, that steel is 
finding homes elsewhere because their exports to the globe, to 
the rest of the world, are actually increasing, up 20 percent 
last year, and now seemingly going to be up again this year. So 
others need to look to their own trade remedies, and we need to 
continue using trade diplomacy and forcing China to confront it 
and follow through on these commitments.
    Senator Brown. OK. I would like to hear from the others on 
that same question. What do we do? What do we do to get China 
to take the needed steps to reform the economy? Obviously, 
policymakers--from ITC, the Department of Commerce, to us on 
this panel--need to show resolve with China. But, Mr. Shea, if 
you would, and then Dr. Lachman and then Dr. Wilson, your 
thoughts on that.
    Mr. Shea. I think the conundrum is that there are people in 
the Chinese leadership who understand what needs to get done to 
get their economy on a more sustainable path, reducing 
overcapacity, moving away from an export-led, infrastructure-
led economy, to one more focused on domestic consumption.
    The problem is making those changes can be very painful to 
the Chinese people. If you are laying people off in steel, 
hundreds of thousands of people potentially in these steel 
mills and other industries with overcapacity, other steps that 
need to be taken could be very painful.
    So what the Chinese--the key thing for the Chinese is the 
primacy of the Communist Chinese Party and the preservation of 
their power. So the leaders say, many of them, OK, we need to 
go this way, but the pain is so great, in the short term it 
could be destabilizing to them. And so I have to say I am 
pessimistic that the Chinese government, based on the desire to 
preserve domestic stability, in the short term at least, will 
force them to make the necessary changes.
    Senator Brown. Dr. Lachman?
    Mr. Lachman. I very much share Mr. Shea's view that this is 
not at all an easy process for the Chinese. The point is that 
the
Chinese have allowed their economy to become hugely imbalanced; 
that if you look at the Chinese--just to quote one statistic, 
China has been investing something like 45 percent of its 
product, and its whole model has been this investment-led, 
export-led kind of model. To shift away from that, to bring 
that down to something like 30 percent is a huge undertaking, 
and it seems that the knee-jerk reaction--they said that they 
were going to do it at the end of last year, but the first 
quarter, what we saw is we again saw a massive increase in 
credit to keep the enterprises alive and not to do anything 
about the excess capacity problem.
    So I know am afraid I share the pessimism that you are not 
really going to get much out of the Chinese.
    Senator Brown. Thank you.
    Dr. Wilson?
    Mr. Wilson. Yes, I have to say the level of excess capacity 
in many basic industries is a serious problem right now in 
China--steel, cement, oil refinery, even solar panels. The 
Chinese Communist Party is essentially between a rock and a 
hard place. I remember when I bought my first apartment, I 
actually painted myself into a corner. I guess I am not that 
bright. I think the CCP has done essentially the same thing. 
They have essentially two options. They have two options. The 
biggest engine of growth in the Chinese economy has been fixed-
asset investment. It has been running 45 to 50 percent of gross 
domestic product. No other country in the world is experiencing 
these levels. Even South Korea, Hong Kong, Taiwan during their 
great growth periods in the 1960s and 1970s never had fixed-
asset investment at 50 percent of gross domestic product.
    I am also a mathematician, too, so if you look at the math, 
to bring that down to a more sustainable level--in other words, 
to reduce the excess capacity to, let us say, 30 percent of 
gross domestic product--ensures basically a financial crisis, a 
strong macroeconomic contraction. And so the Chinese 
authorities have two choices. They can continue--by the way, 
one more thing. Credit growth in China in the first quarter 
grew at its fastest pace since the 2009 stimulus package. So 
they are still growing the credit. So if they can cut back, 
have the recession now, or wait a few years, and it can be a 
lot worse. Those are essentially the two choices.
    Senator Brown. Let me ask in closing one just yes-or-no 
question, starting with you, Mr. Gibson. Should China be 
granted market economy status?
    Mr. Gibson. No.
    Senator Brown. OK. Mr. Shea?
    Mr. Shea. No. If you look at the statutory obligations for 
market economy status, Chinese does not--there are six points. 
China does not meet most of those points.
    Senator Brown. Dr. Lachman?
    Mr. Lachman. No.
    Senator Brown. Dr. Wilson?
    Mr. Wilson. No. Especially since 2002, it has been a state-
led capitalistic economy. I would not grant its economy that 
status.
    Senator Brown. OK. Thank you.
    Chairman Shelby. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman, and thanks to 
the Ranking Member for holding this hearing. And I want to 
thank the panel of experts. I think this is a critical issue, 
not because we worry so much about the Chinese economy, but we 
worry about the effect of the Chinese economy on the economy of 
the world and certainly the economy of the United States.
    And so over the past 12 months, I have watched market 
volatility rise and fall and being affected by speculation, one 
would argue, but certainly by concerns about what is happening 
in the Chinese economy.
    I asked Assistant Secretary for International Finance 
Toloui to come into my office and talk about the Chinese 
banking system, and from Treasury's perspective, what are the 
risks, where do we think we are right now, and what are we 
looking at. He did a great job, I think, kind of running 
through the paces on where we are right now, what the concerns 
are, and honestly saying, you know, this is a situation that 
needs to be watched but do not press the panic button yet.
    So I want to ask a couple questions about where we are 
right now in terms of our evaluation of the Chinese economy, of 
the potential credit bubble, and what that means for the 
American economy, and then also, you know, what we cannot see. 
We see the institutional kind of structure that we are allowed 
to look at, but we have got the whole concern about what is 
happening with shadow banking and what is happening with what 
we cannot see.
    And so I guess my first question would be for anyone on the 
panel. You know, the Chinese government has made commitments to 
be more transparent and to improve kind of their financial data 
and financial reporting. How many of you believe that China 
will actually follow through on those commitments, that we will 
actually get better data as a result of that commitment? And 
then, second--because I think I know your answer already--what 
are the secondary tools that we can, in fact, utilize that will 
give us better data and better insight on what is actually 
happening institutionally with Chinese lending? I would just 
start here with Mr. Shea and work down the row.
    Mr. Shea. Well, you have heard about the credit bubble, 
close to 300 percent of GDP. Shadow banking is a concern. 
Transparency, greater transparency, that is something that the 
Chinese Communist Party is not really too keen on, so I would 
not be optimistic on seeing a tremendous amount of greater 
transparency.
    Let me just make a point that has been raised, if it is all 
right. It relates to your question. This China-America thesis 
that the Chinese and the American economies are so interrelated 
that they are one and the same thing, that is not true. China 
is not America's banker. Please do not say that. This----
    Senator Heitkamp. I do not think I did.
    Mr. Shea. I know, but I have heard----
    Senator Heitkamp. In fact, I think if you had Treasury 
here, you would hear exactly that, that this has been 
overexaggerated in terms of the risk to the American economy. 
But it still needs to be watched.
    Mr. Shea. Right.
    Senator Heitkamp. My question is--you know, I think we all 
agree that we are not going to get transparency. The question 
is: Short of actually getting data that we can rely on from the 
Chinese government, where do we go to actually have a deeper 
and better understanding of what is happening with credit in 
China?
    Mr. Lachman. That China's not transparent certainly is very 
clear, that it is not just a question of the banking 
statistics, as has been mentioned before in terms of their 
whole GDP numbers. All of this seems to be rather fictional. 
You know, I very much agree that China is not growing at 6.7 
percent. It is, rather, growing at something like 4 percent. I 
would think that these problems are very deep-seated, that they 
are serving a Communist Party that is wanting to stay in power 
that does not really have an interest in transparency. And the 
problem might be that they have got control over the banking 
system in a way other countries really do not.
    Senator Heitkamp. I think we all understand--I do not know 
if I am just being too opaque here, like the Chinese, but what 
I am trying to get at is we do not believe and I do not believe 
that we will get reliable data from the government, and the 
government right now is a source of information. What are the 
other sources of information that we can utilize to better 
evaluate? You know, you are speculating on what the actual 
gross domestic product is of China. Why should we rely on your 
4? Why shouldn't we believe it is potentially 2 or 1.5?
    Mr. Lachman. Right, well, if one has to do this privately 
and one has to do this indirectly, you are going to have a 
range of estimates. So basically what people are doing is they 
are trying to figure this out from various indicators. Instead 
of looking at GDP as it should properly be put together, what 
they are doing is they are looking at electricity consumption, 
credit expansion, tourist traffic, rail freight, and so on, and 
trying to pull it up from the ground. But you are really only 
going to get indications that the official numbers are very----
    Senator Heitkamp. Doctor, do you think that is complicated 
by shadow banking, by--you know, we do not really know what the 
complete credit picture is because we do not know--
historically, I would imagine there has been a lot of shadow 
banking. That has been traditional methods of funding capital 
or moving capital that could be below the rate or even for the 
government. And so the question is: How much risk do you think 
we have in shadow banking?
    Mr. Lachman. Certainly, in China there is considerable 
risk. We know that the shadow banks have been very active in 
extending credit, and this would be a problem in a country that 
was not run by the Communist Party, you know, to have shadow 
banks----
    Senator Heitkamp. Well, we have shadow banking.
    Mr. Lachman. Correct. If that is not properly regulated, 
you can really run into difficulties on that score. That is a 
source of concern. But as I----
    Senator Heitkamp. Do you agree with Mr. Shea that we have 
overexaggerated probably in the media more than any place the 
interconnectivity between the American economy and the risks to 
the American economy from Chinese bubbles?
    Mr. Lachman. Well, the risks might be there, but what I 
would just note is that last year what occurred is because of 
capital flight out of China, China reduced its Treasury 
holdings by a fair amount. It reduced its international 
reserves from something like $4 trillion to $3 trillion. There 
was a decline of $1 trillion in their international reserve 
holdings, and the world did not come to an end. You know, so 
the notion that they can really disrupt our markets, you know, 
would seem to have been tested last year.
    Senator Heitkamp. I am out of time, and so I will probably 
submit some questions for the record. But I just wanted to make 
sure that we got the point.
    Mr. Shea. Brookings Institution has done some work on 
Chinese shadow banking, and the work I have read indicates that 
they do not think it is that big a concern in China. So we can 
get that for you.
    Chairman Shelby. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    There are many disadvantages to American businesses with 
respect to China's market barriers, its impediments to 
competition, lack of transparency, state monopolies, government 
subsidies, currency manipulation, discriminatory industrial 
policies, restrictions on trade and distribution rights, the 
lack of intellectual property protections. So as of March of 
this year, the United States has bought 17 WTO dispute 
settlement cases against China on cases in each of these issue 
areas. Clearly, we have identified many areas of disagreement 
with China.
    My question is: Is there any evidence that WTO actions or 
any other actions have actually changed China's policies or 
behaviors? And if the answer to that is no, then what, in fact, 
should we be doing beyond our WTO objections? Does anyone have 
an opinion on that? Mr. Shea?
    Mr. Shea. Well, the WTO process is costly, not necessarily 
accessible to small- and medium-sized businesses in the United 
States. It takes a long time. And even after favorable 
decisions by the WTO in the interest of the United States, 
sometimes the Chinese do not abide by what the decision was. 
And I am thinking of the distribution of movie rights, movies 
into China, as one specific example.
    So I think the system is effective to some degree, but it 
is certainly not a satisfactory system for responding to all 
the things that you just listed as problems in our trade 
relationship.
    Unfortunately, this is something we struggle with on the 
Commission, is to how to come up with sort of effective 
responses. One thing, I think the USTR, for example, should 
initiate cases. Sometimes companies are afraid to come forward, 
and the USTR should initiate cases if they feel the national 
interest is being jeopardized. I think companies are subject to 
forced technology transfers, and I think we ought to look at 
the antitrust laws to allow U.S. companies, as long as their--
in addition to other Western companies--to talk to each other 
about, you know, we are not about resisting these forced 
technology transfer and other requirements without having to 
worry about whether they are violating the U.S. antitrust laws.
    So my testimony lists a few other things. I think 
multilateral action is always much more effective than the 
United States going alone, so working with our allies. One idea 
I heard recently was to create a Department of Trade 
Enforcement within the Justice Department. The USTR negotiates 
trade deals, but maybe put a trade enforcement function within 
the Department of Justice. That is an idea that I have heard 
raised.
    Senator Menendez. Mr. Gibson?
    Mr. Gibson. Thank you, Senator. I would say that was one of 
the reasons it was so important to get the trade law 
improvements last year, because those are tools that are in our 
control to use to bring the cases. The changes help.
    Another thing that helps is increased resources for trade 
enforcement, and the Appropriations Committee made additional 
resources available last year to enforce these new laws that 
were passed last year and is even thinking about putting a 
little bit more money toward that this year.
    So that is our other option, is to use the trade laws and 
to bring cases and to enforce the trade laws where we find 
violations.
    Senator Menendez. On the Finance Committee, I raised this 
issue about it seems to me that the burden is 
disproportionately put on private companies to be the 
prosecutor of violations of international agreements, when it 
should be the Government. Companies could provide information 
to the Government in order to make that analysis and then have 
the Government be the one to prosecute the violations and not 
have the burden on the private sector and/or steelworkers or 
others to try to prove what is going on. So I look forward to 
continuing to pursue that line of opportunity because to the 
extent that there are going to be trade agreements, one of the 
undermining elements of it is that there is a lack of 
enforcement. So what good is an agreement but for the ability 
to enforce it and the rule of law to be able to ultimately 
pursue your differences.
    Let me ask this question: There are some who suggest that 
our two economies--the United States' and China's--are so 
intertwined that failure for one means failure for another, and 
I think some of you have touched upon these remarks. I often 
hear from people running for office that China has a powerful 
tool against us, which is their $1.2 trillion large-scale 
investment in U.S. financial assets, and that a disinvestment 
of China in that regard would be catastrophic.
    Under what scenario would it be possible that China would 
decide to suddenly and significantly reduce their liquid U.S. 
financial assets? And if they were to do that, isn't there a 
very significant consequence to them as well? Dr. Lachman?
    Mr. Lachman. Well, as I mentioned, we saw something like 
that last year. You saw a circumstance in which China reduced 
its international reserves by around $1 trillion because they 
had a huge amount of capital outflow, yet it did not seem to 
have much impact either on United States interest rates or on 
the United States dollar. So I am not sure that I see this as a 
very effective weapon, and there is also the point that using 
that kind of weapon might not be in your own interest, you 
know, to be dumping Treasury bills at a loss. So I am not sure 
that I see this as something that we really need to be too 
worried about. What we do need to be worried about more is the 
continuation of the imbalances in China and what that might 
imply for the global economy. You know, if those imbalances get 
even more out of line, the disruption could be very large to 
the United States economy.
    Senator Menendez. One final question, Mr. Gibson. If China 
