*EPF305 10/29/2003
Text: Evans Urges Faster Economic Reforms in China
(Commerce Secretary remarks at Jiaotong University, Oct. 26) (3120)

U.S. Commerce Secretary Donald L. Evans is urging China to speed up its economic reforms if it is to maintain its gains.

Speaking to business students at Jiaotong University in Xian, China, October 26, Evans said, although China has made much progress, "the march toward a free market economy in China is incomplete." He noted that since 2001 China has been the fastest-growing market for U.S. exports, but expressed concern that that export growth "may be in jeopardy if the pace of reform slows or if there is backsliding."

There is a rising concern in the United States, he said, over China's failure to implement some of its obligations as a member of the World Trade Organization (WTO). "From the United States' perspective, free trade and open market access only works if both of our economies operate under the same rules and a good faith commitment to the spirit of all agreements and obligations."

There is also a rising concern about the pace of reform in China, he said. "An open trading system assumes that enterprises in one country will compete on equal terms with enterprises in another. ...

"When an economy like China's continues to, in part, support state-owned enterprises that continue to be funded by state-owned banks, regardless of their performance, the companies simply do not face the competitive pressures that enterprises in a market economy face," Evans said. "And therein lies the potential for problems in our trading relationship."

Protecting intellectual property rights (IPR) is another area where more progress is urgently needed, Evans said. "We know that China's government understands the importance of IPR protections. We should be open and honest about the fact that there is still a flood of counterfeit and pirated products being produced and consumed in China. These actions are inconsistent not only with China's international obligations, but with its goal of economic reforms and long-term economic growth."

Evans also observed that China's "present system of indentured capital, in which the savings of Chinese workers are appropriated by state banks and transferred through non-performing loans to unprofitable state-owned enterprises, is unsustainable."

Fully half of the portfolios currently held by China's banks are non-performing loans, he observed, adding that "these loans are, effectively, a form of government subsidy."

"These lending practices by China's state-run banks are fueling rapid growth," he acknowledged. "But to the extent that loans with no chance of repayment are going into the ledger, they are also building the Chinese economy on an unsound foundation. This is not a problem you can grow your way out of."

Evans said the U.S.-China trading relationship plays a vital role in the global economy today and the United States and China have a responsibility to make that relationship work.

"China's success," he said, "offers hope for people in developing economies around the world: by moving toward a market-based economy, a country can create the conditions to successfully lift hundreds of millions of people up from poverty."

The model China represents is critically important, he said, to China's future and to the three billion people in the world who live on less than two dollars a day.

"There is too much poverty and not enough hope," he said. "Expanding prosperity to the half of humanity that struggles under the burden of poverty is perhaps the great test for our generation."

Following is the text of Evans' remarks, as prepared for delivery:

(begin text)

Remarks By
U.S. Secretary of Commerce Donald L. Evans

Jiaotong University
Xian, China

October 26, 2003

Thank you for that kind introduction, President Zheng. Let me begin by congratulating all of you on China's recent voyage to space. China's launch of the Shenzhou V this month was a tremendous achievement. Only three countries have mastered the technological sophistication necessary to send a human being beyond the reach of gravity and back to earth safely. You can all take great pride in that historic accomplishment.

For China which invented rocketry to send a man into space marks a bold beginning to a new century - a century that has already welcomed China's integration into the global economy as a member of the World Trade Organization and will see Beijing host the world during the Olympics in 2008. The new century has also seen China play a larger role on the world stage.

We appreciate China's help in forming a common front against terrorism, and we value our partnership with China in working toward a nuclear-free Korean peninsula.

All of this represents the culmination of China's steady emergence from the years of the Cultural Revolution to reclaim its place in Asia and the world. The economic reforms launched by Deng Xiaopeng unleashed the energy and creativity of the Chinese people. Those reforms laid the foundation for China's current place in this world economy and on the world stage.

I appreciate the opportunity to visit Xian because it was from here, at an earlier stage in China's long history, the Qin Dynasty's reforms set the stage for the emergence of modern China. They unified China's boundaries. They also established a standard currency and common system of weights and measures. The Qin Dynasty also ensured the adoption of Mandarin as China's common language.

The Qin Dynasty reforms established the basic elements not just for a nation, but for the emergence of market transactions and the nation's economic growth. In a similar way, the reforms of the past two decades have proved instrumental in China's renaissance in the 21st century.

This university's strong programs in science, technology, and business education will be a critical element in China's advancing economic development. An openness to new ideas and the transparent and thoughtful critique of the rules governing the economy and business are the hallmarks of both a great university and a confident nation.

