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37–551 PDF 2007

U.S. INTERESTS IN THE REFORM OF

CHINA’S FINANCIAL SERVICES SECTOR

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 6, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–35

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

June 6, 2007 ...................................................................................................... 1

Appendix: 

June 6, 2007 ...................................................................................................... 45

WITNESSES 

WEDNESDAY, JUNE 6, 2007

Aldonas, Grant D., William M. Scholl Chair in International Business, Center 

for Strategic and International Studies ............................................................. 13

Decker, Michael, Senior Managing Director, Research and Public Policy, The 

Securities Industry and Financial Markets Association ................................... 9

Evans, Hon. Donald L., Chief Executive Officer, The Financial Services 

Forum .................................................................................................................... 5

Prasad, Eswar S., Tolani Senior Professor of Trade Policy at Cornell University, and former head of the IMF’s China Division ........................................... 11

Sorensen, Norman R., President, Principal International, Inc. ........................... 7

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 46

Brown-Waite, Hon. Ginny ................................................................................ 49

Aldonas, Grant D. ............................................................................................. 50

Decker, Michael ................................................................................................ 64

Evans, Hon. Donald L. ..................................................................................... 83

Prasad, Eswar S. .............................................................................................. 103

Sorensen, Norman R. ....................................................................................... 110

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Statement of Paul Schott Stevens, President and CEO, Investment Company 

Institute ................................................................................................................ 120

Pearce, Hon. Stevan: 

Questions submitted to Hon. Donald L. Evans, Norman R. Sorensen, 

Michael Decker, Eswar S. Prasad, and Grant D. Aldonas ........................ 123

Responses from Hon. Donald L. Evans (Other witnesses did not respond) . 126

(1)

U.S. INTERESTS IN THE REFORM OF 

CHINA’S FINANCIAL SERVICES SECTOR 

Wednesday, June 6, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Waters, Velazquez, Watt, Moore 

of Kansas, Clay, McCarthy, Scott, Green, Cleaver, Sires, Ellison, 

Klein, Wilson, Donnelly; Bachus, Baker, Pryce, Castle, Gillmor, 

Manzullo, Capito, Garrett, Neugebauer, Davis of Kentucky, and 

Roskam. 

The CHAIRMAN. The hearing will come to order. This hearing of 

the Committee on Financial Services is called pursuant to our jurisdiction over trade and financial services, and we deal with the 

very important subject of the ability of the American financial services industry to do business in China. I, along with many others, 

have talked about the unhappiness among a lot of Americans at 

what seems to them to be an uneven deal that they are getting, 

in which there is a great deal of growth and they do not participate 

and then there is also this concern that many have in America 

about an increasing problem in the trade balance perception that 

the world’s rules are not as fair as they should be. Now, I am 

aware of the fact that in the world in general nothing is ever fair 

in the eyes of many people. 

We have a very interesting physical phenomenon that I have 

noted in my years on this committee: namely, we have within the 

country, but also internationally, in the economic field something 

that you would have thought defied logic and maybe gravity and 

that is a constantly declining playing field. People often talk about 

how the playing field is not level, and in all the years in which I 

have heard people talk about an unlevel playing field, I have never 

heard anyone who was at the top. It is a playing field which always 

slants against individuals. 

So apparently it is, as I said, just as we have an economic constantly downward sloping curves in some functions, we have a constantly downward sloping playing field. But just because people 

often unfairly invoke something doesn’t mean they are always 

wrong. And it does seem to me that the playing field between the 

United States and China in terms of openness of each one’s economy to the other is, in fact, unlevel. 

2

The Chinese currently benefit enormously from the openness of 

the American economy and from the prosperity of Americans. It is 

not entirely one-sided—obviously Americans get some benefit from 

this as well—but the American economy, it seems to me, is far 

more open to those areas of Chinese economic activity where they 

have the advantage than the reverse. And that in areas where 

Americans have an expertise and an ability to compete that exceeds that of the Chinese, they have been much less willing to 

allow that to operate than they are to take advantage of it when 

it goes the other way. 

A one-sided invocation of the principal of openness and of free 

trade is not only in my judgment flawed intellectually but it is 

deeply flawed politically. The Chinese should understand that until 

and unless they do a better job of practicing in China what they 

preach within the United States, namely, openness in terms of your 

economy even when another economy might outperform you, they 

will continue to run into resistance. 

I have joined with some others on the Ways and Means Committee and the Energy and Commerce Committee in our concern 

about China currency. I know we will hear today assertions that 

these things are linked, that part of the problem that the Chinese 

talk about when they say they cannot fully allow economic activity 

by our financial sector is in part a self-inflicted wound because of 

the manipulation of their currency. But there will be the concerns 

about the currency, and there will be other concerns. There are, of 

course, geopolitical concerns that are not directly relevant here. 

But the Chinese should understand that until there is more 

openness to American financial services activity, until there is a serious effort in China to protect intellectual property—not the jurisdiction of this committee but relevant—the notion that a society as 

controlled as China where you can in fact regulate the number of 

children and censor the Internet—which we were told was supposed to be uncensorable—but you cannot stop people from massively pirating other people’s intellectual property, does not sense. 

And we are told, ‘‘Well, do not be protectionist and do not be restrictionist,’’ and those are legitimate debates to have elsewhere. 

Today, we are arguing, I believe, to the Chinese that if they wish 

to maintain the kind of political support they will need in America 

for them to be able to continue to enjoy the advantages of the 

American economy, there is going to have to be a great deal more 

reciprocity than there has been to date. 

I will now recognize the gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. I thank the chairman. And by way of explanation, 

Mr. Bachus is on his way to the hearing this morning. I am advised 

that for reasons beyond his control, he was unfortunately detained, 

but he will participate and will arrive soon. 

In his absence, I merely wish to observe that this is not a simplistic policy matter which can be readily resolved by simple actions of the Congress with a single bill being adopted, at least I 

hope that is not the remedy that is ultimately suggested. China 

abandoned its decade-long policy of pegging the yuan to the dollar 

in July of 2005. 

Since that period of time, I am advised that the actual increase 

has been limited to about 8 percent against the dollar. Principally, 

3

because the dollar is weakened, the trade weighted exchange 

weight really has not budged significantly. In real trade-weighted 

terms, it is about 10 percent cheaper today than at the dollar’s 

peak valuation in 2002. 

This should be noted in the context of this conversation about 

what appears to be a government-driven market advantage to U.S. 

interests. I am the first to acknowledge that China’s trade surplus 

with America increased $233 billion just last year. This is by no 

means insignificant, accounting for almost 30 percent of our total 

deficit. The total current account surplus reached an estimated 

$250 billion or 9 percent of GDP. We are still in the first 4 months 

of 2007, the current year, the trade surplus jumped by 88 percent 

compared with the same period in 2006. 

However, not all economists are of the same mindset as to how 

we should address or respond to these factual observations. There 

are some who feel that it is inappropriate to be arguing from a U.S. 

perspective for a great appreciation in Chinese currency. It is even 

difficult to establish and agree on what the correct value might actually be. I only bring these points up at the outset to establish 

that we should be intellectually cautious as we move forward in 

this matter and understand all the moving parts. 

This is a country of a billion people with enormous assets, which 

is awakening to the principles of a free-market system, and once 

fully acclimated to U.S. principles of competitiveness, I suspect 

they will be more than competent in competing in the international 

marketplace. One does not have to go back far to recognize you 

picked up an item, a pair of glasses, and somewhere on it was 

stamped, ‘‘Made in Japan,’’ or ‘‘Made in Indonesia,’’ or ‘‘Made in 

Korea,’’ or ‘‘Made in Taiwan.’’ Now, they are all basically the suppliers to China, who is becoming the aggregating manufacturer. If 

they were to somehow mysteriously disappear, does anyone think 

those prior labels would not resurface in the American economy? So 

let us understand before we act. It may be a big challenge, but I 

think we owe it to ourselves. I yield back. 

The CHAIRMAN. Now, we have been joined by the ranking member, and I recognize him for 5 minutes. 

Mr. BACHUS. Mr. Chairman, I apologize to the committee for 

being late. I was greeted this morning by a police officer at the 

door telling me that there was a suspected pipe bomb in front of 

my residence between 3rd and 4th on Maryland so I did just now 

get a police escort over here. That was nice. They blew it up and 

it was harmless. I did not get close enough to it. I am going to submit my statement for the record, I do not want to delay the hearing 

any more. 

And we have a very prestigious group of witnesses. We are all—

our focus I think, many Americans, we are focused on China and 

trade by China, and we all have a bit of mixed emotions. We are 

happy that they are successful and that they are a capitalist system, or not capitalist system, it is actually I am not sure what it 

is, but transition from communism to a more open market has really brought a lot of prosperity to China. It has brought a lot of benefits to America. With those benefits are some negative consequences. I have great faith in Treasury Secretary Paulson and 

his negotiations, but anyone who has been to China—I have been 

4

to China five times—knows that the Chinese have a different perspective than we do. We tend to think of tomorrow or next week; 

they tend to think of 3 years from now or 10 years from now or 

20 years from now. 

So, even though we agree that we are going to do something, our 

timelines are quite different. I do believe it is essential that we 

maintain good relations with China. It is good for Americans, and 

it is good for the Chinese. And I sincerely believe the Chinese feel 

the same way. We are two countries that are very dependent on 

each other, and I think going forward the one thing my opening 

statement talks about is we made a financial—we had a similar situation with Japan, where we had a large trade deficit, and one 

thing we were able to offer them was financial services; it is an 

area in which we excel. 

We made a financial services agreement with Japan, which has 

been very beneficial to both countries, and I have advocated for the 

last 2 years that the United States and China sign a financial services agreement similar to what we did with Japan. It would really 

help China address a lot of its demographic and economic problems. It would be very beneficial for the Chinese citizens. It would 

be of great benefit to them, and it would also help us address our 

trade deficit. 

But with that, I will yield back and I look forward to hearing 

from the witnesses. 

The CHAIRMAN. Before recognizing the gentleman from New Jersey, I ask unanimous consent to insert into the record at this point 

a statement from Mr. Paul Stevens, president and CEO of the Investment Company Institute. If there is no objection, that will be 

made a part of the record. 

The gentleman from New Jersey, Mr. Garrett, is recognized for 

2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, and thank you everyone for your testimony today on China and the financial services 

sector. 

I would just like to briefly comment for a moment about the 

other side of the Taiwan Straits, that is Taiwan and how it fares 

regarding issues that we will discuss here today. To begin with, let 

me applaud the democratic Taiwan’s accomplishments and willingness to improve access to the U.S. financial markets, banking, and 

insurance industries. But, in contrast, I think it is important for 

us here today to highlight the necessity and feasibility for China 

to reform its financial services and access to international financial 

service providers. 

We often applaud Taiwan’s efforts in having transformed itself 

into a democracy, and we urge China to emulate Taiwan politically, 

but I equally and strongly believe that Taiwan can serve as a successful economic model for China as well. According to a report 

done by Nicholas Lardy and Daniel Rosen of the Institute for International Economics, ‘‘Taiwan has reformed its financial sector significantly in recent years, in some respects, more quickly than required as documented in the 2003 National Trade Estimate Report 

from the USTR.’’ 

One of the U.S. insurance representatives even pointed out that 

Taiwan not only accepted the model schedule for insurance put 

5

forth by the United States for WTO accession, but also was the 

first to embrace extended commitments under the schedule, including regulatory procedures for approval as well. I have co-sponsored 

a resolution that calls for a U.S.-Taiwan free trade agreement and 

through such an agreement, I believe that we can further harmonize the trade policies of these countries that would benefit both 

the United States and businesses in Asia. So I would just be curious from the panel here when you give your testimony and the 

questions later on your thoughts on this comparison and when we 

discuss these issues today and to hear from you whether you think 

that China can learn or look to the economic model and the actions 

that Taiwan has taken in the past. 

And with that, I yield back. 

The CHAIRMAN. If there are no further statements, we will proceed to the witnesses, and I appreciate this very knowledgeable 

panel being available. We are going to begin with Don Evans, the 

former Secretary of Commerce. He was, I am told, the 34th Secretary of Commerce, and he has now come before us as the chief 

executive officer of the Financial Services Forum. We have worked 

on a number of issues. I will report to him now, since I like to give 

good news, that the conversations we have had with our colleagues 

in the Senate lead me to think that we are going to have a CFIUS 

bill on the President’s desk before we break for the 4th of July, and 

I think that is an accomplishment, a bipartisan one on behalf of 

this committee and a bicameral one that we will all be looking forward to. And that is just one of a number of issues on which we 

have worked with Mr. Evans. So, please, Mr. Secretary, you are 

recognized for 5 minutes. All of your statements will be put into 

the record. 

Mr. Secretary? 

STATEMENT OF THE HONORABLE DONALD L. EVANS, CHIEF 

EXECUTIVE OFFICER, THE FINANCIAL SERVICES FORUM 

Mr. EVANS. Mr. Chairman, thank you for your leadership on 

CFIUS very much. It is bipartisan and bicameral but terrific leadership. Thank you for that. 

The CHAIRMAN. I got a grievance from the appropriate union 

about the gentleman from Missouri working on a classification. 

Mr. EVANS. I do not know, but I am surely not going to sit in 

the chair of Congressman Boren, I can tell you that. 

Chairman Frank, Ranking Member Bachus, and other distinguished members, I am delighted to be here. Thank you for the opportunity to participate in this important hearing and for your public service. 

I will focus my brief opening comments on how increased market 

access for U.S. financial services firms in China’s capital markets 

will benefit America and American workers. A more efficient financial sector in China is a prerequisite to successfully addressing 

issues that have complicated the U.S./China economic relationship, 

chief among them, further currency reform and the trade imbalance. 

