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INCREASING MARKET ACCESS FOR 

U.S. FINANCIAL FIRMS IN CHINA: 

UPDATE ON PROGRESS OF THE 

STRATEGIC & ECONOMIC DIALOGUE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTERNATIONAL MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 16, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–126 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

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 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

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 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE

GARY G. MILLER, California, Chairman 

ROBERT J. DOLD, Illinois, Vice Chairman 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

BILL HUIZENGA, Michigan 

CAROLYN MCCARTHY, New York, Ranking 

Member 

GWEN MOORE, Wisconsin 

ANDRE ́ CARSON, Indiana 

DAVID SCOTT, Georgia 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 16, 2012 ..................................................................................................... 1 

Appendix: 

May 16, 2012 ..................................................................................................... 33 

WITNESSES 

WEDNESDAY, MAY 16, 2012 

Brainard, Hon. Lael, Under Secretary for International Affairs, U.S. Department of the Treasury ........................................................................................... 5 

Lardy, Nicholas, Anthony M. Solomon Senior Fellow, Peterson Institute for 

International Economics ...................................................................................... 24 

Lowery, Hon. Clay, Vice President, Rock Creek Global Advisors LLC ............... 22 

Nichols, Hon. Robert S., Chairman, Engage China Coalition .............................. 19 

Strongin, David, Managing Director, the Securities Industry and Financial 

Markets Association (SIFMA) ............................................................................. 21 

APPENDIX 

Prepared statements: 

Brainard, Hon. Lael ......................................................................................... 34 

Lardy, Nicholas ................................................................................................. 38 

Lowery, Hon. Clay ............................................................................................ 42 

Nichols, Hon. Robert S. .................................................................................... 47 

Strongin, David ................................................................................................. 55 

(1) 

INCREASING MARKET ACCESS FOR 

U.S. FINANCIAL FIRMS IN CHINA: 

UPDATE ON PROGRESS OF THE 

STRATEGIC & ECONOMIC DIALOGUE 

Wednesday, May 16, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INTERNATIONAL

MONETARY POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 1:45 p.m., in room 

2128, Rayburn House Office Building, Hon. Gary G. Miller [chairman of the subcommittee] presiding. 

Members present: Representatives Miller of California, Dold, 

Manzullo, Huizenga; McCarthy of New York, Carson, and Scott. 

Also present: Representatives Hayworth and Green. 

Chairman MILLER OF CALIFORNIA. Without objection, all Members’ opening statements will be made a part of the record. I ask 

unanimous consent that Ms. Hayworth of New York and Mr. Green 

of Texas be allowed to sit with the members of the Subcommittee 

on International Monetary Policy and Trade for the purposes of delivering an opening statement, hearing testimony, and questioning 

the witnesses. 

Without objection, it is so ordered. 

We are going to limit the opening statements to 10 minutes per 

side. 

I yield myself as much time as I may consume. 

Today’s hearing is entitled, ‘‘Increasing Market Access for U.S. 

Financial Firms in China: Update on Progress of the Strategic & 

Economic Dialogue.’’ This hearing follows the fourth meeting of the 

U.S.-China Strategic and Economic Dialogue—we will call it 

S&ED—which was held at the beginning of the month in Beijing. 

We want to receive an update on progress made at this meeting. 

The week after the meeting in China the Federal Reserve voted 

to approve the application of three Chinese firms to operate as 

banks in the United States. We are here to discuss today what is 

happening on the other side of the coin. How is the Administration 

fighting for our U.S. financial firms who are seeking to do business 

in China? What has the Administration been able to accomplish to 

level the playing field to ensure fair access to U.S. companies? That 

is a huge issue for us. 

We have a very open market in the United States. As long as investments don’t threaten national security, we welcome investVerDate Nov 24 2008 15:39 Sep 17, 2012 Jkt 075732 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\75732.TXT TERRIE
2 

ment, because we know it creates jobs. To create jobs for U.S. companies, it is also critical that we understand the many issues that 

continue to create barriers to financial services in China, which 

have to be resolved through this debate. 

China continues to impose restrictions on foreign financial institutions with regard to market access, licensing, type of corporate 

ownership, branching, third party auto liability, and permitted 

products and services. There are also numerous examples of discriminatory treatment by Chinese regulators. While China might 

be meeting the letter of the WTO obligations, U.S. firms have complained that China is not meeting the spirit of those obligations. It 

is heartening to hear about the progress made at the recent S&ED 

on some of these fronts, but I want to make sure the Administration understands that China needs to communicate and be held 

open and held responsible for that communication. 

Today, we want to hear more about the actions the United States 

is taking and needs to take to support U.S. financial firms which 

seek to do business in China. I am pleased that the United States 

and China continue to come together to discuss issues of mutual 

importance to our countries and to global economies. The U.S.- 

China economic relationship is one of the most important bilateral 

economic relationships in the world, and how this relationship 

evolves will be critical in determining the growth and stability of 

global economies in the 21st Century. I fully believe that both 

countries will benefit if we continue to encourage open communication, mutual respect, and equal access. 

While progress to help China to modernize its financial systems 

is critical for China to be able to develop its economy and create 

opportunities for its people, it is also competitiveness for U.S. companies. China is now America’s third largest export market. Fair 

and competitive access to China’s fast-growing middle-class and 

business sector represents an enormous opportunity for American 

manufacturers and service providers. 

Better access by U.S. companies to a Chinese market, especially 

for financial services, would create millions of jobs here at home. 

By helping to provide the financial products and services that China’s citizens need and businesses need to save, invest, insure 

against risk, and consume at higher levels, U.S. financial institutions can play a role in China’s developing an economy that is less 

dependent on exports and more dependent on their own consumption in the future. This is beneficial for the U.S. economy and good 

for global growth and stability. 

While progress is being made, it is really being made slowly, and 

I know the Administration agrees with that. 

The American market is open. If you are an American company 

and you want to invest in China, but the investment you take is 

excluded from the catalogue, then you are just basically out of luck. 

This is not equal access and this is not a level playing field. This 

is what the S&ED is all about. We need to create a level playing 

field in China for American companies. It is in America’s interest 

to do this, and it is in China’s interest to work with us on this 

issue. Equal access and free markets will benefit both China and 

the United States, and make both countries stronger. It is time for 

economic uncertainty to end. The two largest economies in the 

3 

world simply do not have a choice. We must engage in productive 

dialogue, we must deepen our relationship, and we must find ways 

to get both economies growing again at a healthy level. 

I will yield back the balance of my time, and yield to Ranking 

Member McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Thank you for having this hearing. And welcome to all of you. 

As the United States continues to recover and rebuild our economy, we must focus our efforts on markets that provide a solid 

foundation for growth and sustained global competitiveness. China’s is the fastest growing major economy and the third largest export market for American companies looking to grow and create 

local jobs by selling goods and services abroad. That is why the 

U.S.-China bilateral economic relationship is so important. 

As two of the largest trading nations and economies, it is vital 

to maintain a global trading system. This system should enable 

U.S. companies and workers to compete on a level playing field. 

The U.S.-China Strategic and Economic Dialogue provides a forum 

to encourage the Chinese to increase market access through economic and overall reforms as a means to expand growth opportunities for American businesses and local job creation through the sale 

of goods and services to Chinese markets. 

The financial services industry is one of the most important industries in the United States. Prior to the fourth Strategic and 

Economic Dialogue held earlier this month, I joined several of my 

committee colleagues in sending a bipartisan letter to the President 

encouraging a robust discussion on reform and modernization of 

China’s undeveloped financial sector that imposes severe restrictions on foreign financial firms, including U.S. firms. 

I want to thank the Under Secretary for being here today, and 

I look forward to your detailed update on the progress achieved 

during the recent dialogue meetings, especially in the area of financial sector reform and market access. 

As China begins to move towards a more balanced economic 

model that relies more on internal consumer demand, America’s 

policy regarding China should ensure that China acts as a responsible stakeholder in the economy. This should include ways to ensure that trade with China is fair and profitable for American businesses and its workers, open market access for U.S. companies, and 

the elimination of discriminatory treatment of foreign investors. 

I would like to thank all of the witnesses for being here today, 

and I look forward to hearing your views on areas of improvement 

still necessary for China market access as well as how progress 

made thus far will help American businesses and workers. 

Thank you, and I yield back the balance of my time. 

Chairman MILLER OF CALIFORNIA. I yield the balance of our time 

to Vice Chairman Dold. 

Mr. DOLD. Thank you, Mr. Chairman, and certainly Secretary 

Brainard, I am so happy to have you here today. I appreciate you 

taking the time to be here. 

Today, when capital is so mobile internationally and global markets are so interrelated, an open and efficient financial industry is 

a necessary component of any stable and growing modern economy. 