through its illegal dumping subsidies and continued growth of 
capacity is allowed to decimate the U.S. steel industry 
further, what is your prediction for the shape of the U.S. 
industry? And how long does the industry have before the United 
States could be dependent on other countries for its 
infrastructure and defense needs?
    Mr. Gibson. Well, you know, the situation right now is 
quite dire. The damage done to the industry has been extreme 
over the past few years. We have seen this once before recently 
in the decade beginning in the end of the 1990s, late 1990s 
into the 2000s. We saw a restructuring of the U.S. steel 
industry, 33 bankruptcies. We went from 46 steel-producing 
companies to 29 steel-producing companies. You only have to 
look out your right window driving up I-95 when you go through 
the Harbor Tunnel and look at what used to be the largest steel 
plant in the world at Sparrows Point, which is no longer there. 
It is gone.
    So over the long term, we need to get a remedy to this, and 
the industry is availing itself of the remedies as under U.S. 
law. And that can deal with imports from China into the United 
States.
    Unfortunately, China has not reduced its capacity. It is 
continuing to produce at a high level, even as its own demand 
decreases, which means it is pushing out more into the world 
market, which is displacing steel in other countries, making 
them look to a market such as the United States. So we need to 
be on this right now. It is an immediate problem.
    Senator Menendez. Thank you.
    Chairman Shelby. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman, and thank you all 
for being here today.
    The data show that China's economy is caught between a rock 
and a hard place right now. Since the 2008 crisis, it has 
relied on massive amounts of debt to finance its ambitious 
growth targets, but now the debt has lurched out of control. A 
decade ago, China's debt relative to its GDP was about 150 
percent. Today that ratio is 260 percent. And the payments are 
coming due on this.
    I understand that now 40 percent of all new debt goes to 
making interest payments on old debt. So it is more and more 
debt before they even get any growth in this.
    The number of delinquent loans has doubled in just the past 
2 years, and these are all classic signs of a credit bubble 
about to burst.
    So China appears to have two options: it can cut back on 
credit and let current economic growth sag; or it can keep 
pumping more debt into the economy, propping up the growth now 
but setting the stage for a bigger crash down the line. The 
impact on the global economy and the U.S. economy will depend 
in part on which of these two paths that China takes.
    So, Mr. Shea, can I start with you? Which path do you think 
China is going to take on this?
    Mr. Shea. I think they are going to take the path of least 
resistance. I think they are going to take the path that in the 
short term they perceive as being in the interest of the 
Chinese Communist Party staying in power, which means making 
sure that people are relatively happy and not losing their 
jobs, not suffering.
    So I think, again, they know what needs to be done. They 
are doing some steps on the debt. They are securitizing some of 
the debt. They are creating, you know, companies to offload 
some of the nonperforming loans, which they did this 10 years 
ago. They created asset management companies that were 
basically zombie companies that took all this debt. They are 
experts at pushing the problem down the road further and 
further. They are really good at that.
    But, again, the point is that they know what needs--many of 
them know what needs to be done, but the pain in the short term 
is so hard that they are concerned that it is going to 
jeopardize the stability of the country and the primacy of the 
Chinese Communist Party. So that is----
    Senator Warren. So you think they will just continue to----
    Mr. Shea. I think they will muddle along. I think they are 
going to muddle along.
    Senator Warren. All right. Well, let me ask about this, 
because I want to dig in just a little bit on this. We have 
already talked about a little bit that the experts cite data to 
show there would be fairly modest direct harms to the U.S. 
economy from a slowdown in the Chinese economy. And you have 
already talked about it here this morning. And most of the 
people who talk about this note that U.S. investors have very 
little money directly in the Chinese stock markets. According 
to some expert analysis, U.S. exports to China make up only 
about seven-tenths of a percent of our GDP. So the general 
impact, it seems there is some consensus around the notion that 
the general impact to our economy if China starts--whether it 
is in the very short term or down the line starts down, it is 
not going to be as severe for us.
    But I want to dig in a bit more on the exposure of our 
financial sector to the Chinese economy and specifically to its 
banking system. After all, it is China's banking sector that is 
the world's largest, yes, larger than the United States, with 
total assets equal to about 40 percent of the entire global 
economy. And while investors here at home may not have 
significant direct investments in Chinese companies, there are 
other ways that we are exposed. You talked recently about the 
impact of disinvestment and said it has not had the big impact 
we expected. But big banks and financial institutions in the 
United States are certainly exposed through derivative trading 
and other financial interactions to sharp changes in commodity 
prices and currency valuations that would result from any 
turmoil in the Chinese market.
    So, Mr. Shea, if the Chinese credit bubble pops, whether it 
is sooner or later, dragging the Chinese economy down with it, 
what kinds of vulnerabilities might we see in our U.S. 
financial services industry?
    Mr. Shea. Well, I was going to kick that over to Dr. 
Lachman----
    Senator Warren. Well, I am going to Dr. Lachman next, so it 
is entirely up to you.
    Mr. Shea. Yes, I think it is the financial sector that is 
probably the most exposed to the Chinese economy. You correctly 
point out they do not own as much Treasury debt as we say--as 
commonly believed. There are--not a significant portion, I 
think 7 percent of U.S. exports are to China. The FDI between 
the two countries is quite minimal as a percentage of global 
FDI, of U.S. FDI to China, Chinese FDI to the United States. So 
we are not as intertwined as commonly believed. As has been 
pointed out before, there are second-order effects. Other 
economies in the world are very intertwined, particularly 
commodity-exporting economies like Australia and Brazil are 
very intertwined with the Chinese economy, much more so than 
ours, and as a result, our relationship--if those economies go 
down, then we get affected as well. But that is a second-order 
effect.
    I am going to turn it over to Dr. Lachman.
    Senator Warren. Dr. Lachman? I was coming to you anyway to 
ask about this question about what happens with the largest 
financial institutions in the United States and their exposure 
on derivatives and other financial transactions.
    Mr. Lachman. Well, the way I think about it is, firstly, I 
would say that it is very unlikely that you are going to get 
the bubble bursting in the way that occurred in the United 
States because they have got control over the banks, they have 
got control over the state enterprises. They are going to be 
just pumping in credit to keep zombies alive, you know, much 
like what Japan did.
    So, for instance, if you look at what happened in China at 
the first quarter of this year, while the government realizes 
that they do have to transform their economy, that did not stop 
them from increasing credit by something like 40 percent, the 
fastest rate that they have done, you know, repeating those 
practices. So it seems unlikely to me that you are going to get 
the bubble bursting.
    Where you could get an impact on the United States 
financial system and on the United States economy is through 
the impact that China would have on the global economy, that 
China is the second largest economy right now, has been 
providing most of the growth, and at a time that we have got 
real trouble in many other economies around the globe. I am 
thinking of a place like the U.K. now, Italy, Brazil, Japan, 
and emerging markets. A Chinese slowing is the last thing that 
you are really wanting to do.
    So I do not think that one should be complacent about the 
impact that this might have on the United States banking 
system, but I do not see the impact as being through direct 
exposure of United States companies.
    Senator Warren. So you are not worried about the exposure 
through derivatives that, for example, put our banks deeply 
engaged on the question of commodity prices or other financial 
transactions more directly?
    Mr. Lachman. Oh, absolutely, I would be concerned about 
that. But it is not to China itself. It is, rather, through 
China's impact on world commodity prices, China's impact on the 
outlook for other countries that are struggling to get their 
economies going. Then, you know, the United States banking 
system is hugely exposed, for instance, to Europe. So, you 
know, if Europe going through its problem with Brexit or having 
trouble likely to occur with the Italians, their referendum, 
the last thing you want to do is to have yet another part of 
the global economy not doing well, and Chinese is a major part 
of the global economy.
    Senator Warren. Thank you. That is very helpful. You know, 
I hear you saying that a sharp slowdown in the Chinese economy 
would have these massive ripple effects around the global 
economy. And I understand you to be saying that in the United 
States the big financial companies would be the place where we 
would be most exposed. That is exactly in anticipation of these 
kinds of risks that Dodd-Frank requires big banks to build in 
more safety ahead of time, with capital requirements and 
leverage ratios. And that is why it is critical that financial 
regulators have the tools they need to shore up the safety of 
the U.S. banking sector.
    Every time Congress tries to weaken Dodd-Frank regulations, 
it puts our country at risk.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Warren.
    Just a few observations from the hearing but from our 
experience, too. We know that China--or at least my 
observation--I have been there. I have not lived there, but I 
have been there since 1981 a number of times, and I have seen a 
lot of changes. But China signs these agreements, these trade 
agreements, and then they make their own rules or ignore what 
we are doing. They are obviously ``eating our lunch'' in trade. 
Look at the current account, you know, what we are doing there. 
There has got to be a day of reckoning there.
    We all know we have to trade. My gosh, we have got to 
trade. We cannot build walls around this. But is the problem 
with China that China is going to sign an agreement and do what 
they want to? Because the imbalance of trade with China, not 
just steel--but steel is important, you know, to us for defense 
and everything that goes with this. But they seem to target an 
industry, a big industry, and people disappear. You know, 
companies disappear, jobs disappear. And this has now 
manifested itself into the current Presidential race--do not 
kid yourselves--in the current races around here. Are we 
trading? Are we smart? Are we stupid or whatever? Dr. Wilson?
    Mr. Wilson. Yeah, I would say this: During the 4 years I 
was there, the most significant change I witnessed in China is 
the fact that if you talk to the U.S. Chamber of Commerce, the 
European Chamber of Commerce, they will tell you this 
unambiguously: that doing business in China has become much 
more difficult in terms of regulation, in terms of entry, 
getting into the market.
    Obviously, you know I am with the Heritage Foundation, so I 
am a free trade guy. But, still, we ran a trade deficit--it is 
mind-boggling. We ran a trade deficit last year with China of 
$365 billion. That accounts for about 80 percent of our annual 
trade deficit.
    Chairman Shelby. Isn't that unsustainable economically 
speaking? I mean, it will go on for a while.
    Mr. Wilson. It can go on for a while. The great thing about 
the U.S. economy is this: that it is very insular. If you look 
at exports and imports as a share of GDP, it is only about 25 
percent. Other countries like South Korea, Taiwan, it is 70, 80 
percent. And so the fact is this: The global economy is growing 
at one-half the rate it was a decade ago. These have been tough 
times. Brazil, Lula said in 2009, when they were booming and we 
were in trouble, that the financial crisis was caused by blond-
haired, blue-eyed bankers. As a former banker, I took some 
resentment for that, and I said that, you know, given their 
connectivity with the Chinese economy, this is a major reason 
why China, Indonesia, South Africa, Russia--I mean, oil prices 
as recently as 2014 were above $100 a barrel. Now we are at 
$40. Who would have expected oil to be a $40 a barrel? This is 
largely the result of the slowdown. We are already experiencing 
this. The Chinese economy has already slowed down. As recently 
as 4 years ago, it was growing at 10, 10.5 percent, now maybe 5 
percent. That is an enormous deceleration for an economy 
producing one-third of global economic growth since 2008.
    But, yeah, I will just finish by saying that it is very 
disappointing. I talk to businessmen in Beijing, and doing 
business there for the corporate blue chips has become 
increasingly difficult.
    Chairman Shelby. But we should have no illusions that China 
is trading with the United Kingdom or with Germany or anybody 
else?
    Mr. Wilson. Correct.
    Chairman Shelby. It is a different world, is it not?
    Mr. Wilson. It is.
    Mr. Shea. Could I--Mr. Chairman, you are exactly right, Mr. 
Chairman, your comments, and you asked the question, ``Are we 
stupid?'' Let me add another layer to your question. We are the 
China Economic and Security Review Commission. The United 
States has brought China into the world, has helped build up 
its economy by providing a market, by investing, and by 
transferring, whether we like it or not, technology to China.
    Chairman Shelby. Big time.
    Mr. Shea. While we are doing it, the Chinese are using the 
money to buildup their military, 10 percent a year over the 
past 15 years, and they are----
    Chairman Shelby. Oh, yes, and will continue.
    Mr. Shea. Yeah, and their military strategy is designed in 
part directed at the United States, to keep us out of the 
Western Pacific. So they are building weapons systems that 
would attack U.S. military assets.
    So are we stupid?
    Chairman Shelby. That is the question.
    [Laughter.]
    Senator Brown. This is kind of amusing. I was in the House 
when permanent normal trade relations (PNTR) passed, and I 
helped to lead the opposition to it, and I heard--normally, 
CEOs of big companies come to Congress and go to leadership 
offices in the House and the Senate. They actually come see 
people like Senator Shelby and me, but in the House they go to 
the leadership. But the CEOs of the biggest companies were even 
going to the fifth floor of Cannon to lobby on PNTR. And they 
would always talk about they could not wait to get access to 1 
billion Chinese consumers. Well, they really were looking to 
get access to 1 billion Chinese workers. And when I hear Dr. 
Wilson in his first
testimony--again, nice work, but when you said how these 
corporate blue chip companies, it is so hard for them in China, 
I mean, it was not my idea that they go to China. It was not my 
idea that Apple does all the innovation in this country and 
then goes and outsources its jobs. It was not my idea that 
these companies begin almost a new phase in economic history 
where they shut down production in Cleveland and Toledo and go 
to Wuhan and Shihan, get a tax break to do it, and then sell 
the products back in the United States. That was not invented--
that was what the U.S. Chamber of Commerce and major companies 
did. And when I hear them say, ``Oh, it is so hard to do 
business in China,'' then come back. But the dollars that you 
are--I mean, I do not really know who funds the Heritage 
Foundation. I suppose it is the Koch Brothers that fund most of 
everything else in this town. But I do know that you talk about 
the Chamber of Commerce and how their members have made so much 
money at the expense of my once-middle-class workers in 
Mansfield, Ohio, where I grew up, and Akron and Youngstown and 
Steubenville and Worcester, Mass., and then I hear complaints 
about how hard it is for these businesses to outsource jobs 
from China, and you talk about the Presidential election, this 
suit I wear, made by union workers 6 miles from my house in 
Cleveland, Ohio. Yet we have Presidential candidates that 
complain about trade policy and then they outsource jobs 
because they cannot find a company in the United States to make 
their furniture. Go to Archbold, Ohio. They can find a company 
that makes furniture. They can find suits here.
    So I just--when I see the business model of this country in 
the last 25 years, in many ways accelerated by PNTR, bad 
decisions in this body, and they move overseas after shutting 
production here, sell those products because the labor is 
cheap, the environmental rules are weak, the currency is in 
their favor, and now they complain about it, I guess I would 
just say, ``Come home, then.'' Enough said.
    Mr. Gibson. You know, China joined the WTO. The WTO did not 
join China. Right? We have got to hold them to the rules. We 
have got to use our trade laws when they violate the rules and 
be able to have remedies against them.
    Chairman Shelby. Well, I thank all of you. I think this has 
been an interesting hearing. We have to face reality.
    The hearing is adjourned.
    [Whereupon, at 11:25 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]