Regarding the currency, most China observers agree that an immediate shift to a fully market determined one is very difficult 

given that Chinese banks, securities firms, and other businesses 

6

lack the expertise to develop and trade financial instruments used 

to hedge the risks associated with greater currency volatility. Chinese authorities are also concerned that a rapid appreciation in the 

yuan would disrupt the current pace of economic growth and job 

creation, which could impact the U.S. and global economies as well. 

A more open and modern financial sector is the answer to both 

concerns. Sophisticated derivative products and hedging techniques 

provided by foreign financial services firms would enable China to 

deal with greater currency volatility and more sophisticated capital 

markets would enhance the ability of the Chinese economy to 

weather economic shocks. For these reasons, China should pursue 

more rapid appreciation of the yuan by opening its financial sector 

to greater foreign participation. 

Turning to the trade deficit, helping China move toward a more 

services-based, consumer-driven economy, a major economic goal of 

China’s leadership, will help to integrate more than $1 billion Chinese consumers into the global economy, creating vast new markets 

for American products and services. This is the most powerful remedy to the U.S./China trade imbalance. This will not happen overnight, but the long-term benefits for U.S. businesses and workers 

are astounding. 

Chinese households save as much as half of their income as compared to single digit savings in the United States and Europe. The 

pronounced propensity to save is related to the declining role of the 

State and the fact that most Chinese depend on private savings for 

health care, retirement, and education of their children, and the 

economic consequences of accidents or unforeseen events. Access to 

financial products and services that we take for granted: personal 

loans; credit cards; mortgages; 401(k)’s; pensions; and insurance 

products will reduce the need for precautionary savings and facilitate consumption. As China’s consumers, a fifth of the world’s population, participate in the global marketplace, new markets will 

open for American products and services. 

Mr. Chairman, the fastest way for China to develop the modern 

financial system it needs to achieve more sustainable economic 

growth allow for a more flexible currency and increased consumer 

consumption is to import it by opening its financial sector to greater participation by foreign financial services firms. If you care 

about the currency issue, or if you care about the trade deficit, you 

care about expanded access for financial services in China. By providing the financial products and services that China’s citizens and 

businesses need to save, invest, insure against risks, and consume 

at higher levels, foreign financial institutions, including the United 

States providers, would help China develop an economy that is less 

dependent on exports, more consumption driven, and, therefore expanding markets for American products and services, and a powerful engine for creating good 21st century jobs for American workers. 

Thank you very much for the opportunity to appear at this hearing, Mr. Chairman. 

[The prepared statement of Mr. Evans can be found on page 83 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Evans, and I appreciate your encountering the difficulty. I am told we have the glitch cleared up 

7

now so we will go to our next witness, and here we are, sorry, Mr. 

Norman Sorensen, who is the president of Principal International, 

Incorporated. 

Mr. Sorensen, please go ahead. 

STATEMENT OF NORMAN R. SORENSEN, PRESIDENT, 

PRINCIPAL INTERNATIONAL, INC. 

Mr. SORENSEN. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee for the opportunity to testify today. I am Norman Sorensen, president of Principal International, Inc., which is a subsidiary of Principal Financial Group 

based in Des Moines, Iowa. I testify before you in my current role 

as chairman of the International Committee of ACLI, the American 

Council of Life Insurers, and in my capacity as the president of 

Principal International. 

ACLI is a unified voice for the United States life insurance, reinsurance, and pension retirement security industry—373 member 

companies are present in every major global market including 

China. Principal Financial Group is the Nation’s 401(k) leader and 

provider of retirement benefits and assists asset management in 

the United States and abroad. We are in 11 countries, including 

China, where we have one of the most successful and well-recognized asset management companies, the China Construction Bank, 

a Principal asset management company. 

With the recently concluded second session of the U.S./China 

Strategic Economic Dialogue, the SED, I am here to underscore the 

importance to our industry of continued engagement with China on 

economic and broader financial services issues and to seek your 

continued support as we address the remaining challenges. In our 

industry, China pledged in the SED II, just concluded: One, to complete the review of branch to subsidiary license conversion applications by August and to institute a policy of completing all future 

license applications within 60 days; two, to have by the time of the 

third session, which is December in Beijing, a streamlined licensing 

regime for financial services firms seeking to provide enterprise annuity services in place; and, three, to expand the qualified domestic 

institutional investor and qualified foreign institutional investor 

programs broadly. 

We view these commitments as meaningful, important, and part 

of a longer term process which our industry and the Administration 

has been working vigorously to advance and which Congress has 

been supporting all along. 

The SED provides us an opportunity to heighten the level of 

focus and attention in two critical areas: One, the need for China 

to redouble efforts to comply with its WTO commitments on insurance, re-insurance, and pension products; and, two, the need for 

China to hasten financial reform, supported by greater liberalization of financial services markets, including removing equity limits 

on foreign financial services firms and establishing a one-stop shop 

which can approve licenses for providing enterprise pension annuities, which is a new Chinese program. 

China is the world’s 11th largest insurance market by total premium volume, the 8th by life insurance, with almost $70 billion in 

total premiums in 2006, including $50 billion in life insurance, 

8

nearly a threefold increase since 2001. Foreign insurance companies, ACLI members and U.S. companies among them, have a 4 

percent share of that market with roughly $3.5 billion in annual 

premiums. That is growing at about 40 percent per annum. 

Although ranked in the top 10 globally, China’s life insurance 

market is underpenetrated, with only 40 percent of households 

having life insurance. As Mr. Evans had indicated before, the financial services area at the consumer level is still in the early 

stages of development. The Chinese spend only about $35 per 

annum on insurance, far below developed markets. As China’s middle class grows, especially in the lower and middle class, it will 

rank among the world’s largest middle class and largest life insurance markets by 2020. The demographics already indicate that. 

To address the pension gap, which is very important, Chinese 

regulators started in the spring of 2005 to establish an enterprise 

annuity pension system similar to our 401(k)—they basically copied 

our plans. Conservatively, our estimates indicate that within 10 

years, the assets under management for this program should be 

close to $100 billion. Within 25 years, they should reach $1 trillion. 

While a number of foreign firms have been licensed to provide 

trustee management and services for pension assets, no American 

firm has yet been licensed to underwrite pension products directly. 

We remain committed to ongoing engagement and dialogue with 

our Chinese counterparts and have confidence in the process started by the SED, as well as other ongoing bilateral discussions, such 

as the JCCT and multi-lateral discussions in Geneva under the 

WTO. We welcome all efforts to help the industry address and resolve longstanding issues of concern, including approval concurrent 

as opposed to consecutive branching for insurance companies, for 

example, and recognition of global experience and assets for insurers seeking asset management licenses in China, all of which were 

discussed most recently during the SED. In particular, I am interested in approval of pension licenses under the new Enterprise Annuity Pension System, which is going to be huge in China. 

Principal Financial Group and ACLI welcome the creation of the 

Enterprise Annuity System, and China’s decision in the SED to 

streamline the application process for financial institutions. This 

afternoon I will be meeting with Ambassador Holmer and Secretary Paulson’s staff to continue the process of detailing what 

these commitments actually mean and pushing forward to produce 

solid results before the SED Session III in December in Beijing. 

Clarifying the regulatory framework to authorize single provider 

plans under a single license is extremely important, both to the 

principal and to the ACLI members. 

Finally, progress in these areas has the potential to greatly increase American participation in China’s efforts to improve its social safety net, as Mr. Evans indicated earlier, and grow its financial service industry assets. Given our experience in this area, 

management of most of those assets should come to American companies. We believe that working constructively to resolve the issues 

noted above and taking additional bold steps, such as removing equity caps and significantly expanding foreign participation in China’s Enterprise Annuity System, would represent a fortuitous win/

9

win for the United States and China, one which we should all work 

to expand. 

Thank you very much. 

[The prepared statement of Mr. Sorensen can be found on page 

110 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Sorensen. Next, we are going to 

hear from Michael Decker, who is the senior managing director of 

the Securities Industry and Financial Markets Association, an organization which frequently gives the committee the benefit of its 

advice and counsel and it is an organization that we very much 

enjoy working with. 

Mr. Decker? 

STATEMENT OF MICHAEL DECKER, SENIOR MANAGING DIRECTOR, RESEARCH AND PUBLIC POLICY, THE SECURITIES 

INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

Mr. DECKER. Good morning, Chairman Frank, and thank you for 

the opportunity to be here. We appreciate your support and that 

of your colleagues in expanding trade and financial services. One 

of the most important things China can do to ensure long-term economic stability and growth is to build their financial markets. The 

Chinese recognize this and in many ways they are working hard 

to build efficient and robust markets that will serve the needs of 

investors and companies who need capital. One of the best ways to 

build their markets is to open participation and financial services 

to companies from outside China, including the United States. In 

the area of securities, China has made some progress in removing 

barriers against non-Chinese securities firms but there is a long 

way to go to make the China securities markets truly open. 

Attracting non-Chinese companies to the Chinese markets would 

bring many benefits to both China and to firms from the United 

States and elsewhere who want to participate in China’s growth. 

For China, opening their markets would bring capital, expertise, 

innovation, experience, and efficiency. For securities firms in the 

United States and elsewhere, better access to the Chinese markets 

would bring the opportunity to help build the financial system from 

its very early stages and would represent an unprecedented commercial opportunity with major implications for the competitiveness and growth of this vital sector. 

Despite these promises, China has been reluctant to take several 

key steps to reap the benefits of a more open market. Working directly and through the Treasury Department, we at SIFMA have 

urged China to make several key policy changes to make the Chinese markets more accessible for non-Chinese securities firms. 

These include lifting the effective moratorium on the approval of 

new joint ventures between Chinese and non-Chinese securities 

firms. China announced at the recent SED meeting that they will 

lift the moratorium later this year but they did not specify precisely when. 

Permitting foreign securities firms to own 100 percent of their 

local operations in China and to organize themselves in whatever 

corporate form is best. Currently non-Chinese securities firms can 

only participate in the local market through minority positions and 

10

joint ventures with Chinese companies or by acquiring stakes in 

local firms. 

Expanding the types of securities activities that foreign firms can 

engage in. Currently, joint ventures involving foreign securities 

firms can underwrite and trade certain securities but are prohibited from trading in the large and liquid A shares market. China 

announced recently that they will expand the permitted activities 

for foreign securities firms, including in brokerage, proprietary, 

trading, and fund management. We welcome this development but, 

again, China has said only that they will announce such an expansion prior to the SED III planned for this December. 

Expanding the qualified foreign institutional investors program. 

The QFII program permits certain foreign institutional investors to 

invest in the A shares market and was a major step forward in 

opening the Chinese markets. But China can go even further by 

lifting certain restrictions on QFII’s that limit the programs 

attractiveness. During the just completed SED meeting, China 

agreed to raise the QFII limit from $10 billion to $30 billion. 

And finalizing the implementation of the Qualified Domestic Institutional Investor Program. The QDII Program permits Chinese 

banks to pool funds from local investors to invest outside China. In 

addition, we have urged China to amend its process of developing 

and implementing domestic market regulations to be more transparent and fair. We have also recommended changes to China’s interim derivatives rules, which have prevented securities firms from 

creating and distributing derivative products. 

Finally, SIFMA is actively engaged with China on helping to 

build the capital markets infrastructure there. For example, last 

year, our affiliate, the Asia Securities Industry and Financial Markets Association based in Hong Kong, entered into a partnership 

with China Bond, the clearing and settlement facility in China, to 

improve China’s trade processing system. We have also been communicating with China’s securities regulator on crafting a regulatory plan for the local corporate bond market, and we have been 

conducting training sessions for Chinese regulators and others on 

the re-purchase agreement market. We believe these initiatives go 

hand-in-hand with opening access to the Chinese markets. After 

all, the more robust and efficient the Chinese capital markets, the 

more opportunity there will be for both Chinese and non-Chinese 

firms to compete. 

The Treasury Department has been very responsive to the interest of U.S. firms in opening access to the Chinese financial services 

industry. We thank Treasury for its efforts in engaging China on 

these important issues. We are hopeful that a continued dialogue 

among U.S. and Chinese governments and Chinese and foreign financial services firms will result in continued progress on opening 

the Chinese markets to all who wish to compete there. 

Thank you again, Chairman Frank, for inviting us to participate 

in this important hearing, and I look forward to the committee’s 

questions. 

[The prepared statement of Mr. Decker can be found on page 64 

of the appendix.] 

11

The CHAIRMAN. Thank you. Next we have Dr. Eswar Prasad. He 

is the senior professor of trade policy at Cornell University, and he 

was formerly the head of the IMF’s China Division. Thank you. 

Dr. Prasad, please proceed. 

STATEMENT OF ESWAR S. PRASAD, TOLANI SENIOR PROFESSOR OF TRADE POLICY AT CORNELL UNIVERSITY, AND 

FORMER HEAD OF THE IMF’S CHINA DIVISION 

Mr. PRASAD. Thank you, Mr. Chairman. The process of broader 

financial liberalization in China is important to the United States 

for two reasons. One is that it has implications for China’s balanced economic development, which is clearly of interest to the 

United States for a variety of reasons, and the second is that the 

pace and manner in which this financial liberalization is conducted 

will obviously have important repercussions on the bilateral economic relationship between China and the United States. 

So let’s start by thinking about what the financial system in 

China looks like. In China, essentially the state-owned banking 

system remains dominant at this stage. Deposits in the banking 

system in fact amount to almost double GDP. And despite all that 

you have heard about the stock market in recent months, the stock 

market capitalization in total is only about 60 percent of GDP. The 

corporate bond market remains very small, and many of the other 

segments of the financial markets remain very small, so the banks 

are really the key game in town. 