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4 

markable over the past 20 years, my colleagues and I have real 

concerns about the Chinese financial sector. 

Today, U.S. firms face meaningful market access barriers that 

significantly limit the efficient flow of private foreign capital into 

the Chinese economy. 

For example, the Chinese financial sector restricts the kinds of 

services that U.S. firms can provide, the corporate structure U.S. 

firms can utilize, and the licenses that U.S. firms can obtain. Additionally, the Chinese Government caps foreign investment on Chinese financial institutions at 20 percent, which has had the effect 

of keeping foreign ownership in the Chinese banking industry to 

below 2 percent. 

In addition to these severe equity ownership limitations, U.S. 

firms are also subject to discriminatory supervision and regulatory 

requirements which I think are inconsistent with WTO standards. 

But recent reports indicate the Chinese Government is willing to 

work with the United States to create a highly developed Chinese 

financial sector that can function in an advanced global economy. 

As we help move China towards that highly developed financial 

sector, we must keep in mind some of the necessary components 

that I believe are important. 

First, a highly developed financial sector must operate under a 

fair and predictable legal system that is consistent with international legal standards, including intellectual property protection, 

contract enforcement, and impartial regulations and proceedings. 

Second, markets must obtain open and transparent and driven 

by market forces instead of political considerations. 

Finally, the financial services industry must be supported by government policy that encourages both domestic and foreign investment on an equal basis. When we have a level playing field for financial services in China, I am confident that U.S. firms will perform very well there, to the benefit of both the United States and 

China, and our respective economies, consumers, employees, and 

investors. 

Secretary Brainard, thank you so much for your time. 

Mr. Chairman, I yield back the balance of my time. 

Chairman MILLER OF CALIFORNIA. Thank you. 

It is my honor to introduce the witness on our first panel. The 

Honorable Lael Brainard is the U.S. Department of the Treasury’s 

Under Secretary for International Affairs. She has been very helpful over the years, very cooperative, and she has really benefited 

this committee tremendously by her time, and I want to thank her 

for that. She served as the Deputy National Economic Adviser and 

Deputy Assistant to the President of the National Economic Council during the Clinton Administration, addressing challenges such 

as the Asian financial crisis and China’s access to the World Trade 

Organization. Secretary Brainard was Vice President and Founding 

Director of the Global Economy and Development Program at the 

Brookings Institution, and was an associate professor of applied economics at MIT. 

Secretary Brainard, thank you for being here. We always appreciate your appearance. It is really helpful. Without objection, your 

written statement will be made a part of the record. You are recognized for a 5-minute summary of your testimony. 

5 

STATEMENT OF THE HONORABLE LAEL BRAINARD, UNDER 

SECRETARY FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY 

Ms. BRAINARD. Thank you, Chairman Miller, Ranking Member 

McCarthy, and members of the subcommittee. It is a pleasure as 

always to be with you here today. 

Before I turn to China, let me just take this opportunity to thank 

you for the very important work you and the committee undertook 

on laying the groundwork for the reauthorization of EX–IM, which 

we think is going to be extraordinarily important for helping America’s workers and exporters to compete on a level playing field. 

With respect to China, no other country presents as many opportunities and challenges. We have been working to achieve a more 

balanced economic relationship with China, a relationship in which 

U.S. companies and workers benefit more from the opportunities 

China presents. 

Since early 2009, U.S. exports of goods to China have almost doubled, and last year we exported around $130 billion of goods 

and services supporting well over 600,000 jobs here at home. 

China’s exchange rate has appreciated by 13 percent against the 

dollar in real terms over a similar time period, and we have seen 

a large reduction in China’s current account surplus, from 9 percent to under 3 percent today. 

As you noted, we are just returning from the fourth Strategic 

and Economic Dialogue in Beijing. We made important progress 

but, of course, many challenges remain. We made progress on leveling the playing field. China confirmed its intention to participate 

in negotiations for new rules on official export financing with the 

United States and other major exporters with the goal of reaching 

agreement over the next 2 years. 

As one of the world’s largest, perhaps the world’s largest providers of export financing, China’s export credit program has been 

a longstanding competitive impediment. U.S. exports must not be 

undercut by subsidized foreign government financing. 

We also made progress on rebalancing global demand, which is 

critical if we are to sustain strong and sustainable growth. 

As we reorient our growth strategy here at home to focus on exports and competitiveness, with European demand expected to be 

weak for some time, sustaining growth will necessarily require 

stronger domestic consumption in China. That will mean more demand for U.S. goods and services, more exports for U.S. companies, 

and more jobs here at home. 

Fortunately, China has ample capacity for boosting domestic consumption. At the Strategic and Economic Dialogue, China pledged 

to reduce tariffs on consumer goods imports by the end of the year, 

and to reduce the high tax burden on services industries, which 

will both promote consumption and opportunities for our competitive services providers. 

And we made progress on securing a more open and marketbased financial system, which is central to our other objectives with 

China. 

China’s financial sector remains dominated by governmentowned banks and subject to extensive government controls. Chinese households get low returns on their savings, and they have 

6 

very few savings, investment, and insurance products, forcing them 

to save more, consume less, and with few opportunities to ensure 

against life’s risks. 

With controls that keep deposit rates and interest rates artificially low, China relies on limiting the quantity of loans to control 

inflation, so banks ration credit to favor politically connected stateowned enterprises. Thus, we continue pressing on financial opening. We have made some progress. Moving to a market-determined 

exchange rate is a key part of both changing China’s pattern of 

growth and reforming its financial system. 

In April, China widened the daily R&B trading ban and is diminishing intervention. If it is implemented in a way that fully reflects 

market forces, this could contribute to rebalancing China’s pattern 

of growth and reforming its financial system. 

We secured new financial sector commitments that improve market access, boost consumption, reduce the unfair competitive advantage of state-owned enterprises, and begin to loosen the 

chokehold that state-owned banks have on China’s financial sector. 

China announced it will move beyond its WTO commitments in 

securities to permit foreign investors to take up to 49 percent equity stakes in joint ventures and to allow securities joint ventures 

to expand business activities more quickly. China also committed 

to allow U.S. and other foreign investors to establish and hold up 

to 49 percent stakes in joint venture futures brokerages. 

On auto financing, our companies will now be able to issue local 

bonds to fund their operations, helping our auto producers in the 

world’s largest automobile market. 

China amended regulations to allow foreign insurers to sell mandatory auto liability insurance, opening a large and growing market to our producers. And China committed to applying credit taxation and regulatory policies on a nondiscriminatory basis across 

state-owned enterprises and other enterprises, and going forward, 

it will increase dividend payments by listed state-owned enterprises to be commensurate with publicly listed firms. 

These are tangible, significant gains that will benefit the United 

States. 

Going forward, we are committed to continuing to work closely 

with Congress and with domestic stakeholders to make sure that 

our relationship with China is more balanced and yields greater 

benefits for our workers and for the American people. 

Thank you. 

[The prepared statement of Under Secretary Brainard can be 

found on page 34 of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you very much. 

I recently sent you a letter about American bond holders in 

China and their inability to collect, and hopefully you will have an 

opportunity to respond to that at your convenience in the future. 

I guess the big concern I have is that three Chinese governmentcontrolled corporations have become bank holding companies—to 

become bank holding companies in the United States was approved 

and the acquisition is going to be up to 80 percent of the voting 

share of the bank of East Asia (USA), National Association. This 

is the first time we have really had this kind of an approval in the 

7 

past. How do we make sure that American investors and businesses have the same opportunity in China? 

Ms. BRAINARD. We are working very hard to persuade China to 

move beyond the commitments it made in the WTO and to provide 

greater market access in key financial services sectors. We were 

pleased by the move they made, the very substantial move they 

made beyond their WTO commitments in the securities areas to 

allow joint ventures to move up to 49 percent equity shares. 

In the banking sector, as you say, currently we actually have— 

our firms have a large number of branches, affiliates, and subsidiaries operating in China, but under the WTO commitment China 

made, they are restricted to a minority shareholding. And so, we 

have raised these issues with China in the past, and we will continue working. As they work on reforming their financial sector, we 

are going to press very hard and use the leverage that we have to 

ensure they do so in a way that gives our firms the same kind of 

access and opportunities in their markets that we generally offer 

across foreign countries to be afforded national treatment in the 

U.S. market. 

Chairman MILLER OF CALIFORNIA. This country believes in free 

trade and open markets, and we have, I believe, demonstrated that 

to China over the years. But they use discriminatory regulations 

and lack of transparency in the process when American companies 

apply to do business in China. I guess my concern is that they continually make gestures of how they are going to accomplish certain 

things, but they never seem to accomplish them in a reasonable 

span of time, if they are accomplished at all. 