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              PREPARED STATEMENT OF DESMOND LACHMAN, Ph.D.
            Resident Fellow, American Enterprise Institute *
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     * The American Enterprise Institute for Public Policy Research 
(AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization 
and does not take institutional positions on any issues. The views 
expressed in this testimony are those of the author.
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                             July 14, 2016
    Thank you Chairman Shelby, Ranking Member Brown, and Members of the 
Committee for affording me the honor of testifying before you today. My 
name is Desmond Lachman and I am a Resident Fellow at the American 
Enterprise Institute. I am here in my personal capacity and I am not 
here to represent the AEI's view on the subject under discussion.
Introduction
    The Chinese economy, which is now the world's second largest 
economy and the world's largest trading nation, has become highly 
imbalanced as a result of an excessive reliance on credit creation and 
on investment-led growth. As a result, China's economic growth model is 
now showing every sign of having run its course. This has prompted the 
Chinese government to recognize the need for more balanced economic 
growth and has led it to significantly mark down China's long-term 
economic growth forecast.
    It would be a mistake for U.S. policymakers to minimize the large 
adverse impact that a further slowing in the Chinese economy could have 
on the U.S. economy. Since a change in the economic fortunes in China 
could have a strongly adverse impact on the world economic outlook and 
on global financial markets. This would seem to be especially the case 
at a time that the world economy is drowning in debt and at a time that 
it is confronted with an unusual confluence of material downside risks. 
These latter risks include those emanating from last month's Brexit 
referendum, from the Brazilian economic and political crisis, and from 
the serious weaknesses now being revealed in the Italian banking 
sector.
China's growth model has become increasingly unbalanced
    In assessing China's potential to impact the U.S. economic 
recovery, it is well to recall how important China has become to the 
global economy. Through two decades of very rapid, albeit unbalanced, 
economic growth, China's share in the world economy has increased from 
2 percent in 1995 to 15 percent in 2015. This has made China the 
world's second largest economy ahead of Germany and Japan. In recent 
years, China, together with the other large emerging market economies, 
has been the principal engine for world economic growth. It was also a 
major factor in the super-international commodity price boom between 
2008 and 2013, which drove strong economic growth in the world's major 
commodity exporting economies.
Figure 1: China's Role in the Global Economy
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    A primary concern about the Chinese economy is that it has relied 
excessively on an unbalanced and unsustainable economic growth model to 
drive its rapid economic growth. The unbalanced nature of the Chinese 
economy is most apparent from the fact that Chinese investment accounts 
for around 45 percent of China's GDP. It is also apparent from the fact 
that China has relied excessively on credit creation from its banking 
and shadow banking systems to drive economic growth and investment. 
Indeed, since 2009 Chinese credit to the nonfinancial private sector 
has increased by around 90 percent of China's GDP. Such a rate of 
credit expansion has been very much more rapid than that which preceded 
Japan's lost decade in the 1990s and that which preceded the U.S. 
housing bust in 2007.