Now, the Chinese have essentially taken the approach of trying 

to reform the state-owned banking system and there are a couple 

of important issues here. One is that traditionally the state banks 

had a process of directed lending, which essentially meant that a 

lot of money was funneled to state enterprises, which are financially unviable, and the legacy of those non-performing loans is now 

coming home to roost. 

Capital controls have played a very important role in protecting 

the domestic banking system from external competition by restricting the entry of foreign banks until recently and by making it harder to take capital out of the country, and both of these dimensions 

are important. This lack of competition for the banking system has 

limited financial innovations and kept the risks of the financial 

system heavily concentrated among banks. 

In recent years, the government has moved aggressively to rid 

the legacy problems of the banking system, and if you think about 

the magnitude of problems that the Chinese authorities are facing, 

they are really quite staggering. Non-performing loans in the banking system a few years ago were estimated to be about 50 percent 

of GDP. State-owned shares—shares in state-owned companies—

were largely non-traded, which meant that even though you had a 

functioning stock market, the capitalizations that you saw in the 

stock market were not really valid representations of the value of 

those companies. So that again was a transition problem that the 

government is dealing with. 

The implication of all this is that banking sector weaknesses 

have contributed to the very unbalanced pattern of economic development in recent years, which means that investment has been the 

primary driver of growth, accounting in fact for almost 40 percent 

12

of GDP and more than half of GDP growth in recent years. The investment boom has raised fears of a resurgence in non-performing 

loans if the economy were to slow down and there are also risks 

of asset-priced bubbles and a future deflation in the economy. 

So the problems are really staggering and the Chinese recognize 

that foreign participation in the financial system is essential or at 

least a very important catalyst in terms of moving forward and yet 

they have not moved forward in terms of what seems to be in their 

own interest. 

And there are three possible reasons for this: One, the concern 

about the preparedness of local financial firms to deal with foreign 

competition; two, whether they have their own regulatory and administrative capacities to deal with the increasing sophistication of 

financial instruments; and three, cross-border penetration of domestic financial firms which will be exacerbated at one level if foreign financial firms enter. They are also a little concerned that lifting the restrictions in cross-border capital flows, which they believe 

will inevitably happen with the larger foreign presence in the domestic financial markets, could cause them to lose control of their 

capital in-flows and out-flows, and given the managed exchange 

rate system that they are trying to sustain, could cause problems. 

And in each of these I think there is a very clear agenda through 

which the United States could contribute to this process. One is to 

emphasize that in terms of domestic financial market development, 

the entry of foreign firms may in fact have a very beneficial effect 

in terms of efficiency, in terms of improving the quality of financial 

instruments and corporate governance that domestic firms can put 

forward, and basically by bringing in expertise that would push forward financial reforms. 

In terms of administrative and regulatory capacities, again, I feel 

that the United States has a very real opportunity to be able to cooperate with the Chinese and to take care of their concerns on that 

front in order that they would feel more comfortable about opening 

up to foreign financial firms. Finally, I think there has to be a recognition that openness to capital in-flows, and equally to out-flows, 

plays a very important role in terms of domestic financial market 

development. 

And here again the Chinese are open in a philosophical sense, 

but I think guiding them through the expertise that the United 

States has to offer is going to be very important. And, arguably, I 

think in terms of this bilateral economic dialogue, tools such as the 

Strategic Economic Dialogue do have a very important role to play 

in terms of creating channels through which this expertise can be 

pushed forward and also in terms of indicating to the Chinese how 

importantly linked the variety of reforms are, the financial market 

reforms, the exchange rate flexibility, which the United States has 

been pushing for, and a much broader set of comprehensive reforms, which I think are going to be important for the United 

States and for China in terms of a balanced economic relationship. 

Thank you. 

[The prepared statement of Mr. Prasad can be found on page 103 

of the appendix.] 

The CHAIRMAN. Thank you very much. Now, we will hear from 

Grant D. Aldonas, the holder of the William A. Scholl Chair in 

13

International Business at the Center for Strategic and International Studies. 

Mr. Aldonas? 

STATEMENT OF GRANT D. ALDONAS, WILLIAM M. SCHOLL 

CHAIR IN INTERNATIONAL BUSINESS, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

Mr. ALDONAS. Thank you, Mr. Chairman, and I want to thank 

the committee for holding this hearing. I happen to think that this 

is the key issue in our bilateral relationship with China. The points 

that I want to highlight complement what the other members of 

the panel have said. The first thing is the tremendous stake that 

we have in the outcome of the reform process in China, not only 

because of the market access it would provide American firms, but 

reform of the capital markets in China are absolutely critical to 

eliminating the underlying distortions in the Chinese economy that 

become trade problems and generate the pressure for protection 

and isolating the United States economy, a policy that would hurt 

both us and China as a part of the process. So we have a tremendous stake in the outcome in terms of what it drives in the way 

of change on the ground in China. 

The second thing is that broader economic policy goals in China, 

the choices they are making, are what is going to drive reform. I 

do not have any expectation that the WTO is going to deliver anything in terms of new market commitments in short order given 

that the Doha Round talks are stalled. And the final point I want 

to emphasize as I go through my remarks is that the time is ripe 

for reform. If you look at the economic situation worldwide today, 

and the economic situation in China, there will be no more benign 

and no better economic environment for China to undertake the 

fundamental reforms that they need to undertake in their own interest than it is now. 

With that, let me just turn to our stake in the process. First, obviously, we have a tremendous commercial stake, as you have 

heard from the other witnesses in terms of the export of financial 

services. We are tremendously competitive in that arena and it is 

something that our firms still remain hobbled despite the WTO 

commitments of China in terms of their market access into the Chinese market. 

But the second factor I think is actually more important, the 

stake we have in the outcome is ending a series of lax credit practices that have driven additions to capacity in the Chinese market 

that when the economic activity turns down in China, they spill 

over in international markets, they are imported to the United 

States, and we face dislocation as a result of those lax lending 

practices. Disciplines inside the Chinese capital markets would do 

a lot to eliminate the distortions that metastasize into trade problems and that you all see as trade friction from your constituents. 

We have a stake in the success of the reforms also because China 

now represents one of the main engines in the international economy, any sharp reversal in China’s fortunes would have negative 

consequences for the world, for China, and for the United States. 

We are tightly interwoven now with the Chinese economy in ways 

that I think are fundamental. That means we need to take great 

14

care but it is also why we should be driving the process of capital 

markets reform in China. 

Despite its impressive record of growth, China has very serious 

economic vulnerabilities. They have a two-speed economy with a 

growing disparity between high economic growth along the coast 

and those portions of the economy that are deeply integrated in 

world markets, slow growth in China’s interior provinces where 

most of China’s population still lives, a heavily distorted mix of economic activity that really results from the lax credit practices that 

I mentioned, the lack of discipline in China’s financial markets and 

undue reliance on export demand is the main driver of economic 

growth rather than a more balanced approach that relies on domestic demand and that of course has generated a significant backlash 

from China’s trading partners. 

And I have to say it is not just a phenomenon in the United 

States. It is interesting that India now surpasses the United States 

as the largest filer of anti-dumping actions. The target of all those 

anti-dumping actions are China. This is not just a phenomena 

where you are seeing a protectionist drift in the United States as 

a result of China’s export-driven growth; you are seeing that worldwide at this point. 

The last thing is that there is a tremendous demographic challenge China is facing as a result of the one child policy. It is growing old before it grows rich. That means that there is an awful lot 

that they need out of the private sector to create a social safety net 

that does not currently exist. That creates phenomenal opportunities for U.S. firms if the Chinese policymakers are wise enough to 

let the American firms in to help grapple with those problems. 

The last thing is the tremendous economic adjustment that my 

colleague alluded to that has to go on in the Chinese economy if 

you are trying to draw 700 million more people out of poverty and 

into productive employment somewhere in the Chinese economy. 

Well, given the stake that we have in the outcome of the reform 

process, it is entirely reasonable to ask where are we in the reform 

process. And at this juncture, I have to say that China did undertake significant liberalizations in its WTO commitments and has 

lived up to those commitments. They exceed commitments that any 

other developing country has made. Now, on the other hand, if in 

fact the goal of China’s accession process was to encourage a more 

efficient allocation of capital and resources throughout the Chinese 

economy, in this instance the WTO commitments fell far short of 

that goal. There are simply too many restrictions on market access 

for U.S. companies to have the profound and powerful impact they 

could for all the reasons I stated earlier. 

Well, at that point, I want to turn just to where we are in terms 

of the world economy. We are seeing the strongest growth that we 

have seen in 3 decades. We have growth at about 5 percent. China’s growth is likely to exceed double digits for more than a decade 

now. It will do so again this year. It has savings that are at least 

half of its current GDP. It has an enormous foreign exchange surplus. When you add all that together, in China’s context and in the 

world’s context, there will never be a better moment actually to undertake the reforms. 

15

The savings, the foreign exchange surplus all serve as a buffer 

against the risks that they will face when they undertake these reforms but there is simply no better time. The pressures inside the 

Chinese economy are such that things will only get worse on each 

of the challenges that I mentioned over time. If they want to solve 

this problem, the easiest way to do it frankly is to import a financial services market from the United States. 

Thank you very much. 

[The prepared statement of Mr. Aldonas can be found on page 50 

of the appendix.] 

The CHAIRMAN. Thank you. Let me begin, and I understand this 

is a matter of some delicacy, particularly for those who represent 

institutions, companies that might want to be doing business, but 

I would like to ask all the panelists, assuming that it is a desirable 

goal for the restrictions that China imposes to be relaxed, are there 

things the U.S. Government should be doing that it is not now 

doing or that it is not now doing with sufficient vigor to advance 

that? What should our posture be in our negotiations and are there 

things we could do more than we are now doing? Let me start with 

Dr. Prasad and Mr. Aldonas, who have less at stake in terms of 

any pending applications, but the others can think about how to 

soft-peddle whatever they want to say while they are talking. So 

we will start with either one of you. 

Mr. PRASAD. Well, I am leaving for China tomorrow morning so 

I guess I should be a little careful what I say. 

[Laughter] 

Mr. PRASAD. I think one very important thing the United States 

has to do is to put issues such as exchange rate flexibility in a 

broader context. Now in a sense, discussions of financial services 

liberalization and exchange rate flexibility have almost been moving on parallel tracks, and I think the authorities’ desire to move 

forward in financial sector reform, which has been alluded to, they 

really care about it, should be turned around to advantage in some 

sense because ultimately these things are linked in the following 

way. 

You cannot really move forward financial sector reform, especially banking reform, unless you have independent monetary policy and can guide credit through the interest rate, and you cannot 

guide credit through the interest rate unless you have an independent monetary policy, which you cannot do if you do not have 

a flexible exchange rate. So I think actually making these connections and showing how capital account liberalization and exchange 

rate flexibility are important for domestic financial reform and how 

these have to move in tandem is very important. 

The CHAIRMAN. That is very important. I notice you make this 

point on page six, and Mr. Morris on my staff underlined it for me. 

We have had people say, ‘‘Well, the Chinese cannot do anything 

about their currency and about really freeing the currency from the 

constraints until they have reformed their financial system.’’ And, 

as I understand what you are saying, it is almost the other way 

around, that in fact as long as they are artificially depressing their 

currency, the banking system will to some extent have to be a servant of that policy and will be accommodating that policy rather 

16

than being able to serve a more independent function. Is that an 

accurate— 

Mr. PRASAD. That is exactly right. There is some misconception 

that exchange rate flexibility necessarily implies the full opening of 

the capital account to both in-flows and out-flows and that is not 

the case. They have a relatively restricted capital account now, 

which they are opening— 

The CHAIRMAN. In fact, what you are saying is that as long as 

you have this very manipulated currency, that is an obstacle to the 

financial openness because you have an added goal for the financial 

system, which is to meet the needs of this currency depression. 

Mr. PRASAD. Manipulated currency is not quite the term I would 

use but it is true that they need a more flexible currency. But the 

focus really is not so much on the level of the currency, which is 

where the debate in the United States tends to focus on, but about 

allowing the currency to move up or down, and it could very well 

move down, if they did allow the capital account to be open and if 

they allowed some of the domestic savings to go out of the economy. 

The CHAIRMAN. Well in fairness, I think, to those of us in America who have been arguing that, I do not know who said that they 

should arbitrarily be raising the level. The argument has been to 

let it float freely and there is a sense that it would go up. But I 

agree nobody is insisting that they artificially peg it high. 

Mr. ALDONAS. Mr. Chairman? 

The CHAIRMAN. Yes, Mr. Aldonas? 

Mr. ALDONAS. I have to say that I am agnostic about a lot of the 

debate about the currency peg, I really— 

The CHAIRMAN. I am glad to meet a member of the Bush Administration who acknowledges being agnostic in any respect. I appreciate that. 

[Laughter] 

Mr. ALDONAS. The distortions in the Chinese economy are such, 

and the conditions under which people talk about revaluation are 

such, that I do not think we can honestly say what the value of 

the reminbi would be. Having said that, the Chinese have the argument precisely wrong: maintaining the peg does not help them with 

the reform process or address the economic challenge that they 

have. In fact, reforming the currency is an absolutely essential step 

to encouraging the reforms, to driving change inside their own 

economy. 

The old line is that, ‘‘The dentist who pulls your tooth slowly 

does not do you any favors,’’ and in this instance, by maintaining 

the peg, in effect what they are doing is pulling the tooth slowly 

on the reforms that have to happen in the Chinese economy. So 

when they say that we are worried about our economic 

vulnerabilities, my own reaction is your economic vulnerabilities 

are going to grow unless you resolve the peg. But that is, again, 

without regard to the arguments that are made about whether it 

is fair or unfair. 

The CHAIRMAN. Well, again, there are people here who are assuming it would go up, but I do not know of anybody who has said, 

‘‘Raise the level of your currency.’’ The argument is to let it float, 

assuming that is where it will go. 