How can you better hold their feet to the fire on this issue, because we understand that doing business creates jobs, and the 

more business we do in China, the more jobs it creates here? But 

we don’t want to have the reality occur where it is just a one-sided 

event where they are coming here and we are not going there. 

Ms. BRAINARD. Yes, I fully share the priority that you place on 

making sure that China moves forward to provide better access 

and then follows through on its commitments. Where China has 

made WTO commitments, we obviously use the WTO dispute settlement to the greatest extent possible. We have taken six cases, 

we have had a number of very important successes, and we are 

building on those successes. 

In other areas, such as the securities equity holding that I mentioned earlier, where China’s WTO commitments do not go far 

enough, we have been using our bilateral engagement to press 

China to move beyond its WTO commitments and to make greater 

access available. And in cases where they make a commitment, we 

use the machinery of the Strategic and Economic Dialogue, the 

very frequent opportunities for very deep engagement that it affords to push forward for actual implementation of those commitments. 

So if you look in the area of, for instance, indigenous innovation, 

where President Hu made a very important commitment to President Obama to dismantle the set of policies that they were going 

to put in place that would have favored Chinese innovators over 

U.S. innovators, we used the machinery of the Strategic and Economic Dialogue across the Administration to ensure that regulaVerDate Nov 24 2008 15:39 Sep 17, 2012 Jkt 075732 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\75732.TXT TERRIE
8 

tions were actually rescinded that would have applied not just at 

the central government level but all the way down to the provincial 

level. 

Similarly, in the case of third party auto liability insurance, we 

got a commitment from China that it would move to open its markets to U.S. providers. We have now followed through and have 

seen that they have issued this regulation, and we will continue to 

press them as our firms apply for licenses. 

And so in each area, we need to be very vigilant and work together with you here as well as with domestic stakeholders to ensure that when commitments are made, there is follow-through, 

and in areas where we feel that commitments are inadequate, we 

continue pushing for more market opening as we have now seen in 

the securities area. 

Chairman MILLER OF CALIFORNIA. My concern is, and I am going 

to close with this, in many cases you have made commitments 

which is dealing in good faith, and they have made comments. And 

enforcing comments can be very difficult. 

My time is up, so I yield to the ranking member. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I 

agree with you and, as I said in my opening statement, the Strategic and Economic Dialogue has been a formula that does allow 

us to encourage China to adopt various reforms, but it is not a 

binding forum, which we had talked about or you had talked about. 

So you mentioned a little bit about how the Administration will 

continue to encourage and urge China to follow through on the 

commitments they made during the recent dialogue, but as you 

press ahead, we have seen them not live up to those particular 

agreements, and I find that as we are trying to get our financial 

markets especially into China the risks that our companies might 

take by going in, setting up, and then getting pulled back on, and 

they are left there. 

China car insurance—as you have said, they have passed the legislation that everybody, it is mandatory to buy insurance, car insurance. The last time I was in China, I think 30 percent of people, 

middle-income families were now buying cars. How are we going to 

be able to protect our business people if they go in there on this 

venture, and was there any discussions of timing for implementing 

these commitments when they were agreed upon? 

Ms. BRAINARD. Generally, we try to be as specific as we possibly 

can, and as you know, we negotiate a joint document coming out 

of each Strategic and Economic Dialogue with the Chinese which 

we then use as a document for tracking actual implementation of 

outcomes. So, we have a pretty precise mechanism, and we go 

through quite regularly with our Chinese counterparts as well as 

soliciting input from U.S. stakeholders to work through on each 

commitment whether they are on time in implementing the commitments they have made to us. 

And, again, in some areas we really have seen explicit followthrough on commitments—not across-the-board, and we share very 

much the sense of frustration that China needs to move forward. 

But we have used to a very great extent all the mechanisms that 

we have available to us. We used Section 421 to provide relief to 

our tire producers. Again, we have taken six enforcement cases in 

9 

the WTO. We have had some very important strategic successes on 

those cases that go beyond the specific matter at hand to really try 

to drive systemic change in the Chinese economy more broadly. 

And we will continue to use trade remedies, for instance, to protect our industries where we think Chinese companies are not playing by the rules. 

So, as you know, the President talked in the State of the Union 

and has put forward in his budget a proposal to create an interagency trade enforcement center, which would bring together staff 

from across the interagency so that we can be very proactive in 

finding areas where our firms are not getting the access that they 

deserve and then following through with the tools that we have. 

So we are going to use all of those mechanisms and the Strategic 

and Economic Dialogue has been useful in that context. Again, we 

have had a set of commitments negotiated and then timelines that 

we have been trying to follow through on, and we will use the WTO 

when we can, we will use our domestic remedies where we must, 

and we will use these bilateral negotiations through the S&ED 

wherever possible to get follow-through. 

Mrs. MCCARTHY OF NEW YORK. Just out of curiosity, are other 

nations also having dialogue with the Chinese as far as bringing 

their products in? Are we going to have competition also with, say, 

Germany, the U.K., France? 

Ms. BRAINARD. China has, as we do, a number of major economic 

dialogues on a bilateral basis with other major economies. I would 

say that we have made more progress through the Strategic and 

Economic Dialogue with China than we have seen in some of the 

other, in all of the other dialogues that China has held, and I think 

that speaks in part to the very substantial engagement and priority 

that the entire Administration has placed on breaking down these 

barriers, leveling the playing field, achieving rebalancing, and 

opening up the financial sector. 

So when I look across the set of engagements China is having, 

and we of course examine them very closely because we want to 

build on progress wherever it has been made, I would say that the 

U.S. discussions with China under the S&ED have made much 

more concrete progress again in areas like market access for securities firms, like indigenous innovation, intellectual property, things 

that matter to American companies and American workers. 

Mrs. MCCARTHY OF NEW YORK. I yield back. 

Chairman MILLER OF CALIFORNIA. Vice Chairman Dold is recognized for 5 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. 

Secretary Brainard, thank you so much for being here. 

In 2009, the United States exported approximately $15.7 billion 

in services to China, a surplus of about $71⁄2 billion. In my view, 

I think that sales should be higher, but access to the Chinese service markets remain severely constrained. China imposes foreign equity limitations in many key sectors, including banking, insurance, 

rail, express delivery, and telecom, just to name a few. Chinese investment restrictions have a significant effect on services companies which often requires a local presence in order to do business. 

Other Chinese regulatory barriers, including limitations on licenses, a lack of transparency, discriminatory or overly burdenVerDate Nov 24 2008 15:39 Sep 17, 2012 Jkt 075732 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\75732.TXT TERRIE
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some regulatory requirements, and other restrictions, also prevent 

service companies from gaining market share. 

What is this Administration doing to create new opportunities for 

U.S. service companies that wish to export to China and continue 

to expand the trade surplus and services? 

Ms. BRAINARD. As you say, China has numerous restrictions in 

its services sector. I should say that China, for the size of its economy, has a services sector that really is not in keeping with its 

being the second largest economy and with its aspiration to be a 

major center for high-value production. So that it is not just restrictions on foreign participation of services but in fact services sectors 

have traditionally received much less favorable treatment in Chinese domestic policies as well. 

We are beginning to see a shift and a recognition that as China 

rebalances its economy, it needs a much more robust services sector, and we are trying to use that shift in thinking among China’s 

policymakers to make inroads on services access, which, as you say, 

we agree this is an area of major competitive advantage for U.S. 

producers. It is an area of major potential export expansion. We 

have seen very strong export expansion, but we think it still is well 

short of potential, and it is an area where China’s commitment 

under the WTO reflected a much earlier stage of development in 

terms of the kinds of services sector they should have. 

So we have raised issues associated with equity on ownership restrictions, market presence restrictions, and investment restrictions. We have raised those in the Strategic and Economic Dialogue. I know that Commerce and USTR raise these issues in their 

JCCT, and we also made this a major focus of the investment 

forum that we held earlier this year with China, pushing in particular on the restrictions in their foreign direct investment catalogue in many of these sectors. 

We are starting to see some changes. They moved some services 

sectors out from their restricted into the encouraged sector. We are 

seeing them shift their taxation system so that they will, we hope, 

start to reduce the burdens on the services sector, and we are going 

to push industry by industry, whether it be auto liability insurance, 

life insurance, express delivery, across-the-board as you—of the 

services you mentioned. 

Mr. DOLD. I appreciate that. If I can, I am going to move from 

the services sector over to financial and even manufacturing. The 

Tenth District of Illinois, which I represent, is actually one of the 

largest manufacturing districts in the Nation, and I had an opportunity to talk with someone yesterday who was doing a significant 

amount of business with China and actually was competing also 

with Chinese companies. Honestly, the thing he told me was that 

he can’t even compete now with the Chinese companies because of, 

in essence, the backing that the Chinese Government is giving to 

their companies. So, the same thing is going to happen with the financial institutions that have the explicit backing of the government as the state-operated enterprises, and therefore their cost of 

capital is going to be significantly lower, putting the United States 

businesses and manufacturers at a tremendous disadvantage. 