Figure 2: Private Debt Bubbles
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Source: BIS, IMF

    The excessive degree of Chinese investment and credit creation has 
given rise to a tremendous misallocation of resources. Many sectors of 
Chinese industry, including most notably the steel and construction 
sectors, are now characterized by massive excess capacity. In addition, 
excessive credit creation has spawned bubbles in the Chinese property 
and equity markets. Those excesses are now apparent in ghost towns and 
see-through commercial properties in many Chinese second-tier cities.
    As the excesses in China's economy have started to be unwound, 
Chinese economic growth has slowed markedly from its former double 
digit rates. According to Chinese official estimates, real Chinese GDP 
growth has now slowed to below 7 percent and is expected to remain 
between 6 \1/2\ and 7 percent over the next few years. However, many 
respected private sector analysts estimate that the Chinese economy may 
have already slowed to around 4 percent. Those analysts are justifiably 
fearful that China's economic growth will remain low as it transitions 
to a more balanced economic growth model.
Delaying Reforms
    The present Chinese Administration appears to fully recognize the 
imbalanced nature of the Chinese economy and of the need to promote 
economic reforms that might make China a more consumer and service 
driven economy. To that end, the Administration has vowed to rebalance 
demand and to eliminate China's debt addiction before the country 
reaches its debt capacity limits. It has done so with the goal of 
achieving a more balanced and sustainable economic growth model.