Whenever I speak to business school students in the United States about their role in building our nation's future, I remind them that there is an important moral element in their studies and their careers.

The world of business is a virtuous calling. By focusing your careers on business, finance and the study of economics, you will help expand prosperity and opportunity for yourself and many others. These disciplines and the occupations they support will improve China and our global economy.

There is also a moral element to free trade unfettered by government intervention in the market. In broad terms, experience teaches us that expanded trade and free and open markets form the most effective tools to raise living standards and create more jobs in both developed and developing countries.

I am convinced that each of you can contribute to the tremendous progress in China by building a free, competitive economy and expanding opportunity for future generations. You are, in fact, all investors and shareholders in your nation's future, and you are responsible for it.

I am certain that you will be good stewards of China's future. That is why I want to speak with you directly and frankly about the vital role that the U.S.-China trading relationship plays in the global economy today and the responsibility that the United States and China share in making that relationship work.

China's amazing progress in the decades since it began opening its economy is a powerful example that displays the benefits of pursuing trade liberalization and moving toward market principles.

China's success offers hope for people in developing economies around the world: by moving toward a market-based economy, a country can create the conditions to successfully lift hundreds of millions of people up from poverty. This is exactly what China has done, and it represents a monumental achievement.

The model China represents is critically important not just to your future and to your nation's future, but to the three billion people in this world who live on less than two dollars a day. There is too much poverty and not enough hope. Expanding prosperity to the half of humanity that struggles under the burden of poverty is perhaps the great test for our generation.

I know President Bush well. He has an intense personal commitment to leave this world a more peaceful and prosperous place than he found it. Both President Bush and I believe that all of us have a responsibility to work toward that goal. And both President Bush and I hope and believe your generation will steer China along the path of reform and openness toward a brighter and more prosperous future.

I've traveled around the world as Secretary of Commerce. One of the most striking things I've found has been the common elements in the dreams we share. We all want the same things. We want a roof over our heads. We want food for our families. We want our children to grow up in safety and security. And we want a strong education for our children so that their futures are filled with opportunity and the best chance for success. We want a job. And we want the chance to live in a world of peace and tolerance.

It is your responsibility to fulfill that dream in China and thereby help us fulfill that dream around the world. We must unite the world around this common purpose.

Now let me explain how your future and the responsibility you shoulder relates to the U.S.-China economic relationship.

Today, China and the United States account for most of the world economic growth. China with a $1.2 trillion economy is currently growing at an 8 percent rate. The United States with an $11 trillion economy is growing at 3-to-4 percent. Through trade, our growth helps foster growth in our own countries and elsewhere around the world. China's growth is driving economic growth throughout Asia, just as America's growth is driving growth in both China and the rest of the world.

What is the source of that growth? Why have U.S. economic growth and productivity gains outpaced Japan and Germany for over a decade? And why has China grown faster than the world economy over that same time? The answer is the broader freedom that our economies have given to young men and women like you to pursue their dreams as far as their energy and initiative can take them.

Having said that, let me say honestly that the march toward a free market economy in China is incomplete. Despite the enormous progress of the past 20 years -- during your lifetime -- there is still a long march ahead. And there is much at stake in ensuring that the pace of economic reform accelerates, both for China and our trading relationship.

For instance, in July of this year, China moved past Mexico to become our second largest source of imports. Since 2001, China has also been the fastest-growing export market for the United States. Yet that may be in jeopardy if the pace of reform slows or if there is backsliding. There is already rising concern in the United States with two aspects of our trade, and accelerating reform is the answer to both.

First, there is a rising concern over the failure to implement some of China's obligations under the WTO. From the United States' perspective, free trade and open market access only works if both of our economies operate under the same rules and a good faith commitment to the spirit of all agreements and obligations.

From China's perspective, fully implementing the WTO rules is important for another reason as well. President Jiang Zemin and Premier Zhu Rongji were right in seeing membership in the WTO as an instrument of reform. But that tool only works if China follows through and actually implements its WTO obligations.

Second, there is a rising concern about the pace of reform in China. An open trading system assumes that enterprises in one country will compete on equal terms with enterprises in another. As students of business and economics, you understand that companies in a market economy like the United States face the continuing pressure to earn a profit by virtue of the demands of the capital markets.

When an economy like China's continues to, in part, support state-owned enterprises that continue to be funded by state-owned banks, regardless of their performance, the companies simply do not face the competitive pressures that enterprises in a market economy face. And therein lies the potential for problems in our trading relationship.