The gentleman I was talking to, again manufacturing in the 

Tenth District in Illinois, was talking about how he can’t even comVerDate Nov 24 2008 15:39 Sep 17, 2012 Jkt 075732 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\75732.TXT TERRIE
11 

pete with the Chinese companies. His costs of raw goods were 

going to be greater than what the Chinese companies were going 

to be able to put out. 

What is this Administration—what are you seeing in terms of 

leveling the playing field? How are we able to try to level the playing field so that American workers can not only manufacture here 

but can compete effectively with China? 

Ms. BRAINARD. We spent a great deal of time at the Strategic 

and Economic Dialogue putting high priority on the competitive advantage that we think state-owned enterprises in China unfairly 

enjoy and pressing for very specific changes for China to dismantle 

the set of preferences that we think unfairly benefit their stateowned enterprises. This is an area where previously we had seen 

almost no willingness to discuss and certainly no willingness to put 

any commitments into a public document. 

For the first time, China did say that it would move forward to 

ensure that credit policies, regulatory policies, and broader sets of 

policies would be applied on a nondiscriminatory basis across stateowned and other enterprises. That is a very important commitment 

but now we are going to need to work to find ways of seeing 

through implementation on very specific fronts. 

The preferential credit terms is a very particular set of problems 

that are closely intertwined with the set of restrictions in the financial sector more generally. You have caps on deposit rates 

which lead to lower interest rates, and then they have to ration 

credit because they are worried about inflation and generally we 

believe, we think that we see a pattern whereby state-owned banks 

ration that credit on a favorable basis to state-owned enterprises. 

So they are starving their own private enterprises and they are 

also unfairly advantaging our companies, which is what matters to 

us. We think that system has to go, and we are pushing really hard 

on it. 

For the first time, China said that they would ensure that stateowned enterprises pay dividends at a level that is comparable to 

publicly listed companies. If they actually move forward on that, 

that is a huge change, and we believe that if they make that funding available, it will also help to strengthen domestic consumption 

and contribute to rebalancing. 

I think this is an area that is going to take a lot of effort to start 

to disentangle. So I don’t want to suggest that we feel like we are 

done, quite the contrary; this is the beginning. But it is an area 

of very high priority for us for the reasons you said. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Scott, you are recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. We understand that 

China may have been much less amenable to arguments about 

opening up their financial sector to U.S. firms during the financial 

crisis that we have had. But they seem to have come around on 

that because they have been impressed with the resilience of our 

financial system and also have seemed interested in some of the reforms that we have subsequently put into place, Dodd-Frank, Wall 

Street reforms, some of the other things we have done. 

12 

What is your view on China’s willingness to engage with the 

United States and with different segments of our financial sector 

during and since our financial crisis? 

Ms. BRAINARD. I think your characterization is very much consistent with our experience, which is that when I first started in 

this job, which was in the early days of responding to the financial 

crisis, China was really most interested in whether we had the capacity to really fix our problems, reform our system, try to retain 

the innovation and dynamism that comes with the U.S. financial 

system is really the hallmark of it, while putting in place reforms 

that would fundamentally strengthen safety and soundness, and 

we have seen that they have responded, and I think this is true 

more generally of our foreign partners, in response to the very 

strong reforms we put in place with Dodd-Frank, the very strong 

increases in capital that we forced our firms to take on, we have 

seen a much more sort of heightened interest again in having our 

financial services firms participate in the financial market opening 

that China’s reformers are pushing forward. 

At the same time, China’s regulators also moved to put in place 

some of the same safeguards that we put in place, so they increased capital buffers in their banking system at the same time, 

and they are moving in a lot of consistent areas to come forward 

with a set of regulations that are in many respects convergent with 

some of the things we did in Dodd-Frank. So, I think it has been 

positive for our financial services firms as they seek to expand 

their participation in China’s market. 

Mr. SCOTT. Let me ask you something else. China is the second 

largest economy in the world. Is that a safe assumption? 

Ms. BRAINARD. Yes. 

Mr. SCOTT. And we are the first, we are the number one economy 

in the world. Is that a safe assumption? 

Ms. BRAINARD. Yes. 

Mr. SCOTT. And China has nearly a trillion or over a trillion dollars of our debt. They purchased it. Is that a safe assumption, too? 

Ms. BRAINARD. I don’t know the exact numbers. 

Mr. SCOTT. It hovers around a trillion. But they are our largest 

investors. So it just seems to me with all of this infrastructure in 

place, I find it difficult to see why China has such restrictive policies in place that make it difficult for our firms to set up operations 

in China. 

How do you assess that? We are number one, number two in the 

economies. They have invested in our debt. But yet, we have this 

other thing here. 

Ms. BRAINARD. I think the relationship between China and the 

United States is fairly extensive in both directions. So our firms 

have much greater foreign direct investment into China, for instance, particularly in areas in which we are very competitive than 

Chinese firms have had in the U.S. market, and they are only now 

starting to increase their investments. 

While it is true that China’s WTO commitments have restrictions 

so that, for instance, in the banking sector, our investors are limited to minority shareholdings, nonetheless, we have a much larger 

number of branches and subsidiaries from U.S. banks operating in 

China than China does in the United States. So moving forward, 

13 

I think there is enormous opportunity for the number one and 

number two economies in the world to greatly expand opportunities 

for our workers and our businesses. But we do want to make sure 

that when that expansion takes place, it does so in a more balanced way. 

Mr. SCOTT. My final point that I wanted to get out, is there any 

differentiation, are there more restrictions on American companies 

based upon what kind of companies they are, whether they are financial services companies or they are manufacturing companies or 

they are distribution companies, electronic companies, computers? 

Is there any differentiation where the restrictions are greater or 

less depending upon the nature of the American firm’s businesses? 

Ms. BRAINARD. China has differential commitments on equity 

ownership, for instance, permitted by all foreign investors, including U.S. foreign investors by sector. So they have, for instance, a 

foreign direct investment catalogue. This is an approach that is 

just very different from the one we have here. We think our approach is a much better approach, which is a general presumption 

in favor of openness as long as those investments are consistent 

with national security. So we are going to continue to push for a 

broad opening of foreign direct investment, and we have seen some 

progress but not near enough to have a fully balanced relationship. 

Mr. SCOTT. Thank you very much. 

Chairman MILLER OF CALIFORNIA. Mr. Manzullo, you are recognized for 5 minutes. 

Mr. MANZULLO. Thank you. 

I noted in your testimony, on the last page, it says, ‘‘China committed to submit a revised comprehensive offer this year to join the 

WTO Agreement on Government Procurement that is responsive to 

the requests of the U.S. and other GPA parties.’’ 

Do you really expect that we will get a document that the United 

States will agree to from the Chinese? 

Ms. BRAINARD. I do expect them to submit an offer because they 

have committed to do so. We have been very frustrated, as I am 

sure you have, that China committed to come into the Government 

Procurement Agreement 2 years ago, and they have yet to submit 

an offer that we think provides commiserate access into its government procurement market to that provided by other large economies. Now, in this area, of course, countries don’t automatically get 

benefits. So, for instance, as you know, here in the United States, 

our ‘‘Buy American’’ policies apply to countries that are not full 

members in the Government Procurement Agreement. 

Mr. MANZULLO. I understand. China has a lousy record of intellectual property protections. They still continue to manipulate the 

currency even though it has appreciated 13 percent in the last couple of years. But I think Americans would be aghast to know that 

if a State or municipality or the Federal Government, especially 

the latter, is opening up this bidding process to the Chinese when 

their record of IP protection is becoming worse. 

Ms. BRAINARD. So, again, I think on the Government Procurement Agreement we are going to continue pressing hard for China 

to come into that agreement with an offer that is commensurate to 

what we have— 

Mr. MANZULLO. I understand. 

14 

Ms. BRAINARD. —demanded from other countries. And until they 

do, they simply won’t have access to those parts of our procurement 

market that are governed by ‘‘Buy American.’’ And that is a very 

important, I think, consideration for them that I hope will persuade them to move forward with an offer. 

Mr. MANZULLO. Look at where we are with minerals and holding 

that hostage. I just don’t think Americans are ready, nor is China 

ready, when you have somebody actively bidding to do a public 

works project or a major purchase that they are ready to have the 

Chinese come in with a government that is still far from open, with 

a continuous violation of ethics and business. 

We had a hearing before my Asia Subcommittee on what China 

did to Fellowes Shredder. It was absolutely outrageous how they 

literally stole $185 million worth of intellectual property, forced out 

their partner, closed the operations, but then opened it up with 100 

percent Chinese ownership. 