Figure 3: Borrowing in China is growing fast again
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    While President Xi Jingxing's administration has adopted certain 
measures toward reforming the economy, it is far from clear that it is 
fully committed to addressing China's credit addiction and to curbing 
its shadow banking system. Indeed, official data reveal that, in 
response to a slowing Chinese economy, the People's Bank of China has 
permitted yet another burst of credit as reflected in a more than 40 
percent increase in such credit for the first quarter of 2016. More 
recently, however, Chinese credit growth appears to be being reigned in 
again.
Precedents from other credit bubbles
    The extraordinary increase in Chinese private nonfinancial sector 
credit over the past 8 years has been at a pace that exceeds those that 
have preceded other major economic and financial crises. These crises 
include Japan's lost decade in the 1990s, the Mexican peso crisis in 
1994, the Thai financial crisis in 1997, and the U.S. housing bust in 
2007. Those earlier crises would all suggest that the current Chinese 
credit bubble will not end well and that the world should brace itself 
for a prolonged period of relatively slow Chinese economic growth.

Figure 4: Comparable Credit Bubbles
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    The fact that China's banking system is dominated by four state-
owned banks makes it unlikely that China will experience an abrupt 
credit event like that which occurred in Asia during the late 1990s or 
in the United States in 2008. Rather, what is more likely is that the 
Chinese banking system will become increasingly clogged with 
nonperforming loans and with loans to zombie Chinese public and private 
sector companies along the lines that has occurred in Japan over the 
past two decades. This is very likely to keep China on a very low 
growth path for an extended period of time.
China's capital flight problem
    Beyond the prospect of a slowing domestic economy, China's present 
capital outflow problem could pose a further risk to the global 
economy. During 2015, private capital outflows from China amounted to 
almost U.S.$700 billion in the wake of China's decision to move toward 
a more flexible exchange rate in August 2015 and of the correction of 
China's equity and property market bubbles. While China still has more 
than U.S.$3 trillion in international reserves, it is clear that China 
cannot sustain its recent pace of capital outflows for too long a 
period.

Figure 5: Chinese Capital Flows
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    Over the past few months, capital outflows from China have 
moderated as capital controls have been tightened and as the Chinese 
currency has stabilized. However, there is a considerable risk that 
China may feel obliged to again weaken its currency to stimulate export 
growth particularly in the context of a rising U.S. dollar in the wake 
of the Brexit vote. The experience of August 2015 would suggest that 
any significant move to a more depreciated renminbi against the U.S. 
dollar could again renew capital outflows.
Implications for the United States economy
    It would be a mistake for U.S. policymakers to minimize the large 
adverse impact that a setback in the Chinese economy could have on the 
U.S. economy. Since a change in the economic fortunes in China could 
have a strong impact on the world economic outlook and on global 
financial markets. This would seem to be especially the case at a time 
that the world economy is drowning in debt and at a time that it is 
confronted with an unusual confluence of material downside risks
    In assessing the financial and economic risks from China, it is 
important to distinguish between the direct and indirect impacts that a 
slowing in the Chinese economy might have on the U.S. economic outlook. 
In that respect, it would seem that a further Chinese economic slowing 
should not have a material direct effect on the U.S. economy. After 
all, China accounts for only around 7 percent of total U.S. exports or 
less than 1 percent of U.S. GDP. Similarly only 2 percent of U.S. 
enterprises' net income is derived from China while U.S. bank exposure 
to China only amounts to around 1 percent of the U.S. banking system's 
balance sheet.
    By contrast, the U.S. economy could be indirectly affected in a 
major way by a further Chinese economic slowing through the effect that 
such a slowing might have on the rest of the world economy and on 
global financial markets. This might occur through three distinct 
channels:

  a.  First, a slowing in the Chinese economy would have a significant 
        impact on the exports of China's Asian trading partners and of 
        countries like Germany, which are very much more dependent than 
        is the United States on the Chinese economy for their exports. 
        As such, it could materially affect the global economic outlook 
        confronting the United States.

  b.  Second, China might be forced to make use of its exchange rate to 
        bolster its flagging economy especially if it continues to 
        suffer from capital outflows. This could result in tensions in 
        global currency markets where all too many countries are 
        seeking to cheapen their currencies.

  c.  Third, a slowing Chinese economy must be expected to keep 
        international commodity prices low for a protracted period of 
        time. This has the potential to deepen the political and 
        economic crises already being experienced in major commodity 
        exporting emerging market countries like Brazil, Russia, and 
        South Africa.