Earlier this year the U.S. Department of Commerce held a series of roundtable discussions with U.S. manufacturers. They raised questions about China's WTO commitments. We heard numerous complaints about areas such as transparency, trading rights, distribution services, agriculture, financial services and standards.

Protecting intellectual property rights is another area where more progress is urgently needed. We know that China's government understands the importance of IPR protections. We should be open and honest about the fact that there is still a flood of counterfeit and pirated products being produced and consumed in China. These actions are inconsistent not only with China's international obligations, but with its goal of economic reforms and long-term economic growth.

As future entrepreneurs, each of you deserves to have your products and ideas protected from theft. Effective protection requires criminal penalties for intellectual property theft and fines large enough to be a deterrent rather than a business expense. These are the reforms to continue to move this emerging economy to one of long-term economic growth.

Markets work best when they are free from government intervention. The Bush administration welcomes globalization. We are committed to open markets, free trade, and fair competition. We are pleased by President Hu's positive and cooperative attitude on the need to accelerate progress toward a more fully, market-based economic system during the meeting with President Bush at the APEC Summit.

Make no mistake, your future as business men and women is directly linked to your government's economic reforms, particularly with respect to financial markets. The Chinese people and China's long-term stability would be best served by allowing market forces to influence investment decisions.

The present system of indentured capital, in which the savings of Chinese workers are appropriated by state banks and transferred through non-performing loans to unprofitable state-owned enterprises, is unsustainable. These loans are, effectively, a form of government subsidy. Under such a system, the hopes, the savings, and the future prosperity of the Chinese people are effectively mortgaged to fund a bubble of excess capacity. Their capital is being misallocated against their best interests.

According to some estimates, fully half of the portfolios currently held by China's banks are non-performing loans. Official estimates put the figure at 30 percent. Either way, the Chinese government must do more to strengthen the integrity of China's economy. Ignoring badly needed reforms would be counter-productive to the type of structural reforms necessary for creating the conditions for long-term economic growth.

These lending practices by China's state-run banks are fueling rapid growth. But to the extent that loans with no chance of repayment are going into the ledger, they are also building the Chinese economy on an unsound foundation. This is not a problem you can grow your way out of.

The United States is committed to working toward a free-trading global environment in which major economies are free of tariffs and trade barriers. President Bush is committed to achieving a level global playing field. We are working to tear trade barriers down-not raise new obstructions.

Several years ago, a free-trading majority in the U.S. Congress emerged to produce two historic achievements: First, the Congress empowered President Bush with trade promotion authority-the ability to negotiate binding agreements with our trading partners that would not be subject to deal-breaking modifications by the legislature. Second, the free-trade majority also granted Permanent Normal Trading Relations status to China. That event was a positive step for China. It was the right policy for the United States. And it was good for the global economy.

Unfortunately, the widespread perception within the United States of unfair trading practices -- tolerated or condoned by the Chinese government -- is undermining support for free trade.

The United States is a democracy. Over the past several months, we have seen proposals that would repeal China's Normal Trading Relations status and impose a 27 percent tariff on Chinese exports. Let me state clearly that the Bush Administration opposes this. However, these proposals reveal the serious trouble spots in our trading relationship. They underscore the need for China to accelerate its movement to a truly transparent market-based economy.

Russian President Putin was right when he observed that accelerating global economic growth demands that we avoid the brakes of protectionism. This is what he said: "As we see it, protectionism, whatever the guise, provokes a predictable chain reaction and limits competition. It has an especially pernicious effect on developing and transition-economy countries."

We completely agree with President Putin's assessment of protectionism's destructive consequences.

We understand that China seeks to offer leadership in the global economy. We recognize that a stable, growing Chinese economy is a key pillar of the international economic system. America and the world have a strong interest in seeing China succeed.

The advantages from trade arise when countries open their economies. But when one economy is organized under principles that are inconsistent with that free-market model, it can cause a great deal of friction and injury within the trading relationship.

This is the central problem beneath the tension over U.S.-China trade. Many of the main drivers in China's economy still remain in state hands. Progress needs to be achieved more quickly than the current pace of transition. Problems need to be addressed, and there must be a high degree of accountability for results.

We ask China's leaders to move aggressively. And I ask you as the future leaders of China's economy to help support your government's moves towards reforms and greater openness.

Last month, China's Foreign Minister made an excellent point about the nature of the U.S.-China relationship. So, I'll close with his words: "There is still a long way to go before lasting peace and common development of all human societies can be achieved. But the task is closely related to China-U.S. cooperation. A stable and steadily growing relationship between us has never been more important."

Thank you all and good luck in your careers.

(end text)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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