But let me ask you a question. Last week, the Fed approved the 

Commercial Bank of China purchasing the Bank of East Asia’s 

U.S. banking subsidiary, the Bank of China’s application to expand 

its U.S. operations to Chicago, the application by the Agricultural 

Bank of China to establish a branch in New York. Can the Chinese 

purchase 100 percent of a company in the United States or of a 

bank and operate here? Is that correct. 

Ms. BRAINARD. In terms of our market access commitments, as 

you know, the U.S. provides for international treatment and does 

not have equity ownership restrictions. 

Mr. MANZULLO. So the answer is yes? 

Ms. BRAINARD. However, companies’ foreign financial institutions 

do need to undergo a process of— 

Mr. MANZULLO. I understand. What I am saying is, we don’t 

have anything mutual going on here. American companies can’t 

buy or have 100 percent of a business ownership in a Chinese company or actual ownership but the Chinese are allowed that in the 

United States. Isn’t that correct? 

Ms. BRAINARD. Under the WTO commitments, China came in 

with a WTO commitment which at the time was more commensurate with— 

Mr. MANZULLO. The answer is yes, isn’t it? 

Ms. BRAINARD. Which is much—which does not allow a controlling shareholding, whereas yes, we do here in the United States. 

Mr. MANZULLO. So we offer the Chinese more than what they are 

offering us? 

Ms. BRAINARD. And we are trying very hard to get them to move 

forward on— 

Mr. MANZULLO. I understand that. My question is, why didn’t the 

Federal Reserve, if possible, take that opportunity or the government take the opportunity to say, I think it is time to talk about 

the same access to Chinese financial or operating U.S. operations 

if China can operate in the United States? We allow them to do 

that but they don’t allow us to do that. Is there a problem there? 

Something intrinsically wrong? 

Ms. BRAINARD. The Federal Reserve has an independent regulatory proceeding which is designed to ensure that prudential requirements are met. The Administration has ongoing discussions 

15 

with China about market access, and we fully agree with you that 

China should provide access that is commensurate with the access 

that we provide to them. So we agree with you very much that it 

should be commensurate. 

Mr. MANZULLO. If I may, please, it is my time. 

Why didn’t we take that opportunity? I am looking at the testimony of the panel that will follow you, from Rob Nichols. 

Chairman MILLER OF CALIFORNIA. The gentleman’s time has expired. You need to wrap it up. We have votes coming in, and I have 

two more Members with questions. I have tried to be generous, but 

we have votes coming, and I have two more Members I have to let 

go through the process. 

The gentleman from Michigan, Mr. Huizenga, is recognized for 5 

minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman, and with that, actually, I am willing to grant some time to my friend from Illinois. I 

will give him some of my time, and let him pursue that line of 

questioning, because I am interested in that as well. 

Mr. MANZULLO. The question was, why didn’t the Administration 

at the time that these applications were pending with the Fed for 

these three purchases tell the Chinese Government that now is the 

time for you to give us 100 percent ownership opportunities just as 

we give to the Chinese? Why didn’t the Administration do something at that point? 

Ms. BRAINARD. I will just say that the Administration has consistently raised with our Chinese interlocutors— 

Mr. MANZULLO. That doesn’t answer the question. 

Ms. BRAINARD. —the ownership restrictions, and we saw some 

progress on market access in the securities sector which we think 

is important progress, but we are going to continue to push. 

Mr. MANZULLO. But why didn’t they take the opportunity at that 

point to demand market access? 

Ms. BRAINARD. We do take every opportunity to demand market 

access, and we saw, again, a very important step forward by China, 

a step forward that will expand meaningfully our market access in 

the securities area, and we will push for China to move beyond its 

WTO commitments in the banking area as well. We agree with 

you, it is important they provide access commensurate to the access 

we provide into our market. 

Mr. HUIZENGA. Reclaiming my time, I appreciate you pursuing 

that line of questioning, because I think the frustration that I have 

had, and probably you are hearing here, is it seems that we take 

two or three steps forward, China will take one step forward, and 

we declare it a tie, somehow that we have made equal progress as 

we are moving along, and that I think is sort of the concern and 

the frustration that I have. And I apologize, I came in a little late, 

but I was curious—and we are hearing the vote bell go off right 

now. But with this approval going in, what impact do we really see 

this happening on our domestic banks as well? I am sure you are 

quickly covering some territory that you may have touched on already, but how are we seeing what these Chinese banks coming in 

may do to our own banks? 

Ms. BRAINARD. Again, these are—this is a regulatory process 

that is undertaken by the Fed on an independent basis and it is 

16 

on the basis of prudential requirements. As you know, we already 

have extensive market access into our banking sector for foreign 

companies, and generally speaking, we believe we have a more 

competitive, more vibrant, more dynamic financial services sector 

as a result of having an open financial services sector. We think 

China should undertake the same policies, that it would be only 

fair for us and very beneficial for the dynamism of their economy. 

Mr. HUIZENGA. But it seems to me that would be a little different 

having Deutsche Bank here or somebody else that we have a—or 

a Canadian bank, TD Bank, which is huge down here, those are 

countries that we have parity on whether it is trade or any of the— 

patent protection and all of these other things that have been addressed in various treaties where they have stepped up and actually done that. That is the concern you are probably hearing, is 

aren’t we again putting ourselves at a competitive disadvantage 

when we say well, they have made positive steps forward but 

haven’t crossed the finish line, yet we somehow say the race is 

done and so therefore we are going to grant this. 

Ms. BRAINARD. Let me just be very clear. We don’t think there 

is anybody who should be saying the race is done. We are working 

very hard because we think that it is important to our workers and 

to our businesses that the relationship with China be more fair, be 

more balanced, and that we need to see greater market access into 

the Chinese market. So, we are using the tools that we have. We 

are very aggressive in taking WTO cases. We have been quite successful so far. We used Section 421 for the first time ever. The 

Bush Administration had not used this tool at all. It is a very important tool and we have been very aggressive on using trade remedies as well. 

So, we completely agree that this relationship is one that needs 

to be more balanced. That is why the President has put forward 

in his budget a proposal to create a trade enforcement center that 

would bring together resources across the interagency that would 

allow us to be more effective in bringing cases on behalf of our companies. We very much agree with you, and you know we made 

some progress at the Strategic and Economic Dialogue, but by no 

means are we satisfied with that and we are going to go right back 

at it, and we look forward to working with you and your constituents to make sure that we are aware of all of the areas where we 

need to keep pushing. 

Mr. HUIZENGA. Mr. Chairman, my time has expired. I know we 

have a vote as well. So thank you. 

Chairman MILLER OF CALIFORNIA. I think the Under Secretary 

is hearing from this committee that we understand the United 

States is making commitments and the Chinese are making comments. And that is of great concern. 

Do you have time for one more questioner? 

Ms. BRAINARD. Sure. 

Chairman MILLER OF CALIFORNIA. I yield to the gentlelady from 

New York, Ms. Hayworth, for 5 minutes. 

Dr. HAYWORTH. Thank you, Mr. Chairman, and Under Secretary 

Brainard, it is a pleasure to see you again. As you are aware, I believe we sent a letter, I worked with our chairman, Chairman 

Bachus, and with Ranking Member McCarthy, to encourage greatVerDate Nov 24 2008 15:39 Sep 17, 2012 Jkt 075732 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\75732.TXT TERRIE
17 

er access to the financial markets by our U.S. institutions, and I 

note that you made some progress in the Strategic and Economic 

Dialogue. I wonder if you could comment briefly and specifically on 

issues like licensing, the forum in which our institutions might join 

Chinese markets, product services, and of course discriminatory 

practices, we are going to address those, by the Chinese Government. And more fundamentally, what kind of leverage can we bring 

to bear, particularly given that we are in rather large debt to 

China at this point? 

Ms. BRAINARD. As you say, we made some important progress in 

financial services opening, and frankly, these are commitments 

that our companies, and indeed the United States, had been seeking for many years. It predated the Administration. So, it was good 

to see China move forward. Again, there are a whole host of areas 

where we need to see much greater progress. So while we welcome 

these steps, we are going to continue pushing very hard for broader 

access in financial services across-the-board. We have seen some 

progress on mandatory third party auto liability insurance. We 

have seen some important progress on futures brokers, on securities. But we need to see more progress in other insurance sectors, 

on the banking sector, and I think we can continue pushing hard. 

We have leverage with China. We are the largest market in the 

world. We have some of the most innovative dynamic companies in 

the world. As Chinese authorities look to transform their economy, 

I think we all tend to forget here that China is facing incredible 

challenges. They are facing a very steep demographic cliff. Wages 

are rising very fast. Costs are rising very fast. They have maxed 

out on resource-intensive, very heavy investment, export-oriented 

policies and need to have a domestic consumer that is going to sustain their growth. 