    Two further considerations would argue that there should be no room 
for complacency in U.S. policymaking circles about the Chinese economic 
outlook. The first is that the three channels by which China could 
affect the global economy are all too likely to play out 
simultaneously. That would only amplify their negative impact on the 
global economy. The second is that a further Chinese economic slowdown 
could trigger other major fault lines in the global economy in 
countries like Brazil, Italy, Japan, and Russia. That too would argue 
against being overly complacent about potential Chinese economic 
developments at this delicate juncture in the global economic cycle.
                                 ______
                                 
                                 
                                 
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             PREPARED STATEMENT OF WILLIAM T. WILSON, Ph.D.
            Senior Research Fellow, The Heritage Foundation
                             July 14, 2016
    My name is William Wilson. I am a Senior Research Fellow at The 
Heritage Foundation. The views I express in this testimony are my own 
and should not be construed as representing any official position of 
The Heritage Foundation.
Overview
    Despite its size, direct global exposure to the Chinese financial 
system is currently still small. A regulatory wall around the Chinese 
financial system is largely responsible for this.
    A financial crisis in China is likely to lead to a heighten level 
of capital flight. The Chinese authorities and central bank would be 
forced to offset downward pressure on the yuan-dollar exchange rate buy 
selling U.S. denominated assets (i.e., primarily U.S. Treasuries). 
This, however, is unlikely to result in a significant fall in U.S. bond 
prices (i.e., a rise in U.S. interest rates) given the dollar's solid 
safe-haven status in times of global financial crises.
    Most of the fallout will be within Asia, where trading and lending 
have the strongest links and where credit has been growing the fastest 
globally since the 2008-2009 financial crisis.
The Current State of the Chinese Economy--A Brief Overview
    There exists great skepticism about the accuracy of many Chinese 
macroeconomic indicators. There are significant reasons for this 
perception. First of all, any government exercising such a significant 
role in managing the direction of an economy is highly likely 
manipulating official statistics. In a nation of almost 1.4 billion 
people, quarterly gross domestic product (GDP) figures are often 
released just 14 days after the end of the quarter with no subsequent 
revisions. (In the United States, GDP figures undergo two revisions, 
sometimes significant, spanning out 60 days after the first release.)
    The headline figures often conveniently match Beijing's target 
figure. To admit the economy was growing at a 4 percent pace could 
cause a loss in confidence in the relatively early 10-year tenure of Xi 
Jinping. There are plenty of inconsistencies. While GDP was reported to 
grow at a 6.8 percent in 2015, electricity consumption rose by only 0.5 
percent. These two figures are simply not consistent.
    More ominous has been the level of fixed-asset investment (i.e., 
residential and commercial construction, physical infrastructure, 
etc.). While it has fallen very modestly as a share of GDP recently, 
since the global financial crisis, it has run at approximately 45 
percent of GDP. Historically speaking, this level is unprecedented 
among the emerging market economies, even those in East Asia during 
their rapid growth periods.
    This elevated level of fixed investment has long passed its 
expiration date. Many industries such as steel, cement, rare earth 
minerals, energy refining and housing are operating at three-quarters 
capacity. This is precisely why wholesale prices have fallen for three 
consecutive years.
    A large drop in fixed-asset investment (as a share of GDP) will be 
a necessity. First, the return on these investments has been rapidly 
declining. The amount of capital needed to generate an extra dollar of 
income has more than doubled over the past decade. Even bringing this 
figure down to 30 percent of GDP is highly likely to produce 
significantly slower economic growth from current levels.
    Reflecting the drop in overall efficiency, the contribution of 
total productivity to GDP has been falling in China. From 1991-2000 it 
averaged 5.9 percent then declined to an annual average of 3.6 percent 
during the past 5 years (2011-2015). To reach a GDP growth target of 
5.5 percent to 6.5 percent per year, multifactor productivity growth 
will need to contribute to 40 percent to 50 percent of GDP growth 
moving forward.
China's Debt
    China's total debt (household, corporate, government) is now much 
higher than in other developing economies and comparable to levels in 
the United States and the eurozone. While the size is a concern, what 
is more troubling is the speed at which debt has accumulated. It was 
approximately 150 percent of GDP in 2007 (a year before the crisis), 
and is now approximately 250 percent to 300 percent of GDP.
    The economy's debt load has more than tripled over the past 7 
years. New borrowing increased by Rmb 6.2 trillion in the first quarter 
of 2016, the largest 3-month increase on record.
    Roughly two-fifths of new debt is swallowed by interest on existing 
loans. Less credit is going to good firms for productive uses.
Rising Defaults on the Way
    It is impossible for China to deploy all the capital productively 
over a short period of time.
    It now takes nearly four yuan of new borrowing to generate one yuan 
of additional GDP, up from just over one yuan of credit before the 
financial crisis.
    Rising debt levels cause financial distress on borrowers which lead 
to slower growth before defaults even begin increasing.
    China could experience a balance-sheet recession similar to 
Japan's. When corporate debt reaches a critical level, conventional 
monetary policy losses its effectiveness because companies focus on 
paying down debt instead of borrowing at lower interest rates.
    Official data has nonperforming loans at just 1.7 percent of total 
loans. This figure grossly underestimates the current stock of ``bad'' 
loans.
    One of Beijing's new strategies to handle this problem is a debt-
equity swap, where banks could write off problem company loans in 
return for taking equity stakes in them.
    Seeking to become less reliant on bank borrowing, Chinese 
corporations have aggressively tapped the bond market. At $900 billion, 
it is one of the largest in the world.
    Approximately 85 percent of China's bond issuers have AA ratings or 
above by domestic rating agencies, compared to Moody which rates only 3 
percent of global issuers so highly.
The Shadow Banking System
    Five years ago, the Chinese shadow banking system was primarily 
driven by companies unable to secure traditional bank loans. Today, the 
driver is from ordinary people looking for higher rates of returns.
    China's shadow banking system is estimated to be at least two-
thirds of GDP. As long as banks do not guarantee the principal of these 
products, they do not have to report them on their balance sheets. In 
essence, they are a hidden balance sheet.
    One big difference is that the government guarantees bank deposits 
while shadow lenders are supposed to stand on their own.
    China's shadow banking system has become large, but until now, it 
has avoided creating products similar to the mortgage-backed securities 
like in the United States before the financial crisis. Banks with the 
largest shadow loans are mid-sized institutions. Wealth Management 
Products (WMPs) account for about 15 percent of deposits at the largest 
banks but over 40 percent at mid-tier banks.
Liquidity Issues
    Banks are increasingly relying on short-term funding from the sale 
of high-yielding wealth management products instead of stable deposits. 
This funding can quickly evaporate when defaults rise. It is probably 
only a matter of time until banks are unable to fund all their assets 
safely.
    Banks are becoming more reliant on WMPs, where they pay higher 
returns in lieu of short-term deposits and invest these in long-term 
assets. This causes a mismatch in duration. China traditionally 
restricted bank loans to less than 75 percent of their deposit base, 
but that figure is now approaching 100 percent.
    The average maturity of WMPs is only 113 days, but bank loans have 
much longer maturities, meaning that banks are forced to constantly 
sell new WMPs for funding.
Global and U.S. Financial Exposure
    Since the 2008-2009 global recession, China has accounted for 
roughly one-third of global economic growth, by far the highest in the 
world. With a GDP of roughly $11 trillion (current prices), the second 
largest in the world after the United States, any economic slowdown in 
this Asian juggernaut is bound to have enormous global consequences.
    Since 2010, the rate of economic growth in China has decelerated 
from a 9.3 percent pace in 2011 to 6.8 percent in 2015 (and the 
accuracy of the latest figure is in serious question). The question is 
what impact a further slowdown in China would have on the U.S. economy.
    There are three primary channels in which a significant slowdown in 
China could impact the U.S. economy. The first is through trade. In 
2015, China was America's third largest export market, after Canada and 
Mexico, respectively. This was valued at $116.2 billion, a 50 percent 
increase since 2008. Exports to China accounted for 7.7 percent of 
total U.S. exports in 2015, not an inconsequential figure but not
devastating to U.S. export revenue in the event of a further Chinese 
stall in growth. (Chinese exports to the United States were $481 
billion in 2015.)\1\
---------------------------------------------------------------------------
    \1\ U.S. Census Bureau, ``Top Trading Partners--December 2015),'' 
https://www.census.gov/foreign-trade/statistics/highlights/top/
top1512yr.html (accessed July 12, 2016).
---------------------------------------------------------------------------
    The second channel is financial. The Chinese are now the largest 
holder of U.S. debt (after Japan), standing at $1.2 trillion in April 
2016. This currently represents 20 percent of total foreign 
holdings.\2\
---------------------------------------------------------------------------
    \2\ U.S. Treasury, ``Major Foreign Holders of Treasury Securities 
(in billions of dollars),'' June 15, 2016, http://ticdata.treasury.gov/
Publish/mfh.txt (accessed July 12, 2016).
---------------------------------------------------------------------------
    In the event of a further slowdown in the Chinese economy, the 
government may want to sell some of these securities for economic 
stimulus. This could lead to a fall in U.S. bond prices (i.e., a rise 
in domestic interest rates), depressing domestic investment. This 
impact has been discussed extensively and largely exaggerated for two 
reasons. First, the Chinese are unlikely to liquidate a large portion 
of their U.S. Treasury holdings because it might lead to a capital loss 
on their existing holding. Second, U.S. Treasuries are the most liquid 
and coveted securities in the world. In the event of an economic 
crisis, investors would flee toward Treasuries. The recent economic 
crisis illustrates this.
    The third channel is largely a positive one. The slowdown in the 
Chinese economy has significantly depressed global commodity prices. 
Despite the shale oil revolution, the U.S imported 9.4 million barrels 
of petroleum per day in 2015. While the United States exported 4.8 
million barrels per day in 2015, the net impact for the U.S. economy 
was positive.\3\
---------------------------------------------------------------------------
    \3\ U.S. Energy Information Administration, ``Frequently Asked 
Questions,'' April 1, 2016, 
http://www.eia.gov/tools/faqs/faq.cfm?id=727&t=6 (accessed July 12, 
2016).
---------------------------------------------------------------------------
    So what is the likely net impact? According to the Organization for 
Economic Co-operation and Development (OECD), a 2 percent decline in 
Chinese domestic demand growth will cause a decrease in U.S. GDP growth 
rate by approximately 0.3 percent.\4\
---------------------------------------------------------------------------
    \4\ Elvin Mirzayev, ``Impact of the Chinese Economy on the U.S. 
Economy,'' Investopedia, July 29, 2015, http://www.investopedia.com/
articles/investing/072915/impact-chinese-economy-us-economy.asp 
(accessed July 12, 2016).
---------------------------------------------------------------------------
    Bottom line? With an economy cruising along at a lackluster 2 
percent rate of growth, this drop is not insignificant but also not 
traumatic.
    In terms of the Chinese economy, if the past 7 years have taught us 
anything, it is that financial crises typically result in a period of 
protracted slow growth. It already appears that China may be entering 
the early stages of this correction. How the Chinese Communist Party 
reacts to it will change the future of global
geopolitics.