Mr. Sorensen, you had something? 

17

Mr. SORENSEN. Mr. Chairman, you asked a very specific question, which is what can the U.S. Government— 

The CHAIRMAN. I know, general questions make me nuts. 

Mr. SORENSEN. What can the U.S. Government do that it is not 

doing today? I would suggest that Congress and your committee, 

Mr. Chairman, can play a tremendously powerful role in supporting the SED dialogue, not only in supporting it but insisting 

that the deliverables that the Chinese are beginning to commit to 

are in fact delivered. If you add your weight to the process, the 

SED and Secretary Paulson and the Administration— 

The CHAIRMAN. ‘‘SED’’ stands for what, now? 

Mr. SORENSEN. The Strategic Economic Dialogue— 

The CHAIRMAN. Thank you. 

Mr. SORENSEN.—that Secretary Paulson has been undertaking 

with Madam Wu Yi. Times are changing very fast in China. I am 

there every 2 months. I am going there again next month. And I 

can see the positive winds, as Mr. Aldonas is saying, of change. But 

if Congress can support the SED and insist on the deliverables 

very, very actively and very insistently, I think the Chinese will get 

the sense that we are a united front, and it is not just the Administration that is pushing these reforms. 

The CHAIRMAN. Thank you. Mr. Bachus? 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Aldonas, you said 

that China will grow—their economy will grow by 10 or 12 percent 

for the next 10 years, that is the assumption that is pretty much 

universal but is that in fact true? They are a first-class manufacturer but their financial markets, their ability to invest capital efficiently and effectively is not first-class or even second-class, it is 

very third-rate. And I say that—I think they realize they have a 

long way to go. And you talked about the demographic challenges 

and that they have to reform their financial markets and their financial services if the middle class, if the 700, I think billion, Chinese participate with the other 300 or 400 billion. But if they do 

not do that, are all these assumptions people are making, they cannot keep growing at 10 percent if they do not do exactly what we 

are saying they need to do, can they? 

Mr. ALDONAS. Thank you, Congressman. I should clarify, what I 

said was they have been growing for a decade at double digits. I 

do not actually expect that on the trajectory they are on, with the 

relative capital inefficiency that is built into the Chinese system, 

that they can maintain that level of growth. And even the growth 

that exists is so weighted towards certain activities, like construction and a variety of other things, it is not actually providing a lot 

of value to the average Chinese citizen. 

The best measure of that is that a McKinsey study showed that 

in the 1990’s, as there were great productivity gains that cost about 

$3.30 of investment to produce a one dollar of GDP growth. Since 

2001, that number has become $4.90 for every dollar of GDP 

growth. What that means is at a time when you would expect most 

economies are becoming relatively more capital-efficient, they have 

become less capital-efficient. And that is not the trajectory you 

want to be on if in fact you are moving toward a society where you 

are going to have fewer workers, many more retirees, and many 

more social problems to deal with. 

18

Mr. BACHUS. Anybody else? Secretary Evans? 

Mr. EVANS. Yes, I would just—when I first went to China back 

in 2001, there was a lot of concern among economists as to whether 

or not we were going to see a hard landing or a soft landing in 

China because of the dramatic growth that people had seen the 

previous 10 years or so. Here we are some 6 or 7 years later and 

we are continuing to see this double-digit kind of growth. I think 

more and more economists are starting to get comfortable that 

China is doing a relatively effective job of managing the ongoing 

growth and structuring itself for long-term economic growth. 

But what they do need to do is they do need to turn it into a 

consumption-based economy. Right now, it is an industrial-driven, 

export-based economy, and they know that to really continue this 

kind of pace of 10 percent growth, they have to become more like 

America where two-thirds of the GDP is driven by consumption, 

and you cannot get there when 1 million Chinese own credit cards 

and 500 million of them own cell phones. You have to have the financial tools in place for the citizens of the country to begin to become consumers. And we have articulated some of that already, but 

I think that just really puts a hard focus on what they need to do, 

and I think they know they need to do it. 

And I am going to follow-up on what the chairman asked a little 

bit earlier too. What else can we do? I really think, in my experience dealing with the Chinese, they are really starting to understand the important role that Congress plays in the process. I do 

not think they understood that 5 or 6 years ago. I think within the 

last year or so they are starting to get the picture and starting to 

get the message. What I would say is if this committee could go, 

or members could go, and I am sure, as you said, you have already 

been over there 5 times, if I go over there and look them in the 

eye and tell them, ‘‘This is what we expect,’’ and they are very 

open, they are receptive. I am over there once a year at least, talking to all the regulators. But for them to hear from you in their 

country, I think, is a powerful statement. They are starting to understand the important role that this body will play in the ongoing 

economic relationship between our two countries. 

Mr. BACHUS. Yes, Mr. Sorensen? 

Mr. SORENSEN. Congressman, one of the things that has been 

mentioned here is a social safety net. We are in the pension business, Principal Financial Group, that is what we do, we are in 

China with that objective. China just established basically the first 

ever social safety net. It is the enterprise annuity system, which is 

like our 401(k). We should be thankful that they copied our system 

and did not emulate the European systems, which, as you know, 

are upside down and almost insolvent. 

As they establish this social safety net by allowing Chinese 

households to save for retirement, the Chinese capital markets will 

grow like ours did in the United States. The potential for U.S. companies to participate in that market is immense. It can grow very, 

very quickly and it will. So I think that Congress and your committee should, in my opinion, consider supporting that process 

very, very strongly because over the past 40 years since the 401(k) 

was created, 25 or 30 years ago, the capital markets have benefitted enormously from that. As people understand that they do 

19

have their retirement nest egg relatively growing and secured, they 

consume more freely and they are less precautionary, putting less 

money under the mattress, so to speak. 

Mr. BACHUS. Most Americans do not realize that they save a lot 

of money, well, there is no social security, there is no pension, 

there is no Medicaid, there is Medicare, there is no social net. Now, 

one thing they need to do, and if they do it they are even going 

to be more efficient, is to not model themselves after some of the 

things that we have done. Our social security system is not the 

most efficient in the world. 

But they basically can put it in the bank and draw 2 percent interest or they can put in the stock market and they do not know 

what they are investing in and it is going to turn out very badly 

for them in many cases. They are going to lose a lot of money. And 

it is going to be a real political problem for the country. If their 

leaders do not allow their people to efficiently and effectively invest 

their money, I think you are going to see 300 or 400 million Chinese—I think I said billion before and I should have said million, 

but you are going to see—I think you are going to see the Chinese 

people demand that their government allow them to— 

Mr. SORENSEN. Precisely, Congressman, we know the exact number. There are 165 million Chinese over the age of 65. We do this 

every year. By 2020, which is very, very close by, the population 

is aging so quickly, they will have 320 million Chinese over the age 

of 65 and most of those people will not have retirement funds to 

retire on. This is why the government has established this enterprise annuity system and other systems, which need to be established in that area. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. The gentlewoman from California? 

Ms. WATERS. Thank you very much, Mr. Chairman. I appreciate 

this hearing. We need to do more hearings and have more discussions about China because China is emerging as not only a very, 

very powerful country but there are many concerns that are circulating and being discussed about China. It is very hard for me to 

even talk about what is happening in the financial services community when in fact we have so many other issues with China. 

First of all, we have never resolved our concerns about human 

rights issues. The Congressional Black Caucus is leading a fight 

about their relationship with Darfur and trying to encourage them 

to use their power in the U.N. to help us end genocide there, which 

they do not appear to be willing to do. I cannot even begin to talk 

about intellectual property concerns that we all must have about 

them. They produce more fake and phony goods than I guess any 

other country on earth. 

We have to be concerned about the bilateral trade surplus, the 

currency manipulation, where do we begin? There are those, and 

I suppose in an article that was just given to me from the Economist about China-bashing, those of us who have some of the concerns I have alluded to just do not understand that we should not 

be concerned about the currency manipulation and other kinds of 

actions. I guess they think it will all work itself out. But all I can 

say is that my hat is off to Secretary Paulson for meeting and having the dialogue, and I suppose that will continue. But they make 

20

his job very hard because of all of these other issues to which I 

have alluded. 

I guess my only question to the panel is, are they aware that we 

do not like our pets killed by contaminated pet food? Are they 

aware that there are real concerns about their continued support 

of the government in Sudan, the killing of so many people? Are 

they aware of all these other issues that we have? Anybody can answer that. 

Mr. DECKER. I cannot speak to all the important issues that you 

have raised, Congresswoman, but I can tell you with regard to financial services there are many influential people in China that 

recognize the weaknesses in their own financial system and recognize that a corporate lending system that is based too heavily on 

bank lending and inefficient allocation of credit is a two-legged or 

one-legged stool that is just waiting to topple. And there are a 

number of influential people in China who are internally pushing 

reforms and trying to build alternatives to the existing capital system to better be able to serve both investors and users of capital. 

They are worried, I think in part, with regard to opening their 

markets to foreign firms. They are worried in part that U.S. and 

European and Japanese firms will come in and dominate the local 

market and crowd out the local firms with expertise and capital 

and other benefits that they bring to the market. 

Ms. WATERS. I suppose I should ask you, should we continue to 

have a policy that will allow China to buy up as many firms and 

whatever they want to buy in the United States, and invest as 

much money as they want to, while we still have limits imposed 

by them on our ability to be involved in their financial services sectors? As I look at what has just been given to me, those limits include a 49 percent ownership cap on fund management joint ventures, a 20 percent ownership cap on single investors in the banking sector, and perhaps most crucially, a 33 percent cap on ownership of securities joint ventures. Thus, should we continue to be as 

liberal as we are, given all of those restraints? 

Mr. DECKER. Yes, they are worried about big foreign firms coming in and dominating, but when you look at some other emerging 

market countries, like India, Brazil, Russia, Mexico, Korea, and 

Taiwan, they all allow 100 percent ownership of financial services 

firms and there is still plenty of room for local firms to be able to 

compete. If you look at the U.S. market, there are over 5,000 registered broker-dealers in the United States; they are not all Goldman Sachs. 

Ms. WATERS. So what do we have to do to convince them? 

Mr. DECKER. I think we are confident that the SED process is 

going to result in meaningful change. We have seen some incremental benefits from that process already. And I agree with what 

Mr. Sorensen said a few minutes ago, that ensuring the message 

to the Chinese that the entire U.S. Government, both sides of the 

aisle and both branches, are fully behind the points the Treasury 

has been making, I think, will go far. 

Ms. WATERS. Thank you very much. 

The CHAIRMAN. If the gentlewoman would yield me just 30 seconds because I was negligent and should have said what she said. 

And you are right, we should let the Chinese know what we think 

21

and we are for economic encouragement but the Darfur issue is one 

of the most deeply felt in America. If the Chinese continue to be 

an obstacle to an international effort to relieve the people of Darfur 

from this genocide, they will pay a significant price in America. 

And all of the rational calculations about economic self-interest 

could come crashing down if we were go to the U.N., if there were 

to be a Chinese veto of a resolution, so the Chinese, if you want 

them to understand what Congress thinks, to understand that Congress is reflecting the views of the American people who care very 

deeply about this Darfur situation, and they put a great deal at 

risk if they continue to be an obstacle to a resolution. I thank the 

gentlewoman for reminding us of this issue. 

The gentleman from Louisiana? 

Mr. BAKER. I thank the chairman. I wish to return to the initial 

economic focus that is a cause for concern. Not in this body at 

least, but on the Senate side in prior sessions, there have been suggestions as a result of the view that there is under-valuation of the 

yuan, that certain economic congressionally-driven sanctions, a 20 

percent tariff for example, should be imposed in order to re-balance 

the international equities. I find that to be somewhat short-sighted 

in the consequences of that in a global economic view. 

Mr. Secretary, I want to just make a few observations, some of 

which are based on the article that was previously mentioned in 

The Economist and some of which is U.S. Treasury and Federal Reserve data and get your learned opinion about whether these are 

consistent with your overall view of our China imbalance. It is 

pointed out in that article that since 2004, almost the entirety of 

the trade surplus occurred in heavy industrials and equipment. 

In the build-up internally in China, in an enormous explosion of 

economic activity, there were internal assets built up until 2004 

when the Chinese government began to tighten policy a bit while 

continued investment continued in metals equipment, creating substantial excess capacity, much of which found its way to the United 

States, so that much of the imbalance can be attributed to that specific economic abnormality in the Chinese market. 

Secondly, that excluding food, their internal inflation rate has 

been less than 1 percent and that has been brought on by extraordinary excess liquidity. Others have referenced the personal savings rate, which is abnormally high within China, that surplus of 

funds has driven abnormally low interest rates, which is now causing households not to invest in bank product but to speculate in the 

markets, which only further fuels the potential for an economic 

overheating. 

The conclusion of those observations is to get China back on a 

solid monetary platform, letting its currency rise is really—value to 

the dollar—is really to its own economic best interest going forward. But any action that is viewed, excluding the human rights 

issues previously mentioned, any economic adverse action by this 

Congress comes at our own significant peril. I go to now the Treasury data as of May 7th and in looking at debt held, U.S. Treasuries 

by Mainland China, they are second only to Japan, and making the 

top 20 list now for the first time is the City of Hong Kong, which 

held only $11 billion a year ago, and is at $110 billion now, as of 

this report, demonstrating a $100 billion growth just in Hong Kong 

22

and a similar $100 billion growth in Mainland China, now exceeding over $800 billion. 

Then when you look at the portfolio that is constructed by this $800 billion investment, it is principally a long-term debt, which 

goes directly to the stability of our interest rates and our housing 

markets. So if we were to see as a result of congressional actions 

precipitous increases or tariffs or actions resulting in a currency readjustment, it could have consequential and significant adverse impact on one of the big concerns of many on this committee, the 

dream of homeownership, and having our own rates precipitously 

climb as our ability to market our securities in international markets becomes impaired. 