We have leverage. They want what we have. They want an environment that produces innovation, they want a dynamic private 

sector, they want an economy that channels capital to companies 

on the basis of their good ideas and good management, not on the 

basis of rationing by state-owned banks. So, we do actually have 

leverage. And we are seeking to use, where necessary and where 

we can, dispute settlement at the WTO and leverage in that form, 

but we also have a lot of leverage by virtue of the strength of our 

private sector and the depth of our engagement. And so, we are 

trying to use all of those things to make progress, again recognizing the huge interest here and we should not be satisfied. We 

have a lot of work ahead of us. 

Dr. HAYWORTH. I appreciate your comments and your dedication 

to this task, Secretary. No question. 

We just passed a bill through the House for—CSPA to help our 

institutions to fight the challenging battle against hacking by those 

who seek to harm our institutions or our country. And unfortunately, of course, much of the challenge seems to come from China. 

Is there any—are we addressing on an official level China’s policies 

toward—I realize this would be a delicate subject—but toward industrial espionage, if you will, all the ways in which our fundamental code of ethics, if you will, is different seemingly from 

theirs? 

18 

Ms. BRAINARD. Yes. I share very much the priority that you put 

on the cybersecurity issue. We do see this area of cybersecurity as 

a major risk to the competitiveness of our companies and their ability to compete on a level playing field internationally. 

It is an area which has been included in the Strategic and Economic Dialogue. The State Department has taken the lead in conversations on cybersecurity, so I would suggest that they could give 

you more information there, but it is a priority for the Administration, and the State Department has held discussions on this topic 

in the context of the S&ED. 

Dr. HAYWORTH. Thank you, Madam Secretary. And I yield back, 

Mr. Chairman. Thank you. 

Chairman MILLER OF CALIFORNIA. Thank you. I want to thank 

Madam Secretary for her testimony. You have always been very 

candid and thorough in your thoughts. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to this witness and to 

place her responses in the record. 

Madam Secretary, I have a letter I would like to give to you on 

Chinese bonds that I sent to Secretary Geithner on April 6th. I 

thank you for your time. 

I would encourage all the Members to come back for the second 

panel. 

The subcommittee is in recess. 

[recess] 

Chairman MILLER OF CALIFORNIA. The hearing is called back to 

order. 

I would like to introduce our second panel. 

First, the Honorable Rob Nichols has been chairman of the Engage China Coalition since its creation in 2006. He is also the 

president and CEO of the Financial Services Forum, a nonpartisan 

financial and economic policy organization comprised of CEOs of 20 

of the largest and most diversified financial services institutions 

doing business in the United States. 

Before joining the Forum, Mr. Nichols served as the Assistant 

Secretary of Public Affairs at the U.S. Treasury. He also held positions in the House, Senate, and White House. Mr. Nichols was recognized as one of the most effective trade association leaders in 

Washington, D.C., in 2009, 2010, and 2011. 

Welcome. 

Second, Mr. David Strongin is managing director of international 

policy at the Securities Industry and Financial Markets Association, SIFMA, which brings together the shared interests of more 

than 650 security firms, banks, and asset managers. Mr. Strongin 

is SIFMA’s expert in U.S.-China policy. 

Third, the Honorable Clay Lowery is vice president of Rock 

Creek Global Advisors. He previously served as the Assistant Secretary of International Affairs at the U.S. Treasury Department, 

where he was involved in the first Strategic and Economic Dialogue 

with China headed by former Secretary of the Treasury Henry 

Paulson. 

19 

Mr. Lowery has chaired the Committee on Foreign Investment in 

the United States, CFIUS, and served as the Financial Deputy to 

the G-20, G-7, International Monetary Fund, and Financial Stability Forum. At various times, Mr. Lowery has been appointed to 

be the U.S. representative on the board of the World Bank, the African Development Bank, the European Bank for Reconstruction 

and Development, and the Inter-American Development Bank. 

After his government service, Mr. Lowery was vice president of 

international government affairs with Cisco Systems and the managing director of Glover Park Group. 

It is good to have you here today. 

Finally, Mr. Nicholas R. Lardy is the Anthony M. Solomon senior 

fellow at the Peterson Institute for International Economics. Mr. 

Lardy joined the Peterson Institute from the Brookings Institution 

where he was the senior fellow in the Foreign Policy Studies Program and served as the interim director of Foreign Policy Studies. 

Before Brookings, he served at the University of Washington, 

where he was the director of the Henry M. Jackson School of International Studies from 1991 to 1995. He was also the Frederick 

Frank Adjunct Professor of International Trade and Finance at the 

Yale University School of Management. Mr. Lardy is an expert in 

Asia, especially in Chinese economy. 

I want to thank you all for being here today. 

I would like to recognize the witnesses in order, for 5 minutes 

each. 

Mr. Nichols, you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE ROBERT S. NICHOLS, 

CHAIRMAN, ENGAGE CHINA COALITION 

Mr. NICHOLS. Thank you, Chairman Miller and Ranking Member 

McCarthy, for the opportunity to participate in this very important 

hearing regarding the need to expand access to China’s financial 

sector for U.S. institutions. 

Today’s hearing is both timely, given the recent round of the 

Strategic and Economic Dialogue in Beijing, and it is enormously 

important. China’s economic emergence and the impact of its integration into the global economy are unprecedented in the history 

of the world’s economy with profound implications for U.S. economic growth and job creation. 

Today, I would like to use my appearance to help connect the 

dots and shed light on why a more consumption-based Chinese 

economy is very much in the interests of the United States, how 

a more active Chinese consumer will dramatically expand demand 

for U.S.-made products and services, and, finally, what role a more 

modern and sophisticated financial sector plays towards the acceleration of a more consumption-based Chinese economy. So I am 

really going to focus on jobs today. 

As you all know, China’s economy has grown at an annual rate 

of nearly 10 percent over the last 2 decades. It was the world’s seventh-largest economy in 1999. It recently surpassed Japan to become the world’s second-largest economy. Since China joined the 

WTO in 2001, our exports to China have increased more than sixfold, growing 7 times the pace of U.S. exports to the rest of the 

20 

world. China is now America’s third-largest export market and the 

largest market for U.S. products outside of North America. 

According to a recent article in the Washington Post, exports to 

China from almost every U.S. State and congressional district have 

grown exponentially in recent years. So clearly, fair and competitive access to China’s fast-growing middle-class and business sector 

represents an enormous commercial opportunity for American manufacturers, service providers, farmers, and our ranchers. 

So let me give you a quick sense of what an expanding China can 

mean for U.S. economic growth and job creation. 

Last year, for example, our exports to Japan totaled about $66 

billion. Our exports to China were about $104 billion. China’s population, of course, is about 10 times the size of Japan’s population, 

so about 130 million people in Japan, about 1.3 billion in China. 

If China’s citizens were eventually—not overnight but eventually—able to consume American-made goods and services at the 

same rate as her neighbor, Japan, U.S. exports to China could, over 

time, grow to $660 billion. That is 7 times what America exported 

to China last year and an amount equivalent to nearly 5 percent 

of U.S. GDP and nearly twice what we imported from China last 

year, potentially turning a $300 billion trade deficit into a $300 billion surplus. 

More importantly, if we apply the Commerce Department’s metric that there are 5,000 new American jobs for every $1 billion in 

additional exports—that is a Commerce Department figure—increasing exports to China $660 billion a year would amount to 

somewhere in the vicinity of 2.8 million new jobs here. That won’t 

happen overnight, but with the right reforms and with the right access to their markets, it will happen over time. 

Now, for that remarkable transformation to occur, clearly, many 

things need to happen inside of China—I will be the first to acknowledge that—to change their culture from one more towards 

consumption and less saving. There needs to be infrastructure 

changes, cultural changes, societal changes. But first among equals 

is her citizens need the tools found in developed nations to save, 

to invest, and to insure against risk; and those are the tools that 

are offered in an open financial services sector. 

So by providing the financial products and services that China’s 

citizens and businesses need to save, invest, and insure against 

risk, raise standards of living, and consume at higher levels, foreign institutions will help China develop an economy that is less 

dependent on exports, more consumption-driven, and therefore an 

enormous and important and expanding market for American-made 

products and services. 

I look forward to answering your questions. Thank you for 

hosting this important hearing, which I, frankly, think is about 

jobs in America. 

[The prepared statement of Mr. Nichols can be found on page 47 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. That was very timely. I am 

impressed. 

Mr. Strongin, you are recognized for 5 minutes. 

21 

STATEMENT OF DAVID STRONGIN, MANAGING DIRECTOR, THE 

SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. STRONGIN. Thank you. 

Chairman Miller, Ranking Member McCarthy, I thank you for 

the opportunity to testify today on behalf of the Securities Industry 

and Financial Markets Association on the importance of improved 

market access for financial services firms in China. 