                        * * * * * * * * * * * * * * * * * * *

    The Heritage Foundation is a public policy, research, and 
educational organization recognized as exempt under section 501(c)(3) 
of the Internal Revenue Code. It is privately supported and receives no 
funds from any government at any level, nor does it perform any 
government or other contract work.
    The Heritage Foundation is the most broadly supported think tank in 
the United States. During 2014, it had hundreds of thousands of 
individual, foundation, and corporate supporters representing every 
State in the United States. Its 2014 income came from the following 
sources:

    Individuals 75 percent
    Foundations 12 percent
    Corporations 3 percent
    Program revenue and other income 10 percent

    The top five corporate givers provided The Heritage Foundation with 
2 percent of its 2014 income. The Heritage Foundation's books are 
audited annually by the national accounting firm of RSM US, LLP.
    Members of The Heritage Foundation staff testify as individuals 
discussing their own independent research. The views expressed are 
their own and do not reflect an institutional position for The Heritage 
Foundation or its board of trustees.

 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY FROM DENNIS 
                           C. SHEA 
---------------------------------------------------------------------------

     Please note the responses here represent my own views and not 
necessarily those of the Commission itself or other members of the 
Commission.
---------------------------------------------------------------------------
Q.1.a. In your oral testimony, you stated that food security is 
a matter for which the United States needs to pay close 
attention. This is an issue that attracts increased attention 
within Congress with each passing Chinese agricultural 
acquisition.
    Do you find that China's attempts to integrate its 
strategic sectors vertically and horizontally, by coordinating 
the activities of its state-owned enterprises while deploying 
state resources to target key global industries and non-Chinese 
companies, to significantly influence China's foreign 
investment decisions in United States agriculture and to 
negatively affect its food security concerns?

A.1.a. At present, there is no evidence of an excessive Chinese 
presence in the U.S. food supply chain. However, because 
Chinese state-owned enterprises (SOEs) are encouraged to invest 
abroad in what the Chinese government considers ``strategic'' 
industries, continued Chinese investment in the U.S. 
agriculture sector should be closely monitored. Several recent 
investments illustrate how the Chinese government utilizes 
foreign investment to develop the country's domestic 
agriculture sector. In September 2013, a subsidiary of the 
Chinese meat processing company Shuanghui Group  acquired U.S. 
pork producer Smithfield Foods Inc. for $4.7 billion.\1\ Then, 
in August 2016, the state-owned China National Chemical 
Corporation (ChemChina) finalized a $43 billion bid to buy 
Syngenta AG, one of the world's largest producers of crop 
protection products, including pesticides, fungicides, and 
genetically modified seed.\2\
---------------------------------------------------------------------------
     Shuanghui Group is privately owned, but has received substantial 
support from the Chinese government. In a September 2014 interview with 
the Public Broadcasting Service (PBS), Shuanghui's president, Zhang 
Taixi, explained that the Chinese government had been ``very 
supportive'' of the Smithfield acquisition, offering preferential 
policies and financing from state banks to support the deal. PBS 
Newshour, ``Who's Behind the Chinese Takeover of World's Biggest Pork 
Producer?'' September 12, 2014. http://www.pbs.org/newshour/bb/whos-
behind-chinese-takeover-worlds-biggest-pork-producer/.
    \1\ Smithfield Foods, ``Shuanghui International and Smithfield 
Foods Complete Strategic Combination, Creating a Leading Global Pork 
Enterprise,'' September 26, 2013. http://www.smithfieldfoods.com/
newsroom/press-releases-and-news/shuanghui-international-and-
smithfield-foods-complete-strategic-combination-creating-a-leading-
global-pork-enterprise.
    \2\ China National Chemical Corporation, ``ChemChina and Syngenta 
Receive Clearance from the Committee on Foreign Investment in the 
United States (CFIUS),'' August 22, 2016. http://www.chemchina.com/en/
press/press/A604001web_1.htm.

Q.1.b. Should the various current U.S. review processes, 
including that of the Committee on Foreign Investment in the 
United States, take into account the accumulative percentage of 
market control by all Chinese state-owned enterprises currently 
operating within the U.S. agriculture sector, not just the 
immediately acquiring entity, when reviewing transactions 
---------------------------------------------------------------------------
involving Chinese state-owned enterprises?

A.1.b. Yes, the U.S. Government should take into consideration 
the accumulative percentage of market control by Chinese SOEs. 
The Chinese Communist Party uses SOEs to pursue social, 
industrial, and foreign policy objectives. Therefore, SOE 
activities should be scrutinized to determine the reasons 
behind these investments.

Q.1.c. Can an over-reliance on China for U.S. domestic food 
supply qualify as a valid threat to U.S. food security or U.S. 
national security, and what is the difference between the two?