In other words, sure, we need to get these folks to open their 

doors and let smart people in and help them build their pension 

plans, their governmental services, move to consumer-oriented 

commerce, but all the while we need to make sure we are viewed 

as being helpful partners in this process because they are enormously invested in our economic stability at this time. 

Mr. EVANS. Well, Congressman, I think you have hit on a very 

important point. First, let me say who I am one that is on the side 

of they need to move at a quicker pace toward a market exchange 

for their currency. They need to pick up the pace. They are not getting there quickly enough, and they need to do it in their own selfinterest. They need to get their system structured in a way to 

where they can use monetary policy tools in an effective way, 

which they are really not able to do now because they have to 

worry about administratively controlling their currency. 

So I am one who falls on the side of, let’s pick up the pace of 

moving toward a free market exchange of their currency. But when 

we start moving down the path, and moving toward protectionist 

kinds of policies or isolationist kinds of policies or trying to push 

it too quickly, you are exactly right, we might find in our economy—we can say right now, guess what, this economy in America 

is strong. It is very strong, we have a 4.5 percent unemployment 

rate, it is showing great strength, the global economy is strong, the 

China economy is stable and growing. 

So when you start moving things around too quickly, then does 

it create some instability in the system in their own economy that 

winds up kind of spilling over into our economy, as you suggest. If 

all of a sudden the currency goes up too quickly, well, guess what, 

they do not need to buy as many dollars and so guess what, our 

interest rates go up. And guess what, maybe it also means inflation 

starts to creep up in this country. 

And my experience in Commerce was that all the times we tried 

to use some of our tools, which I support, but would tell you that 

when we put anti-dumping kind of tariffs in countries here and 

there on their products, their product would come from someplace 

else. And so the idea that if we try and shut off China, well it is 

going to come from Thailand or Malaysia or Vietnam or somewhere 

else. 

And so I think we have to be very careful in how we deal with 

the issue. And I would go back to I think the most important issue 

to focus on for them is open up your financial services industry. All 

of us—to me, sometimes we put the yuan out there as a kind of 

23

quick fix, silver bullet, solve all the problems, we are losing jobs 

here and there, that will stop that, I do not think so. And I really 

think the focus really needs to be laser-focused on open up your financial services industry. Thank you. 

Mr. ALDONAS. Congressman? 

The CHAIRMAN. I am afraid the time has expired for the gentleman, I am sorry. The gentlewoman from New York? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Aldonas, in your 

written testimony, you discuss some of the risks inherent to China’s liberalization of its financial markets. Could you please comment on how these risks could affect U.S. firms? 

Mr. ALDONAS. What you worry most about is that there is something catastrophic that comes about in China’s capital markets. 

You are seeing an asset bubble. Alan Greenspan has referred to 

that—some discontinuity on the financial side that drives Chinese 

growth down and American companies with it. It is what I was referring to earlier, Congresswoman. I was saying that we have a 

very large stake in China’s success. It is one of the main engines 

of growth in the world economy from which we benefit and we participate in. 

And China’s absence from that would have negative effects on 

the U.S. economy as well as U.S. firms, both those invested in 

China and those invested in the United States. So what you worry 

about is that discontinuity. But the tonic, and the reason why the 

hearing is so important, the tonic is capital market reform. 

The more that you see the liberalization of China’s capital markets, the more that you see U.S. firms with the discipline of their 

credit practices operating in a Chinese market, the less risk there 

is of that catastrophic sort of boiling down of the Chinese economy. 

And so one of the great reasons to try and ensure that our firms 

are on the ground doing what they do best is to make sure that 

it is a buffer against that sort of problem. 

Ms. VELAZQUEZ. Thank you. Mr. Aldonas, many have expressed 

concerns that enactment of reforms that strengthen the review 

process for the Committee on Foreign Investment in the United 

States could result in similar changes in other countries that will 

have the effect of deterring the ability of U.S. firms to enter overseas markets. Do you believe that CFIUS reform could indirectly 

impact the ability of U.S. financial services firms to enter foreign 

markets in China? 

Mr. ALDONAS. I cannot say that specifically but certainly the 

issue of Dubai ports, the issue of China National Overseas Oil, an 

offshore oil company investing—trying to invest in the United 

States, have generated—and the response in Congress and the Administration, have created a backlash against U.S. investment in 

the form of similar sorts of procedures that have been introduced 

abroad. China is certainly looking at it. Russia has already introduced one. 

You see this mirror-image legislation going on. The problem is 

that the process in these other countries is nowhere near as transparent as what would go on in the United States, the opportunities 

to state your case in front of the Treasury Department, to get a 

reasoned judgment does not always exist. And so that is a much 

24

greater barrier than the CFIUS review process that you are grappling with here in the Congress but that is the risk. 

Ms. VELAZQUEZ. Thank you. Mr. Evans, in 2004, during a Senate 

Finance Committee hearing, then-U.S. Trade Representative Robert Zolak stated that he did not support pursuing a World Trade 

Organization dispute settlement case against China over concerns 

of currency manipulation in part because it could be difficult to 

prove that China is in violation of WTO laws. In your opinion, 

would this argument change if reforms were instituted that increased the ability of U.S. financial firms to participate in the Chinese financial system? 

Mr. EVANS. Ask the question again, Congresswoman, I am sorry, 

the very last part? 

Ms. VELAZQUEZ. Can a case for currency manipulation be made 

without the reforms to the financial systems that have been discussed today? 

Mr. EVANS. I am not that familiar with the facts of it. I would 

say this though, you raise a very important point about China 

being a member of the WTO and it is very important to use that 

and all the tools available to us through that rule-based system to 

do exactly what the chairman pointed to earlier and that is a level 

playing field. So I am not the expert on whether or not we would 

have what the position should be with respect to taking that case 

to WTO, but I would tell you we ought to use the WTO every time 

we can if we think it helps level the playing field with our economy 

and the China economy. 

Ms. VELAZQUEZ. Mr. Aldonas? 

Mr. ALDONAS. Just by way of background, I spent most of my life 

working in the international trade arena and teaching WTO law at 

Georgetown University and at least on the basis of the petition the 

United States faced, I would say that, no, that was not a case you 

could make under WTO law. It remains to be seen whether you 

could craft a case that you could actually pursue under Section 301. 

But the important thing is what would that lead to? It would 

lead to the potential for retaliation in the form of tariff sanctions 

or withdrawal of other trade benefits. The important thing to focus 

on is what needs to change that has a negative impact on our economy, and those are the distortions in the Chinese economy, not the 

currency peg. 

There is nothing about changing the currency peg or necessarily 

about slapping a 27 percent tariff on Chinese goods that will do 

anything to end the practice of non-performing loans that are in 

fact at zero cost of capital, that favor capital-intensive investment, 

that lead to this burst in manufacturing that Congressman Baker 

referred to and that metastasize into trade problems when those 

imports come to our shores. The answer to that is financial market 

reform. 

Ms. VELAZQUEZ. Yes, thank you very much. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. ROSKAM. Thank you, Mr. Chairman. As I have been listening 

to the testimony, one of the things that occurs to me is the different foundations upon which these two economies that we are 

talking about are actually premised. Our economy and our economic growth and success is based on the premise that the indiVerDate 0ct 09 2002 17:45 Sep 11, 2007 Jkt 037551 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\37551.TXT HFIN PsN: TERRIE
25

vidual matters and that freedom is a glorious thing and private 

property rights are to be upheld, free markets and free people and 

you know the sound bite but it actually works. 

We are trying to translate that or we are casting that, sort of 

with hopeful eyes, upon a system that really does not share that 

premise. And so the question is now, as we are having this discussion about the financial marketplace and the maturity of it, as you 

look forward 10 or 20 years, what is it that animates your hope 

that the Chinese will see this in a self-interested point of view and 

how do we shake off the things that they have done in the past 

that do not give us that hope? 

And here is what I mean by that, let’s take the conversation that 

we have had as a country over the past several years about the 

manufacturing sector. We have talked a lot about it. I represent a 

district that I have characterized before, the west and northwest 

suburbs of Chicago, that feels really conflicted in some ways about 

China, in some ways, great opportunities, in some ways, a lot of 

pain. 

But if you look at what the Chinese have done in the past, they 

have manipulated currency; I think there is a consensus there. 

They, as Ms. Waters mentioned earlier, abused intellectual property rights and so forth. So what is it that animates the hope that 

they are going to do the right thing as it relates to the financial 

marketplace and that we will not be having this same conversation 

in 6 or 7 years about the financial markets being abused by the 

Chinese the way that we have been having that conversation about 

our manufacturing folks feeling abused. Do you have some insight 

on that? 

And also maybe just commenting on the premise that the Chinese—I think it was an earlier witness, but basically laying out the 

notion that the Chinese Government is very patient, very controloriented, casting a long view and do they get eclipsed at the end 

of the day, do the Chinese officials get eclipsed and does freedom 

come raining down in China because of the economic growth and 

they have to translate that into political freedom? I would just be 

interested in your observations on that. 

Mr. PRASAD. How the politics will play off is very difficult to predict, Congressman, but I think a case can be made that in terms 

of pure economic self-interest, the Chinese are very concerned 

about what is happening with the financial sector because, as Mr. 

Aldonas said, there is a two-speed economy in China right now and 

there are implications of that for social stability. 

In addition, if China continues to grow at 10 to 12 percent as it 

has been for the last 2 years, but does it in this very inefficient 

way, in a manner that the benefits do not reach down to the households, then again I think social stability becomes a very important 

issue. So I think in terms of the narrow question about whether financial services that are formed, and liberalization more broadly, 

is something that the Chinese care deeply about. They care about 

it deeply. 

Now, why they care about it, whether it is for the perpetuation 

of the existing political system or to lead to something bigger or different is a little hard to tell. But I think on the narrow question, 

especially as it affects the interest of the United States, is whether 

26

in terms of the economic dimension, China is doing the right thing. 

And I think we can guide them towards doing the right thing, 

which will be ultimately in the best interest of the United States 

as well. 

Mr. ALDONAS. If I could, Congressman, they are communists and 

they want to stay in power, and it has dawned on them that the 

only way they can stay in power is by meeting the rising expectations of the people. They understand that further liberalization is 

essential to meet those rising expectations, but they have no experience with how far and how deep that freedom has to run to actually meet those expectations. And so they hedge in terms of their 

liberalizations, thinking that maybe one part more will make a difference. They just do not realize you really need to blow the whole 

thing open. It goes to your point about operating off of very different premises. 

The interesting thing looked at is China’s trade policy is not that 

different than during the Imperial Age, they granted a silk concession to Marco Polo in Shanghai, what does that sound like to the 

financial services firms? You get the life insurance thing in Qiang 

Jo but nowhere else, right? It is not that different. They really lack 

the experience with the ultimate freedom it would require, but that 

is one of the reasons why I think we have to articulate why this 

works in their interest. 

And then if I could, I have a little story I have to tell about traveling in China where we were very close to the Straits of Taiwan. 

We were in a cab in one of those causeways that go out on the 

street, and I am with a friend of mine who speaks Chinese. And 

we go by a sign on the Chinese side that says, ‘‘One Party, Two 

Systems,’’ right, and it is so large you can see it in Taiwan. And 

I noticed there is a sign on the closest Taiwanese island so I asked 

my friend to ask the cab driver what that says, and in much more 

colorful language, what the cab driver said was the sign in Taiwan 

says, ‘‘Get Bent.’’ 

Well, that is a story about the cab driver’s freedom, not the story 

about Taiwan, right. There are these indicia that what we are seeing evolving in China is a very different society and it is one that 

frankly the folks in Beijing do not control, and I think it scares 

them to death. But they need to understand that the only way they 

are going to achieve their ultimate goal, even under the best of circumstances, is to blow that freedom through their system. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. We were trying to figure 

out what ‘‘get bent’’ meant, but I think we figured it out. 

The CHAIRMAN. You could check with the Vice President. 

Mr. WATT. Say it again? 

The CHAIRMAN. Check with Vice President Cheney. 

Mr. WATT. Oh, okay. All right. 

Well, that’s the third interpretation of it, but anyway. As Members of Congress, it seems to me that we approach this on two different levels. And there’s going to be a question at the end of this, 

so you can be assured of that. 

One is the micro level that we experience in our own congressional districts. At that level, obviously being from North Carolina 

I’ve seen my textiles decimated, my furniture in the process of 

27

being decimated. In exchange for that decimation, I’ve seen people 

argue when I walk into Wal-Mart and Target, lower prices for my 

consumers. 

I’ve seen my constituent corporation, Bank of America, become a 

small part owner of a bank in China. For the life of me I can’t figure out why anybody would want to own a bank if you have 50 percent nonperforming loans. But you know, I chalked that up, they 

understand, there’s a reason for them to be there. And so I chalk 

that up as a positive. 

On the macro basis up here, everybody in the room, Republicans, 

Democrats, everybody on the panel has agreed that this transition, 

transformation is not taking place as quickly as they would like. 

I heard the chairman’s first question, what should the Administration be doing that it’s not doing, which I never heard a real good 

satisfactory answer to other than let’s keep doing the same things 

we’ve been doing, keeping the pressure on. 

And somebody mentioned that there was a role for Congress 

here, but I’m still not clear what that is. So my question is, given 

these micro impacts in our congressional districts and the macro 

imperative of quicker change, what is the role of Congress here? 

What should we be doing as a financial services committee other 

than sending shots over the bow like we’re doing today at this 

hearing, assume the Chinese financial services elite will read what 

we’ve done here, and maybe the government personnel will read 

what we’ve done here, maybe they’ll hear the message that we’ve 

sent to them over and over again through the Congressional Black 

Caucus that if they don’t do something to humanize their response 

in the Sudan it’s not at all a foregone conclusion that there won’t 

be a growing momentum toward a boycott of the Olympics that are 

about to take place in China. 