I would also like to take this opportunity to reiterate our support 

for the Strategic and Economic Dialogue and the efforts of Treasury Secretary Geithner, Under Secretary Brainard, and the rest of 

the Administration. 

With the conclusion of the most recent S&ED, this hearing is especially timely and provides us with the opportunity to assess the 

progress made and the need for continued reform in China. 

My testimony will cover three areas: priorities that are necessary 

to allow U.S. firms to compete on a level playing field; the significance of the commitments made at the S&ED; and the growth of 

China’s financial services firms and their implication for a level 

playing field. 

Despite progress at the most recent S&ED in raising ownership 

share and for securing joint ventures, full market access and national treatment for financial service firms in China remains an industry priority. 

We have identified five key interconnected priorities: first, permit 

100 percent ownership and the right to establish in a corporate 

form of choice; two, allow the same scope of business; three, further 

develop the Qualified Foreign Institutional Investor Program; four, 

improve the bond market; and, five, promote regulatory transparency. 

This year’s S&ED yielded commitments from which further 

progress must be made. This includes some of the things Secretary 

Brainard discussed: 

One, raising ownership on security joint ventures from 33 to 49 

percent. This is a notable development, but we believe a roadmap 

toward full ownership should be developed and implemented as 

quickly as possible. 

Two, reducing the seasoning period from 5 years to 2 years. This 

will provide U.S. joint ventures with expanded access for different 

activities in China. However, the length of the season period of 2 

years remains. We believe that is a significant obstacle, and there 

are also a number of opaque requirements that restrict access for 

U.S. firms in China related to this. 

We also believe while increasing the qualified foreign institutional investor quota at $80 billion again is a step forward, we need 

those quotas to be eliminated and allow free investment. 

We believe that it is essential that these commitments are implemented expeditiously and that this committee is well placed to ensure these obligations are met. 

The S&ED remains the primary forum in which to discuss financial services’ issues on a bilateral basis. Ongoing engagement and 

continued dialogue is vital for pushing forward with further reform 

of China’s markets. 

22 

SIFMA has consistently urged both the Bush and Obama Administrations to engage in results-oriented discussions that lead to the 

reduction and elimination of these barriers. Despite these commitments, more work needs to be done to ensure U.S. financial services firms are able to operate on a level playing field, and monitoring implementation of China’s S&ED commitments will be critical. 

While the United States continues to advocate for improved market access and the reduction of regulatory barriers, China has increased its global profile considerably. Chinese regulatory authorities are now full participants in the G-20, the Financial Stability 

Board, and the International Organization of Securities Commissions. As China becomes a more active participant in these institutions, it is imperative they reduce restrictions and eliminate discriminatory barriers in order to meet these global commitments 

and responsibilities. 

We look forward to working with the committee, Congress, and 

the Administration to further expand the industry’s access to 

China. We believe the committee has a central role in helping ensure the rapid implementation of China’s S&ED commitments 

while at the same time pursuing a level playing field for U.S. firms. 

Finally, to ensure these goals are met, we offer two recommendations: first, that an annual report from Treasury to Congress is provided demonstrating China’s implementation of commitments 

agreed to at each S&ED; and second, increasing the frequency of 

the economic portion of the Dialogue to perhaps twice a year, as 

was done during the original S&ED. 

I very much appreciate the committee’s interest in this issue and 

the opportunity to testify today. Thank you very much. 

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

55 of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Lowery, you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE CLAY LOWERY, VICE 

PRESIDENT, ROCK CREEK GLOBAL ADVISORS LLC 

Mr. LOWERY. Chairman Miller, Ranking Member McCarthy, 

thank you very much for the opportunity to testify today on increasing market access for U.S. financial firms in China. 

I think Mr. Nichols covered the jobs issue very well, and Mr. 

Strongin covered some of the specific areas, and Mr. Lardy, I know, 

is a complete expert on China. So I figured my area that I could 

help you with is what is it like to be in a government position 

doing financial liberalization negotiations with China, no longer 

being in that position. 

In my experience working with Chinese financial officials, China 

makes changes when it believes it is in China’s interests. This 

probably does not come as much of a surprise to you, and I don’t 

mean to diminish the impact of external pressure, but that pressure is mitigated by China’s size, its unprecedented speed of economic growth over the last 30 years, and its ability to attract investors from around the world. That is why financial liberalization 

should be thought of as more than just increasing market access 

23 

for U.S. companies. It is also about rebalancing China’s internal 

economy. 

For a few years, various observers have noted that China’s export-led, production-heavy growth model could not last forever. Two 

major questions were asked: one, when is the turning point at 

which China needs to transform its economy; and two, can China 

actually accomplish this transformation? 

With regard to the first question, the timing of this hearing is 

excellent. China appears to be on the verge of significant changes. 

The leadership is scheduled to change in China over the next 10 

months or so; and these leaders will be the ones responsible for 

taking China through what I believe is an even more important 

transition, the vital changes to its economy that are going to be 

made necessary by the long-term unsustainability of its current 

economic model. 

You have heard from Under Secretary Brainard and others on 

this rebalancing of its internal economy, but the challenges in 

China cannot be underestimated. Entrenched interests, whether 

they are state-owned enterprises or captured regulatory agencies, 

there is just inertia; and, frankly, pure politics will fight for the 

status quo. 

While the jury is out whether China can make this transition, 

the last 30 years suggests that China at times does use external 

pressure to advance internal reforms. Therefore, I see the S&ED 

and the negotiation of a Bilateral Investment Treaty as opportunities for the United States to provide input and maybe even influence the way China addresses these challenges. 

The difference between when I was working on these issues a 

few years ago and today is that U.S. officials and observers are not 

the only ones emphasizing that China is bumping up against the 

limits of its existing growth model. As your letter and many members of this committee’s letter to President Obama points out, Chinese leadership and respected international organizations like the 

World Bank have joined the chorus, and perhaps most importantly 

we are actually starting to see some of that transformational 

change. 

In many ways, financial sector development is the key to this 

transition. The current system is influenced heavily by the state, 

capital markets are woefully underdeveloped, and households suffer from a form of financial repression due to interest rate caps on 

deposits. This system leaves small- and medium-sized enterprises 

with little access to capital, stifles consumption, and leads to a 

banking system with growing nonperforming loans. As is well-recognized and mentioned earlier, financial sector development depends on various factors, but a key one is opening the market to 

global competition. 

I want to conclude my testimony by respectfully suggesting areas 

where Congress can play a role. Mr. Strongin suggested a couple. 

Let me add one. This committee should bring the same intensity 

and oversight of pushing for strong deliverables at the S&ED and 

in the Bilateral Investment Treaty negotiations that Members of 

Congress have shown on the exchange rate issue. Putting pressure 

on the Executive Branch to continue to work with the financial 

services industry to push for market access, to work with China to 

24 

regulate in a fair and transparent manner, and to assist China in 

building out its capital markets are all good steps that should be 

taken. 

If China breaks the rules, then by all means hold them accountable and enforce the rules. But we also should be open to working 

with China, engaging in vigorous but productive discussion with 

them, and finding solutions that are clearly in the interests of both 

of our countries. 

Thank you very much. I will be happy to answer any questions. 

[The prepared statement of Mr. Lowery can be found on page 42 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you very much. 

Mr. Lardy, you are recognized for 5 minutes. 

STATEMENT OF NICHOLAS LARDY, ANTHONY M. SOLOMON 

SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. LARDY. Chairman Miller and Ranking Member McCarthy, 

thank you very much for inviting me to participate in this hearing 

today. 

I believe that the Strategic and Economic Dialogue has made 

some progress in addressing issues in the bilateral economic relationship. These range from the big picture, like China’s commitment in principle to rebalance the sources of its economic growth 

away from investment and exports towards domestic consumption 

demand, to small points like concrete steps, concrete commitments 

on more specific issues, for example, increased access for U.S. financial firms. 

I would say further that since China joined the WTO, it has partially liberalized its financial services industry, but I think U.S. 

and other foreign firms have been disappointed that they have not 

been able to expand their activities in China more rapidly. I attribute this to three factors, and I would be happy to expand on 

that in the question period. 

First, I think in the bilateral negotiations that we entered into 

with China in the 1990s, we did not press very hard for market 

opening in financial services. All these ownership caps that are in 

place today were agreed to in that bilateral negotiation, and the 

Chinese by and large have found it relatively easy to live up to 

their commitments because they were not very demanding, and 

now we are in the position of having to kind of renegotiate. 

So my second point would be, in this renegotiation, I think both 

the U.S. and the Chinese side negotiators are very constrained in 

their ability to make reciprocal concessions in order to get further 

market-opening measures in the U.S.-China Strategic and Economic Dialogue or in other bilateral fora. 