A.1.c. According to the United Nations Committee on World Food 
Security, food security is the condition in which all people 
have access to sufficient, safe, and nutritious food.\3\ 
Meanwhile, the Heritage Foundation's 2015 Index of U.S. 
Military Strength defined national security as anything that 
protects national interests, which encompasses economic, 
military, political, and other forms of power projection.\4\ In 
general, excessive reliance on any one country for food 
products should be avoided. Current evidence does not suggest 
the United States is over-reliant on Chinese agriculture 
products, although some processed foods are sourced there. 
According to data from the office of the U.S. Trade 
Representative, top food imports from China in 2015 included 
processed fruit and vegetables ($1 billion), fruit and 
vegetable juices ($321 million), snack foods ($208 million), 
fresh vegetables ($178 million), and spices ($159 million).\5\ 
Data from the U.S. Department of Agriculture show that in 2014 
(the most recent available), China was the United States' third 
largest source of imported food, with $5.8 billion worth of 
food products imported that year.\6\ Canada ($22 billion) and 
Mexico ($19.2 billion) are the largest sources of U.S. food 
imports.\7\
---------------------------------------------------------------------------
    \3\ United Nations Committee on World Food Security. http://
www.fao.org/cfs/cfs-home/about/en/.
    \4\ Kim R. Holmes, ``What is National Security?'' in 2015 Index of 
U.S. Military Strength, Heritage Foundation. http://index.heritage.org/
military/2015/important-essays-analysis/national-security/.
    \5\ Office of the United States Trade Representative, ``The 
People's Republic of China.''
https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-
republic-china.
    \6\ U.S. Department of Agriculture, ``Source Countries of U.S. Food 
Imports,'' March 30, 2015. http://www.ers.usda.gov/data-products/us-
food-imports.aspx.
    \7\ U.S. Department of Agriculture, ``Source Countries of U.S. Food 
Imports,'' March 30, 2015. http://www.ers.usda.gov/data-products/us-
food-imports.aspx.
---------------------------------------------------------------------------
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM DENNIS C. 
                              SHEA

Q.1.a. You stated in your testimony that the Chinese government 
``is introducing policies that aim to replace established 
market leaders with [Chinese] firms.'' As you know, there is 
significant evidence that the Chinese government is stealing 
American intellectual property via cyber espionage and 
disseminating stolen technology to Chinese businesses.\1\,\2\
---------------------------------------------------------------------------
    \1\ DOJ Indictment.
    \2\ USS 337 Complaint.
---------------------------------------------------------------------------
    Do you agree that the theft of American intellectual 
property by Chinese agents is a serious concern?

A.1.a. The Commission has been examining the cyber espionage 
threat China poses to the United States for many years. In 
2015, for example, the Commission held a hearing on 
``Commercial Cyber Espionage and Barriers to Digital Trade in 
China.'' In the
corresponding chapter of the Commission's 2015 Annual Report to 
Congress, the Commission stated that ``China causes increasing 
harm to the U.S. economy and security through two deliberate 
policies targeting the United States: coordinated, government-
backed theft of information from a wide variety of U.S.-based 
commercial enterprises and widespread restrictions on content, 
standards, and commercial opportunities for U.S. 
businesses.''\3\ Ongoing developments in Chinese cyber 
espionage are also assessed in the Commission's forthcoming 
2016 Annual Report to Congress. The Commission expects that the 
theft of American intellectual property by Chinese government-
sponsored and supported agents will continue and will require 
vigilant monitoring.
---------------------------------------------------------------------------
    \3\ U.S.-China Economic and Security Review Commission, Chapter 1, 
Section 4, ``Commercial Cyber Espionage and Barriers to Digital Trade 
in China,'' in 2015 Annual Report to Congress, November 2015, 192.

Q.1.b. Do you think that the Administration's previous actions 
(e.g., filing criminal charges against PLA operatives and 
engaging in formal negotiations to discourage hacking) have 
---------------------------------------------------------------------------
been effective in reducing illegal cyber espionage?

A.1.b. According to publicly available reporting, the 
effectiveness of the Administration's actions has been mixed. A 
June 2016 report released by the U.S. network security company 
FireEye indicates Chinese cyber espionage against U.S. 
companies has decreased in frequency since September 2015, when 
the United States and China signed a memorandum of 
understanding pledging that ``neither country's government will 
conduct or knowingly support cyber-enabled theft of 
intellectual property.''\4\ However, several other factors 
could account for the decline of Chinese espionage, including 
increased sophistication of Chinese hackers, a decrease in 
public reporting of cyber crimes, or shortcomings of U.S. 
detection capabilities.\5\
---------------------------------------------------------------------------
    \4\ FireEye iSight Intelligence, ``Red Line Drawn: China 
Recalculates Its Use of Cyber Espionage,'' June 2016, https://
www.fireeye.com/blog/threat-research/2016/06/red-line-drawn-china-
espionage.html; White House, Fact Sheet: President Xi Jinping's State 
Visit to the United States, September 25, 2015. https://
www.whitehouse.gov/the-press-office/2015/09/25/fact-sheet-president-xi-
jinpings-state-visit-united-states.
    \5\ U.S.-China Economic and Security Review Commission, private 
discussion with cyber security experts, June 9, 2016; U.S.-China 
Economic and Security Review Commission, Hearing on Chinese 
Intelligence Services and Espionage Operations, oral testimony of John 
Costello, June 9, 2016; U.S.-China Economic and Security Review 
Commission, Hearing on Chinese Intelligence Services and Espionage 
Operations, oral testimony of Mark Stokes, June 9, 2016; Jack Detsch, 
``Report: China Bolsters State Hacking Powers,'' Christian Science 
Monitor, February 4, 2016. http://www.csmonitor.com/World/Passcode/
2016/0204/Report-China-bolsters-state-hacking-powers.

   LA report by the State Department's Overseas 
        Security Advisory Council noted, ``While media 
        reporting has emphasized this alleged decrease in 
        malicious activity, cases of Chinese espionage 
        campaigns against the U.S. private sector are 
        ongoing.''\6\
---------------------------------------------------------------------------
    \6\ Bill Gertz, ``State Department Report Says Chinese Cyber 
Attacks `Ongoing','' Washington Free Beacon, June 29, 2016. http://
freebeacon.com/national-security/state-department-report-says-chinese-
cyber-attacks-ongoing/.

   LIn an April 2016 interview with the Financial 
        Times, Rob Knake, the former director of cyber security 
        policy at the National Security Council, stated that 
        while the days of widespread Chinese-sponsored 
        espionage seem to be over, there's a consensus that 
        ``activity is still ongoing, but [it is now]
        narrower in scope and with better tradecraft'' as 
---------------------------------------------------------------------------
        hackers become more adept at covering their tracks.\7\

    \7\ David J. Lynch and Geoff Dyer, ``Chinese Hacking of U.S. 
Companies Declines,'' Financial Times, April 13, 2016. https://
www.ft.com/content/d81e30de-00e4-11e6-99cb-83242733f755
#axzz4BBcRuRz7.

   LIn June 2016 testimony before the Commission, Mark 
        Stokes, the executive director of the Project 2049 
        Institute, also highlighted the need to distinguish 
        between China's ``A team''--or their best computer and 
        information security engineers--and the ``B team,'' 
        which is comprised of amateur hackers.\8\ According to 
        Mr. Stokes, ``the A team is still just as active'' in 
        its efforts to exploit vulnerable U.S. computer 
        systems.\9\
---------------------------------------------------------------------------
    \8\ U.S.-China Economic and Security Review Commission, Hearing on 
Chinese Intelligence Services and Espionage Operations, oral testimony 
of Mark Stokes, June 9, 2016.
    \9\ U.S.-China Economic and Security Review Commission, Hearing on 
Chinese Intelligence Services and Espionage Operations, oral testimony 
of Mark Stokes, June 9, 2016.