I reminded the Ambassador myself that it was black folks who 

stood with their fists on the winning podium in the middle of our 

own transition, so this notion that the Olympics is sports and politics is politics is something that we never have quite bought into. 

My ultimate question here, and maybe whoever mentioned the 

possibility of congressional involvement can really answer this, 

what should we be doing other than sending these shots over the 

bow as Congress now, as this Financial Services Committee? If 

somebody can, respond to that in the time that I have left. 

Mr. Sorensen seems like a willing participant here. 

Mr. SORENSEN. Thank you, Congressman. Very well put, a specific question, which I like to delve into. I yield to my colleagues 

here who are probably above my pay scale on this but my sense 

of things is very simple. 

Congress can and should work very, very closely and aggressively 

and insistently with the Administration’s efforts to open up the financial services area. Congress in my opinion with respect to the 

chairman and everyone on the committee has probably not worked 

as hard with the Administration in constant communication and 

constant insistence in this work. 

The devil is in the details unfortunately. For example, the commitments to open up the insurance section in the branch two subsidiary, the commitments to open up in the securities sector, the 

28

commitments to open up in the banking. Those are commitments. 

They have to be delivered. 

So on a very specific basis over the next 6 to 9 months as the 

new—the strategic economic dialogue third session gets going and 

started, and the dialogues with China, those are very specific items 

in which the committee could work with the Administration, directly with Secretary Paulson or all of his staff at that level. 

And then the second thing is to become acquainted a bit more 

with the actual issues on the ground in China. If we agree that the 

opening of the financial sector could yield to lots of household aspirations and investments that will eventually free up the currency 

to the levels where it should be, if that premise is correct then the 

second premise is, ‘‘Let’s get it done faster.’’ 

I don’t think the Chinese understand, as Mr. Evans had earlier 

said, that the Congress has such a tremendous interest and such 

an influence. And the congressional process is not very well understood in China because there is no such thing there. 

Mr. ALDONAS. Congressman, you know, it’s the old trade negotiator in me, but things work best when there is unity in Congress 

behind a set of negotiating objectives and a very clear message 

about what the outcome is going to be if those results aren’t met. 

And again it’s probably my instinct as a trade negotiator to say 

I think what you really ought to do is add an authorization to the 

President to negotiate. It doesn’t have to be trade promotion authority, but an authorization to negotiate on these issues, and then 

say with the outcome is going to be. We’re not going to pull the 

trigger on 27 percent tariffs in response to a pegged currency if we 

actually see the underlying reforms that would eliminate many of 

the distortions. 

I recall working on textiles and working on furniture when I was 

at the Commerce Department. And I’ll tell you, when I looked at 

that problem economically a lot of the unfair competition I saw 

wasn’t from a pegged currency. What I saw was this problem in the 

financial markets that created a zero cost of capital for Chinese 

firms. 

It wasn’t labor costs. This just blew a hole through an industry 

because it favored those manufacturing interests that now have 

productive capacity that isn’t going to go away until there are reforms in the capital market sector. But what I would want to do 

is rather than focusing on the peg, identify those items that are 

critical for American companies to open the market for this committee in the financial services arena, and then lay out what the 

outcome is if those instances aren’t met, give the President the authority and tell him to get after it. 

The CHAIRMAN. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and I would like 

to welcome my fellow Texan and neighbor to the south, Mr. Evans. 

It’s good to have you here. 

As I was listening to this testimony, and by the way, Mr. Chairman, I think this has been a great panel and great discussion—we 

know that China has been basically financing their industrial revolution through their banking system and that they have these high 

savings rates, and what we want them to do is to open up new opportunities in the financial markets in their own country. 

29

I guess the question I have is, is the reluctance of the Chinese 

to do that because, well, this is the mechanism where if we force 

all this money to either go to the banks—this is where we have 

control over that money, this is how we can finance our infrastructure and our industrial agenda. If we open up other investment opportunities to the Chinese people, say, 401(k)s or just other financial vehicles, is there a concern on the Chinese people then that 

takes the control out of how that money is invested and does that 

money leave their country or does it stay and continue to be reinvested in their country? 

For example, if American companies come in there and they start 

collecting money from Chinese people, where does the money go 

and is that a concern of theirs? And I think secondly, if we introduce those new financial vehicles and the ability to borrow and to 

do some of those other kinds of things in that, does that begin to 

take some of that money out from under the mattress because 

maybe they don’t trust the bank? 

Could you kind of just—I think that may be the premise of what 

the dynamics in China are doing. Now Mr. Decker, do you want to 

start, lead off on that? 

Mr. DECKER. Sure. I think that concern may have been in place 

in the past. I think it’s less so now. I think that many in China 

want to build a more robust, more efficient capital market so that 

companies that need capital don’t have only one source through 

bank lending. They have other sources. They can issue bonds, they 

can issue stock. 

We’re contacted regularly by people in China who want advice 

and help and technical support in how to build a bond market or 

how to improve the efficiency of the stock market, how to build a 

clearance and settlement system, issues like that. 

The hurdle is that they recognize the need to build an internal 

market; they’re much less willing to open a more robust market up 

to non-Chinese companies to come in and compete. 

Mr. PRASAD. To make one point, they are very concerned about 

broad financial market reform, but again the order that they are 

thinking about things may be a little complicated because the 

banking system again is very dominant and households have a tremendous amount of deposits in the banking system. So their concern is that allowing more financial opportunities for households to 

put money in places other than banks or to take money out of the 

country could have a negative impact on the banking system. 

So their approach is, let’s fix the banking system and then move 

forward, but the problem is that it’s very difficult to fix the banking 

system unless it has competition, unless there are incentives to improve its efficiency, including importing expertise from abroad. 

And the other point I’d like to make is that in terms of their 

opening, there is a serious concern that they have about their regulatory and supervisory capability because in the past it was the 

case that this was not an issue. The government told banks who 

to lend to and the government was going to step in and take care 

of things. 

If the banks need to run as commercial institutions, they don’t 

have the expertise yet. This is why U.S. firms could help them. But 

even though one might argue that U.S. firms are paragons of virVerDate 0ct 09 2002 17:45 Sep 11, 2007 Jkt 037551 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\37551.TXT HFIN PsN: TERRIE
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tue, there is a concern among the Chinese that they have a difficult 

enough prudential problem on their hands. If foreign firms enter 

with their expertise, do they have the expertise to be able to regulate them effectively? 

And this is where I think in terms of the dialogue and in terms 

of the expertise that the United States can transfer to them, not 

just through the private financial sector but also in terms of 

regulational supervision the United States could make a difference. 

Mr. NEUGEBAUER. Mr. Aldonas. 

Mr. ALDONAS. It’s about political power. Ultimately they’re concerned that market-based reforms would siphon capital away that 

is going to be lent to underperforming state-owned enterprises that 

will result in the displacement of workers. They’ll face social unrest. 

They don’t want to change the capital controls because that siphons money out of the state-owned banks that fund the stateowned enterprises that would lead to job displacements and social 

unrest. So what they need to be convinced is that there is actually 

far more to gain from eliminating these things than the risk that 

flows from those state-owned enterprises. 

Now the problem is right now bank lending goes about 75 percent to those state-owned enterprises. It’s only about 27 percent 

roughly to private enterprises, and they’re horribly inefficient, so 

it’s a dead weight. The problem is growing, not declining as a practical matter, and so it’s a tax they’re imposing both on themselves 

and as their society ages. 

That’s where you have to point to the risk because if you’re really 

trying to persuade them, look, all right, you want to stay in power, 

you want to avoid that longer term problem. You know, in politics 

it’s much easier to deal with the short term than the longer term, 

and I think that’s what they’re facing, frankly. But it’s about the 

politics as far as I’m concerned. 

Mr. NEUGEBAUER. My friend, Mr. Evans. 

Mr. EVANS. Well, Congressman, my view is that China is amazed 

at our economy, and they’ve been moving into a free market economy for about the last 25 years. We’ve been in it for a couple hundred years, and it takes time to get these systems in place. 

And look at what they’ve recently done to their banking system. 

They just separated out the People’s Bank of China that now can 

be the one body that acts as their federal reserve, that conducts 

monetary policy. 

My experience over there is that the leadership understands they 

need to continue to move away from administrative kinds of controls toward market-based forces. And the debate gets to be the 

pace of that and how fast does that happen. 

But it seems like—my judgment anyway is that they are continuing to try to move—their intention is to move toward more 

market-based reform. And they have the Central Banking Regulatory Commission now in place that they didn’t have a few years 

ago, the China Insurance Regulatory Commission, the China Securities Regulatory Commission. All of these regulatory bodies are 

being put in place, so my judgment is that they’re trying to continue to move toward market-based economy. 

Mr. NEUGEBAUER. Mr. Sorensen. 

31

Mr. SORENSEN. Very briefly, Congressman, in the interest of your 

time, I’ll give you a specific example. 

We are partners with the same bank that Bank of America actu- ally bought a 9.9 percent share of for about $4 billion. Their investment has tripled in value. Their $4 billion investment has become 

about $12 billion because of the stock market increase in China. 

That was a good play on the part of Bank of America, and a good 

play on the part of Principal Financial Group and our asset management company. 

The specific reason is that the Chinese regulator insisted on an 

American partner for the bank in asset management. They did not 

allow the bank, China Construction Bank, our partner in joint venture, to enter the asset management field without an American 

company as an equity partner. The same happened to the other 

three pilot banks. 

So it is by sector. There is some reluctance, but the regulators 

actually know that without a foreign technical partner, an equity 

partner that owns part of the business, that bank or that institution will not do as well. 

Mr. NEUGEBAUER. Thank you. 

The CHAIRMAN. Let me just ask unanimous consent, if I could, 

to follow up on that. 

Is that a danger then that that’s—they got B of A to come in for 

9.9 percent to get that technical expertise, so is there a danger 

then that they’ll let us in enough to help them but not enough to 

really benefit and profit? I mean that’s a kind of very limited role 

and it could be an exploitative one. And that seems to me to be a 

great danger that they need the expertise, so they buy all the expertise for a very small piece of the equity, and that’s trouble. 

Mr. SORENSEN. Sir, with great respect, I would argue the opposite. China gets it. The regulators and the government get it. They 

understand that they will soon be a market economy. And soon to 

them means 15 to 20 years. They will be absolutely freely interchangeable in the markets within 20 years, in fact probably earlier 

than that because they need their companies to be global companies. 

So this bank, China Construction Bank that has a partner, a 10 

percent partner in Bank of America, whose investment, by the way 

as I said, just tripled in value in the last year-and-a-half, that 9 

percent does not need to stay at 9 percent. 

The bank will have and probably does have— 

The CHAIRMAN. But isn’t the policy the other way around, they 

get the expertise, it doesn’t need to expand? If they buy the expertise and they earn, they’re smart people and you say they get it. 

It just seems to me they did get it; they buy the expertise and if 

they have that then there’s no need to expand. 

The other thing I would have to say is that we’re dealing with 

Americans who have current needs and concerns. 15 to 20 years is 

a long time and it’s a long time to expect people on our side that 

we represent to continue to forebear. 

But to go back to the specific point, I don’t see how there is any 

necessity for them, having bought all the expertise—they didn’t 

buy 10 percent of the expertise. They get 100 percent of the expertise for 10 percent of the equity, and if they learn and know—beVerDate 0ct 09 2002 17:45 Sep 11, 2007 Jkt 037551 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\37551.TXT HFIN PsN: TERRIE
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cause we run into this in the technological area. There isn’t anything automatic that says they will then have to open up more. 

Maybe they get the expertise and say, ‘‘No, we don’t need you as 

much.’’ 

Mr. SORENSEN. There is obviously that possibility, and of course 

that depends on business relationships. I don’t know the terms of 

the agreement that this specific equity purchase entailed. There 

are a number of other requirements from Bank of America to enter 

the credit card business. I believe that they have over 500—this is 

the information that I have from my partners who have shared 

this—actual Bank of America technical experts putting in a credit 

card system that is partly owned by Bank of America and the 

China Construction Bank, whose profits actually are revenue split 

with Bank of America. 

The CHAIRMAN. In what proportion? 

Mr. SORENSEN. I’m sorry? 

The CHAIRMAN. In what proportion, 90/10? 

Mr. SORENSEN. I really don’t know, but I know that the intent 

of Bank of America, in that particular situation was not only to 

own equity in the bank, but to actually create a credit card business— 

The CHAIRMAN. For the Chinese owner who may then not need 

them in the future. 

Mr. SORENSEN. Well, I would say for both, for both, sir. 

The CHAIRMAN. At 90/10? 

Mr. SORENSEN. Well, maybe not necessarily at 90/10. 

The CHAIRMAN. You’re right. I don’t want to exaggerate it, at 

90.1 to 9.9. 

The gentlewoman from New York. 

Mrs. MALONEY. I thank you. A fascinating—I’m sorry I missed 

the testimony, but I was on the Floor mainly because we on the 

Education Committee have been trying to push science, math, and 

engineering for our young students, which fits into the global economy that we’re facing. So we finally got something that we’ve been 

trying to do for 5 years now. 

I had the privilege of being over in China with the Education 

Committee last year. I’m not going to say that my knowledge on 

the financial services issues is as sharp as some of the others, but 

the questions that were brought up I have a curiosity about. 

Meeting some of the younger communist leaders who mostly 

have gone to school here, they are looking to the future. And then 

dealing with the older ministers who have been there for a long 

time, you can see they’re concerned about moving forward too fast. 

And with us here, you know, we’re a fast moving country; we want 

to go, go, go, go, go. 

Understanding the culture is something that the United States 

has not done a good job with; we need to work on understanding 

the cultures of different countries. Are we pushing them too fast? 

They know they have to change their finance service outlook, but 

one of the questions that was just answered—Bank of America, 

does the money come back here to America or does it stay in 

China? When you were talking about that the profits, where does 

that money go? 

33

Mr. SORENSEN. From my understanding of the capital market 

system—and by the way, I’m not an economist, so I’m not an expert in this area, China Construction Bank is a publicly traded 

company. It is 51 percent owned by the government, however 49 

percent of the shares are actually in the public hands; 10 percent 

of those shares are Bank of America’s, so any dividends that the 

China Construction Bank pays do come back to America from those 

shares. 

Mrs. MALONEY. They do come back. And I guess the other question that I had—Mr. Evans, we talked about being protectionists 

and everything else and yet, with the conversations that we’ve 

heard, China is doing the same thing. They’re afraid of discourse 

because their laborers will be laid off. So we’re fighting the same 

thing here. That’s what a lot of Members of Congress are dealing 

with as far as our people losing jobs. 

And again, I do believe over the last 20 years we have not done 

the right thing on retraining workers for the future. You know, everyone keeps talking about that even with some of the trade deals 

that we’re looking at now with Peru. Where is the educational force 

coming in, not for a job that’s going to last for 2 years, but where 

are the jobs going to come from that will be there in the future? 

And that’s where the businesspeople in my opinion should have a 

voice in this because the more people that are laid off in this country, which I understand is going to happen, it has always happened—but we have not been prepared for it. In the past it has 

been a slow movement. 

Now we’re seeing it with the automobile industry. It is something 

that is happening. You know, we’re losing that. And we’re going to 

be seeing—you know, you wonder why we’re going to have Korean 

cars, Chinese cars. I toured their plants. They’re way ahead of us 

on the technology, the forms. So I can understand why the Chinese 

are afraid of their people losing jobs in discourse. We have that 

going on here. 

So until we start settling some of our own problems here in this 

country, how do you expect us as Members of Congress, who all 

know global economy is there, how do you expect us to handle that 

when we should be protecting our people too? It’s all part of the 

global economy, but you can’t tell that to a lot of people who are 

being laid off. I mean that’s just my common sense talking. 

Mr. EVANS. Yes, I think you raise the central issue. What do we 

do to make all Americans ready for globalization, ready for this 

rapidly changing economy that we all find ourselves in now? I 

think it’s important to put it in perspective. Remember that in 

1975 we had about 30 free market economies in the world and 

about 400 million workers. Now we have 135 free market economies in the world and over 2 billion workers that we’re competing 

with. We have to train our people, educate our people, and get our 

people ready for this rapidly changing global economy that we are 

in today. 

And I would be one who would be a very strong advocate for increasing the support for training programs and education programs 

and supporting people who are in transition from one job to another job. It used to be you’d go to work for a company and that 

was your career at that one company. Now you may have 4 or 5 

34

different careers, not to mention 10 or 15 different jobs. And we 

ought to make sure people understand that’s the economy we live 

in today, so as American workers you’d better have yourself ready 

and trained and have the skills to compete in this rapidly changing 

economy. 

And I think as you said, I think the private sector has a very important role to play there. I think government has a very important 

role to play there. 

Mrs. MALONEY. I’m not concerned about the younger workers; 

I’m talking about the workers who are 55 years old. You know, yes, 

you can retrain them, but they’re being retrained for a job where 

they’re not making as much money. That has a lifelong effect on 

them because that deals with their pension. That deals with social 

security. That deals with their healthcare benefits. 

I mean we, as the Federal Government, in my opinion, know that 

we’re going forward. We will go forward, but we still have to do a 

better job of taking care of people who are going to be disrupted 

by this economy that is changing rapidly. 

The CHAIRMAN. I’m afraid we have to move on. Mr. Manzullo. 

Mr. MANZULLO. Thank you very much for coming. I recall reading an article by Bob Vestine years ago that when financial services—and I’m wondering why he’s not on the panel, but— 

The CHAIRMAN. If the gentleman would yield, in part because the 

Republicans didn’t suggest him. 

Mr. MANZULLO. Yes. That’s okay. I’m sure we’ll have lots of hearings, a lot more hearings on this. Anyway, the article talked about 

manufacturing will follow—manufacturing exports into underdeveloped countries will follow the development of financial services because you have to find a way to buy the stuff and pay for 

it, etc. And I’ve always believed that to this date, the more penetration we have into China’s financial services, the greater opportunities we’ll have to sell U.S.-manufactured items there. 

Some people disagree with that, but I think what happens is that 

the maturity of the financial markets really is a forced springboard 

into economic maturity. The Chinese have—to them, ‘‘soon’’ could 

be 5,000 years. That is the length of recorded history. 

Secretary Evans, the last time you were here the press said that 

I gave you a very difficult time. I didn’t think that I had, and I just 

want to let you know that I think you’re doing a great job over 

there as you did in Congress. And Under Secretary Aldonas, you 

came to Rockford and held one of the manufacturing seminars that 

improved everything. 

The problem that we have, and I agree with everything that everybody says, it’s a very scholarly presentation, and it makes a lot 

of sense. The problem is, I think, joined by what Chairman Frank 

said, and that is, how long are the American people going to have 

to wait for this? 

I believe that it could be sooner than 15 or 20 years and you cannot have the hemorrhaging that’s going on, but I know that what 

you’re saying is factual based on two things. I mean your word 

would be enough, but when I was in Shanghai, I ran into Mr. 

Shang He, who was the president of the Shanghai stock exchange. 

He’s 30 years old. And I said, ‘‘Mr. Shang He, how is it somebody 

35

your age is the president of the stock exchange?’’ And he said, 

‘‘Anybody over my age does not know what a stock exchange is.’’ 

And when I was in Macao, there was this incredible festival 

going on and there were balloons and clowns and I had no idea 

what it was. It was an insurance festival. I mean people were just 

excited that all of the vendors were selling insurance. And I said, 

‘‘Why are the Chinese excited?’’ 

It was like an outdoor circus or a carnival. People were excited, 

and lined up, and getting balloons and pins—Made in America—

and everything. And the issue there, the issue with the fact is that 

there is no real social security system. The Asians do invest a 

fourth to a third of their money for retirement. 

So I mean no one can say that what you gentlemen are stating 

is without factual basis. I’ve seen it for myself, and you really have 

to be there to see what’s going on in the country. 

My question is this. And Grant, if you want to take a stab at it, 

and Don, and anybody else, what will it take to go from an undeveloped to a developed state? What incentive do the Chinese need? 

And the third thing is that now they have a very aggressive federal 

government that is slapping countervailing duties on glossy paper, 

which is the first time that’s been done in a non-market economy. 

Madame Wu Yi has gone wild over that. She’s extremely excited. 

That caught her attention. What do we need to get this thing moving? 

Secretary Evans, maybe you could take a stab at that, because 

I feel I owe that to you after what that newspaper article said. 

Mr. EVANS. No, I thank you, Rob. Look, I think we’re doing what 

we should be doing and just I would pick up the volume probably 

a little bit. As I said earlier, Congressman, I think this committee 

has a vital role to play, a critical role to play. And if we should be 

heard, you make the absolute point that, you know, they’re starting 

to understand countervailing duty tariff. 

Where did that come from? Well, that came from a trade law 

that was passed by Congress. That’s where it came from. And so 

Congress plays a critical role in this whole process. The Administration has set out, under Secretary Paulson’s leadership, the strategic economic dialogue, which has enhanced the engagement, increased the engagement with China, and I just think that Congress 

must play a big role in that engagement. 

It comes from doing what you did, going over there and seeing 

them and sitting down and talking to them. You know—in terms 

of I’m not here to propose any specific policy. Here is my belief of 

how this works. My belief is that when you conduct commerce or 

trade with somebody, you have to communicate with them. You 

talk to them. When you talk to them, you begin to understand 

them better, and they understand you better, and then you develop 

respect for one another. Once you develop the respect, all of a sudden you have some friendships and partnerships, and so I think 

that’s what it’s about. I think it is about continuing to enhance the 

communication between our two countries, so they clearly understand where we’re coming from, and we get them to respect that 

view, as we should respect their own views. 

But I don’t have any silver bullet, other than just keeping the 

pressure on through dialogue and I think it’s perfectly appropriate 

36

obviously that Congress is talking about different kinds of legislation. I think it’s perfectly appropriate that the Administration continues to enforce the trade laws, like anti-dumping, on glossy 

paper, or taking them to the WTO. 

The CHAIRMAN. Briefly, Mr. Aldonas. 

Mr. ALDONAS. It’s a wonderful question, Congressman, and I’d 

make one concrete suggestion just to add what the Secretary said. 

We deem them to be a non-market economy under the dumping 

laws. Why not go to them and say, we’re more than happy to call 

you market economy, but you have to have a function in capital 

market before we can do that. 

And what we want to have is complete liberalization in the financial market. Put it on the table. See if they bite. You know, the 

reality is if these people have full access to their market, you will 

find it will be a market economy. It will drive change. 

But why not go ahead and sit down and have that conversation 

rather than shooting at it? And Congress can lead on that score. 

Congress can put that issue out there as a possibility so that the 

Chinese know there’s a successful outcome as well as a potentially 

negative outcome. 

The CHAIRMAN. I’m going to recognize the gentleman from Georgia. I’m going to take 30 seconds of his time just to say, Mr. Secretary, I was delighted to hear you say, and I’m serious, that 

there’s a rule for the private sector but also for government in responding to the important social concerns of the gentleman from 

New York, retraining, education, yes. 

The problem we have is this. There has been for a decade or 

more a relentless and unfortunately successful assault on the revenues of government, and the fact is that neither the Federal Government nor most state governments today have the money to do 

this important job training. I’ve heard from Chairman Bernanke 

and Chairman Greenspan. Education is the way you deal with diminishing inequality. The fact is that in America today, the way 

we finance higher education reinforces inequality. It does not diminish it. 

And so I welcome that, but you know it’s important to recognize 

the role of government. It’s unimportant to make sure that government has the revenues to do that and until we have that, the situation will get worse and worse. 

I thank the gentleman from Georgia and I recognize him. 

Mr. SCOTT. Thank you, Mr. Chairman. I find this to be a very, 

very interesting and provocative hearing. China presents a dilemma for us, in effect. It’s sort of like a yin and a yang. It’s like 

a threat and a big one, but it’s also an opportunity and a big one. 

And we have here a growing private capitalistic economy: 

globalization, and yet at the same time it’s tied within the secretive 

constraints of communism. And I think within—that gives this tug 

and pull that we’re faced with here, particularly in the area of currency reform, in which all of our manufacturers are saying that 

they need to raise their currency and value. 

At the same time all of this is going on, we’re in debt to China for nearly $400 billion. At the same time, our trade deficits are 

huge. And at the same time, there is this reluctance to increase the 

level of foreign ownership in Chinese banks and other financial inVerDate 0ct 09 2002 17:45 Sep 11, 2007 Jkt 037551 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\37551.TXT HFIN PsN: TERRIE
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stitutions. So, one of the first questions I’d like to kind of get at 

in all of this is, could you give me an assessment of something that 

we haven’t mentioned. We’re dealing with a communist country 

still, are we not? 

And could you tell us in your own opinion, very quickly, because 

I have a series of other questions I wanted to ask, of what significance is this now. What role does China being a communist country 

play in particularly the issue that we’re facing today, trying to get 

market-determined currency exchange rates, trying to get the currency reform, trying to do the issues we do. What problematic situations are we faced with with, that being within the constraints of 

this still being a communist country? 

Mr. DECKER. I’ll take a shot at it. Well, I think one of the most 

significant effects we see with regard to the process, the policymaking process in China is the relatively closed and opaque process that they have in place for rulemaking and for regulation. It’s 

difficult for firms doing business in China to understand always 

what rules apply and how they apply, how they’ll be enforced. 

When rule changes come about, it’s not always possible. The 

process is not often interactive. Those being regulated don’t really 

have a chance to make their views known to the regulators. There’s 

not always sufficient time, once regulations are put in place, for 

firms to comply, to change their processes in order to comply. And 

one of the points we’ve tried to make through the SED, and independently in talking with China is that the regulatory process 

there needs to change. 

It needs to become more transparent. It needs to become more 

open. It needs to be the same kind of opportunities we have here, 

to file comment letters with regulators when new regulations are 

proposed or to have sufficient time to implement regulations or to 

know that enforcement of regulations will be uniform and fair. 

Those same kinds of processes need to be in place. 

Mr. SCOTT. You don’t see the fact that they are still a communist 

country being problematic here? 

Mr. ALDONAS. I think that the regulatory process stems in part 

from the broader system of government that’s relatively closed and 

undemocratic. 

Mr. SCOTT. Particularly, would that be in terms of their managed 

control of the yen as currency? 

Mr. ALDONAS. I think the desire to control the currency value 

and the other kinds of currency-related issues that we’ve talked to 

probably stem from a different motivation than trying to keep the 

regulatory process relatively closed. 

Mr. SCOTT. Do you see the influence of communism in the near 

future being lowered? Are we looking at a crystal ball ahead as we 

move forward with China becoming more open in terms of its markets, in terms of capitalism, in terms of all of the trade issues, all 

of the interplay and the globalization? Do we see communism then 

being marginal as something the old guise about to be had now and 

maybe in the next 10 to 15 years, communism will be a thing of 

the past in China? 

Mr. ALDONAS. Congressman, first of all, you’re right. It just 

builds in a very conservative, from their perspective about any kind 

of change that moves in the direction of a market. We have a tendVerDate 0ct 09 2002 17:45 Sep 11, 2007 Jkt 037551 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\37551.TXT HFIN PsN: TERRIE
38

ency to think about this as a monolith, but it’s not. There’s politics 

in China and there is a backlash against liberalization going on in 

China right now. 

Mr. SCOTT. My time is up. But Mr. Chairman, I’d like to just ask 

one more question. 

The CHAIRMAN. I took a minute of your time. 

Mr. SCOTT. Thank you, sir. And while Secretary Paulson has 

stated his support for continuing dialogue with China and how it 

has allowed this country, our country, to achieve certain results, 

Mr. Secretary has also expressed disappointment that China has 

refused to make changes to its foreign ownership rules, especially 

in its financial services sector. I’d like to know your thoughts on 

ownership caps and furthermore do you believe that domestic Chinese interest groups have something to do with or a strong influence on blocking more extensive change? 

Mr. PRASAD. As in any other country, there are interest groups 

that would prefer to keep things a little bit protected. But I think 

the Chinese authorities, and this is where the communist role that 

you brought up becomes very important, because it is true that 

there are issues about lack of accountability, lack of transparency, 

which is referred to. But there is also a strength in the sense of 

the communist party derives its legitimacy from economic development. And therefore they can focus on that, tamping down some of 

the short-term pressures that arise in the process of transition to 

a market economy. 

Again, with respect to the question that Chairman Frank had 

asked earlier about whether ownership should be opened up completely, I think the Chinese are fearful at the moment that opening 

up their financial system completely to foreign ownership could in 

fact lead to the domestic financial institutions, including the banks, 

essentially becoming non-competitive. So they’re taking it in stages, 

and I would like to echo the optimism of the other panelists, that 

they are taking this in a stage-by-stage process, and I do see this 

moving forward, once they feel that the domestic finances— 

The CHAIRMAN. You say they’re afraid to open up because their 

people wouldn’t be competitive. What do we say to American manufacturers who have been put out of business by the Chinese because they weren’t competitive? Why does it become legitimate to 

say, we can’t let you in because you’ll be too good at it? Why is that 

a one-way ocean? 

Mr. PRASAD. Other than legitimizing this, I think in terms of economic welfare, I think there is a consensus that opening up, either 

in terms of the financial services or trade, is ultimately beneficial 

to the economy. 

The CHAIRMAN. Except you’ve just accepted, or not accepted but 

put forward the Chinese reason for not doing it. And remember, 

again, not everybody benefits equally from this. But you’ve just 

come to the heart of it. We are talking about—you can’t expect the 

Chinese to allow our banks to go in there. They would out-compete 

the Chinese banks. But why is that not an argument for restriction 

against Chinese coming in and putting Americans out of business. 

And, I mean, to tell Americans well, you shouldn’t worry about it, 

but they’re allowed to, they’re not happy. 

39

Mr. PRASAD. In a sense I think those restrictions hurt the country that impose the restrictions, and in the Chinese case, if they 

do not move fast, I think it will affect— 

The CHAIRMAN. Well, Dr. Prasad, let me say this. Now you say 

that because I brought it up, but I think if you go back and look 

at the transcript, you sounded much more sympathetic to that earlier. And it was oh, the Chinese don’t want to open up because then 

their people will be at a disadvantage. And yet when I raised it, 

you say well, it’s not in their interest. But they think it is and 

they’re acting that way, and you have this fundamental contradiction, gentlemen, that you have to deal with. 

And then, I mean I know you did not explicitly say it was okay, 

but you said this is why they do it. What is it, to comprende, to 

pardonne; to understand is to accept and to pardon. And there is 

this theme, and you’ve heard this from some of my colleagues. It 

is a one-way ocean to some extent, and that is causing problems. 

Mr. Decker? 

Mr. DECKER. I just want to respond by saying that some of the 

biggest financial services firms in this country are predominantly 

owned or headquartered outside the United States, companies like 

Credit Suisse, UBS, and Nomura. 

The CHAIRMAN. Deutsche Bank, yes. 

Mr. DECKER. And of the 8 or so emerging markets countries with 

the biggest potential for growth and financial services, 6 of them 

allow 100 percent ownership of financial services firms by foreigners. 

The CHAIRMAN. China and who else? 

Mr. DECKER. China and Malaysia are the only two that don’t. 

The CHAIRMAN. So that does not seem, I accept what you say, 

that does not bolster the case for letting the Chinese off the hook. 

The gentleman from Georgia? 

Mr. SCOTT. I want to conclude on this point. We’re trying to find 

out—my follow-up was is there anybody who can give us any level 

of foreign ownership in Chinese banks or financial institutions? 

You know, I said earlier that China to me has really been the big 

elephant in the room for a long time, but we’re going to have to 

deal with this. It’s the biggest market. 

There are all kinds of problems going on over there in terms of 

their pollution, their environment, and their population. I mean, 

they’re just—so we have to deal with it. The area that concerns me 

so much is the fact that this not allowing participation and ownership in getting involved with their financial institutions, we are an 

open area, yet we borrow $400 million, $400 billion a year from 

Chinese banks and their financial institutions. Just the interest 

alone on paying that is more than we put in to take care of our 

veterans. And yet this participation is only one way, and the most 

critical area of financial services rests within the banks and the financial institutions that—they’re closed to us. 

So, I just wanted to, in conclusion, see if anybody had any information in terms of what is the current level of foreign participation 

in the Chinese banks or their foreign service, and specifically 

American— 

The CHAIRMAN. Let me do this, because I think these are useful 

figures. We would ask you to please respond to that in writing, but 

40

could we maybe get an ‘‘off the top of your head’’ estimate now. But 

if we could get that in writing that would be very helpful, and we’ll 

leave the record open. 

Mr. EVANS. Yes, Congressman, you articulate that very well, so 

keep it up. The numbers as I understand it are 25 percent total 

ownership, 20 percent by anyone from any one country, I think it 

is. 

The CHAIRMAN. Any one investor? 

Mr. EVANS. Any one investor. So, it’s 25 percent total and 20 percent any one investor. The investor can’t own more than 20. 

The CHAIRMAN. The gentleman from Missouri. Oh, I’m sorry. Mr. 

Sorensen, go ahead. 

Mr. SORENSEN. That would be in the banking sector. 

The CHAIRMAN. Yes. 

Mr. SORENSEN. Insurance is up to 50 percent, and that is due to 

the commitments that China made to the WTO. We have not been 

able to get them over that 50 percent range yet. In the enterprise 

annuities area, which is my specific area, which is just being born 

now, no particular percentages has yet been set up, because it is 

too new an industry, and we are pushing to have at least the same 

as the insurance industry, which is 50 percent. 

The CHAIRMAN. Thank you. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. My concerns are a bit 

different than those that have been expressed, which were very enlightening. You are very enlightening. Thank you so much for being 

here. Doctor, perhaps my question should be directed to you. The 

Chinese began construction on a new coal-fired plant every week, 

one a week. Each coal-fired plant emits about 10,200 tons of nitrogen oxide, NOx. That equals to about 500 late-model cars. 

And in addition to that, they are essentially saying to the EU 

and to other 21st century companies, which I hope we join eventually, that ‘‘yes, we are carbonizing the atmosphere. Yes, we are 

damaging the earth. But you did it for years, and now that we have 

our opportunity, now that we’re into the industrial age, you’re saying we need to stop.’’ Our effort now is to stop. 

Now does not this create problems, particularly when the 27 nations of the EU are already putting in place a carbon trading system and the European nations and almost all the nations in the 

world except the United States, Australia, China, and India are already trying to deal with this problem? 

But in a global economy when you have the EU and the companies there, and by the way there are American companies that are 

in Europe, like shale, that are also far ahead of the U.S. Government in dealing with this issue of climate change. But when you 

have China in bold disregard to the environment, trying to do business with Europe and the United States, does not this create some 

major problems for all of us down the road? 

I mean, I’m not suggesting that, you know, setting up a cap and 

trade system or the other things that we need to do, will by any 

means create economic problems for us. But at least we’re going to 

be moving toward new technologies, and if China is and India—but 

let’s deal with China now, is still going back doing what we did in 

the 1920’s and 1930’s, and refusing to even make any modest 

changes, aren’t we headed for some major economic problems? 

41

Mr. PRASAD. This is normal. But let me make two observations 

based on what I have heard from the Chinese authorities. One is 

that they are concerned, as you are, about the implications for the 

rest of the world. They are very concerned about implications with 

China itself, because again, when you go on the streets in Beijing, 

the effects of the pollution and the smog are very visible. So I think 

ultimately the pressure will come from within. But the problem is 

whether the accountability systems are there in place so they can 

actually control what individual enterprise system, especially the 

state-owned enterprises, which in principle are under the government’s control. 

So I think ultimately the move towards market economy will, I 

hope—and this is more a hope than anything specific, that it will 

include aspects of environmental concern. But the government, I 

can tell you, is very seriously concerned about it. But again, the legitimacy of the government derives from a variety of things, including economic development, so they are facing this very difficult balance, which is what ends up coming out in the sort of statements 

that you referred to. 

Because, ultimately, the legitimacy does come from being able to 

deliver economic development to the people. So when the issue of 

the environment starts becoming something that the people demand, it’s very difficult to tell. 

Mr. CLEAVER. So, with Europe and as I said, I hope that the 

United States can join the 21st century during our lifetime, that 

we will also admit that there is a climate change. But as we’re 

moving toward trying to establish new technologies, it appears that 

China is not trying to move at all. I mean, I realize that with some 

of the government sponsored companies, that does create a challenge, but there’s going to eventually be even greater resentment. 

We have a resentment here, because of the balance of trade-in and 

a number of other issues. But there will be even greater resentment when we begin to alter economically how we produce goods 

and services and the Chinese are simply, you know, just building 

coal-fired plants, which is very inexpensive to operate, and we’re 

using all kinds of new technologies. 

It seems to me that I’m saying we, I’m hoping that we’ll join, but 

the problems that I foresee is the balance of trade increases, the 

imbalance rather of trade increases that we are going to import 

many, many more cheaply produced products into the United 

States, because the Chinese are not spending any money trying to 

clean up the environment, and the Europeans are already looking 

at what’s going on over there and over here, for that matter. 

Hopefully, something will happen this week in the G8 meeting. 

I don’t think so, but the concern I have is we don’t have time. I 

mean, time is not on our side in terms of the environment. You 

know, it’s not like we can fix this in 2020. I mean, it’s not on our 

time. Most of the scientists are saying that we need to move today 

in order to put in place whatever controls that are needed, you 

know, in the next 2 or 3 years. And I could go on. I don’t want to 

start preaching, but Mr. Sorensen? 

Mr. SORENSEN. Just a quick comment, Congressman, in the interest of your time. One of our partners in our joint venture with 

China Construction Bank is a minority partner, with a smaller 

42

stake than as a Chinese partner. It was Huadian Power Generation. It’s a very large, I think the third largest power generation 

company in China. They have two things: one, they are building a 

number of coal plants, yes. They’re also building nuclear plants. 

The concern that they have is that they don’t have access to 

enough technology from the United States to actually reduce their 

carbon emissions, so there has been a lot of intensive dialogue. I 

sat at the head table with Mrs. Hu Yi and Mr. Dave Johnson, the 

Administrator of the EPA, whose counterpart was on the other side 

of the table, the Chinese counterpart. 

They are extremely worried. In fact, one of the things they’re actually discussing is that during the Olympics in July 2008, most industry in Beijing will have to shut down because they will not be 

able to, for the 2 or 3 weeks, deal with all of the pollution and will 

obviously wish to put a better face on the environment, because 

Beijing is becoming extremely polluted. 

So there’s a lot of worry about their own environment, which 

transcends, basically, their economic concern about not having 

enough energy. So they’re between a rock and a hard place on this 

and there’s a huge concern. There’s a huge opportunity for American technology in basically the sequestration or capture of these 

carbon emissions, for technology companies in the United States to 

actually provide this and sell it to the Chinese as best as we can. 

Mr. CLEAVER. They’re refusing any kind of cap and trade system, 

the Chinese have so far. They’re saying no. We have 103 nuclear 

plants here in the United States and we have some major problems, because as you know there’s no way of storing the waste. 

The CHAIRMAN. We do. I mean, it’s not our jurisdiction, so if you 

gentlemen could just wrap up, we could. 

Mr. CLEAVER. Thank you. 

The CHAIRMAN. I thank the panel. I have one last question. Why 

are there two names for the Chinese currency and is either one the 

preferable one to use? 

Mr. PRASAD. The reminbi is the name of the currency. It literally 

means the people’s money. The yuan is the unit of accounts. It’s 

sort of like pound sterling. You know, the sterling is the currency, 

but you say 10 pounds for something. So you would say that something costs a yuan or it is 8 yuan to the dollar. 

The CHAIRMAN. The reminbi is like the sterling and the yuan is 

like the pound. 

Mr. SORENSEN. Well, on the actual currency, the actual term is 

printed. 

The CHAIRMAN. What does it say? 

Mr. SORENSEN. Reminbi yuan, both. 

The CHAIRMAN. Oh, it says both? 

Mr. SORENSEN. Yes. 

The CHAIRMAN. All right. Now, I know. Thank you. And I really 

appreciate this. I have been talking to staff members here, and I 

think we will probably take some further action. It does seem to 

me that frankly a resolution of the House might make some sense 

as a contribution to the dialogue, and so you’ve suggested it. Congress ought to speak out on this. 

And I would just say this: From the employment standpoint, we 

don’t expect this to be a major source of American’s going over to 

43

work there, but there is enormous concern about the balance of 

trade in that huge deficit and our ability to earn a lot more in 

China, if they would have reduced these restrictions, is a very important one. And I think you might see that in a resolution. 

Thank you, very much. 

[Whereupon, at 12:27 p.m., the hearing was adjourned.] 

(45)

A P P E N D I X

June 6, 2007

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