Third, I would say that the U.S. argument, which I think is increasingly heard and has an element of truth to it, this argument 

that China would benefit from further unilateral opening of its 

market to U.S. and other foreign financial services firms, quite 

frankly is just far less compelling today than it was prior to the 

onset of the global financial crisis in the United States. 

Let me just expand on one or two of these points. 

25 

First, with respect to what concessions each side can make, U.S. 

negotiators, I think, are very constrained. China’s number one request is to have a relaxation on controls of exports of U.S. hightechnology products to China, and negotiators can’t relax these 

standards unilaterally. 

Congressional action is required to move this forward, and I am 

sure Members of Congress would be quite upset if they read in the 

newspapers that the Executive Branch had decided to unilaterally 

liberalize this regime along the lines that might ultimately be appropriate. 

So what commitment did we make in the most recent S&ED? 

The United States commits to give full consideration to China’s request that it be treated fairly as the United States reforms its export control system. Commitment to give the other side top priority 

involves no concrete commitment on the part of the United States 

to do anything at any specific time. 

The Chinese have the same problem. They are talking about rebalancing their economy in ways that would be very beneficial to 

us, but they have been talking about it for years. But vested interests within China, I think, have stalled the very important financial and fiscal reforms that are necessary to undertake this rebalancing. 

For example, market-oriented interest rate liberalization, which 

Secretary Geithner has correctly said would increase household income, reduce their need to save, and thus lead to substantially 

more private consumption expenditure. This has been on the agenda for years, but no progress has been made on this since 2004 because basically the vested interests that have blocked this and 

other reforms, even when them are being promoted by the top Chinese leadership. 

So my view is when each side is very constrained in what concessions it can offer to the other, it is not surprising that the incremental steps are indeed very incremental. Moving insurance from 

33 to 49 percent is important, but I wouldn’t classify it as a breakthrough; and it is very hard to see how we are going to get breakthroughs, given the limitations that I have outlined today. 

[The prepared statement of Mr. Lardy can be found on page 38 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you very much. 

I look back to the late 1960s when we were looking at Germany 

selling cheap cars we thought of in the United States, and everything you bought said, ‘‘Made in Japan’’ on it. Kids today don’t 

know that. You thought Japan was going to control it forever. Then 

wages started increasing, the cost of living started increasing, and 

the Japanese people started to see what was available in the West 

and started wanting it. Now today, you see very few products that 

say, ‘‘Made in Japan’’ on them anymore. 

Do you see that same trend occurring in China? Any one of you? 

Mr. LARDY. I would say it is a long way off. China is starting at 

a level of per capita income and then obviously wage levels that are 

far, far below the level that Japan had in the 1960s when we were 

very worried about Japanese imports. So I think it is a process that 

will take effect over a long period of time, but I think we are very 

26 

far from reaching the kind of turning point that you alluded to that 

we experienced with respect to Japan. 

Chairman MILLER OF CALIFORNIA. My concern is as I look at a 

restrictiveness in financial markets paper that OECD put out in a 

2010 update with zero percent being the best and 10 percent being 

most restrictive—China was about 6.1; Russia was about 5.4; Mexico was about 4.3; the United States was about four-tenths of one 

percent; and surprisingly, Japan was zero percent. 

But at these types of numbers, how can the pace of that growth 

be accelerated through financial services reform of the markets 

when, as you said, you talked about the Chinese just talking, and 

my comment to the Under Secretary was that they make comments, and we make commitments? How do you see that changing 

in the near future, unless we change the way we are dealing with 

them? 

Mr. NICHOLS. I will start, Mr. Chairman. 

I would say that how it can change over time is there is a huge 

group of folks in China who do not have access to the global financial services marketplace, the things that you would find in other 

developed nations. So we need to continue to stay both at the table 

bilaterally, multilaterally, and then, most importantly, to underscore to them that it is in their best interests to change the economy, their economy, from one of manufacturing to export into one 

based on domestic demand and consumption. Ultimately, that is 

how we will get them there. 

I would say, just as a general observation, we are not satisfied. 

We are not satisfied. We have plenty of concerns. There is more to 

do. Has there been some incremental progress? Absolutely. Is it 

positive? Absolutely. But we are not satisfied. There is much more 

to do to get them to open their markets. 

But as that huge, what I call silent, majority of her citizenry 

does begin to participate in the global marketplace, it will I think, 

as I indicated earlier, be a huge export opportunity for our manufacturers and our ranchers and our farmers, but we just need to 

continue to point out why they need to do that. 

Mr. STRONGIN. I also wouldn’t discount the importance of continued outside pressure. So I think the S&ED, this committee, and 

even the China-U.S. commitment to restart BIT negotiations all 

provide us with both pressure and some leverage, not all the leverage we would like to have, but I think we have to sort of see what 

is in our toolbox and use whatever is appropriate. 

Mr. LOWERY. The only other thing I would add is, if you took 

that same index 25 years ago, China probably would have scored 

a perfect 10. And then if you took it probably 5 or 6 years ago, they 

probably would have been about an 8. So I think the point is that 

they are making progress. It is not nearly at the pace, as Rob said, 

that we would like. 

But I think that with outside pressure, with potentially internal 

reform being driven more by Chinese citizens than by Americans 

thinking that they want to do this, there are possibilities that we 

can make even more and more progress. But I agree with the 

premise that we need to keep the pressure on them. 

27 

Chairman MILLER OF CALIFORNIA. Do you believe the S&ED 

meetings are being fruitful? Are they benefiting this country? Are 

they moving in the right direction? 

Mr. STRONGIN. I think from the securities industry perspective, 

they have been helpful. They have moved the ball forward. Not 

nearly enough. We are talking about going from 33 percent ownership in China to having U.S. firms now being able to own 49 percent. It still does not give them strategic control. That movement 

from 49 to 51 is in a sense much greater than from 33 to 49. So, 

I think it is helping the margins, but there is a lot left to do. 

Chairman MILLER OF CALIFORNIA. I think the American people 

are having a real problem right now. Our markets are tough over 

here. We are getting out of a recession. Too many people are out 

of work. And they are looking at China as taking their jobs through 

fixed currencies. 

And then, when you hear on the news that the Administration, 

the Federal Reserve is talking about allowing more groups to come 

over here in banking industries when our companies are restricted 

from going over there and doing the same thing, that is a tough 

pill to swallow for the American people. 

What is your opinion? Some of you were in government before, 

but now you are representing the private sector. Something has to 

change. And if Congress standing up to the Administration or 

whomever and saying this is unacceptable, we believe in a fair and 

open marketplace—yet if you look at Germany and Japan today 

and China, they are still benefiting from trade agreements that 

were post-World War II because they were such a downward economy we were trying to help them get out. But some of those agreements are still in place today that they benefit from. What would 

your response be to the American people? 

Mr. NICHOLS. Mr. Chairman, I will start on that on this issue of 

the Fed licenses. 

Again, my initial position is we are not satisfied. This playing 

field is not level, and that is not good. That said, we, the United 

States, should lead by example. We have an open capital market. 

That is the right message to send to emerging markets. So I don’t 

think that we should move backwards. 

That said, again, it is not a level playing field, so I am not happy 

about that at all. But I think it is important for the United States 

to lead by example and send the right message to these other 

emerging economies around the world about the right direction to 

go. 

Now, also, actually there is some positive aspect here that the 

reason the Fed—among the reasons the Fed granted these branch 

licenses that have been pending for some time there is because the 

home country supervision in China has improved, and it is starting 

to come into global norm. So, that is actually good, too. That is a 

good thing you can point to. 

So, acknowledging the playing field is not level, the fact that 

their home country supervision has improved up to some global 

norms, and the Fed has been sending teams over there to inspect, 

to talk to the regulators, to look at the way they are supervising 

and making sure they are doing it in a modern, efficient way, that 

28 

is actually a good thing. All that being said, we are not level. We 

are not where we need to be. 

Chairman MILLER OF CALIFORNIA. I agree, and I think we need 

to aggressively encourage them to do the right thing. 

I yield 5 minutes to the ranking member, Mrs. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Listening to all of you, and I think certainly the chairman and 

I at this point agree with everything that you are saying. We know 

that the markets are going to be opening down the road. 

The one thing I guess that just keeps going through my head is 

how are you going to market your products? Because China, the 

people of China, do not trust us. That was taught to them from 

their government: Do not talk to Americans. 

Now, they are trying to change that. I had about 44 Chinese— 

I will call them students, but they were probably middle management from the banks from China—over here at Georgetown for 6 

months learning our ways. But it is the people, when you go outside of the inner cities, who don’t have the education yet, how are 

you going to sell your products? Why would they trust Americans 

to give them car insurance or life insurance or get into our banks 

versus their own? 

And this is really scary, because it is in the back of my mind. 

Supposing we are doing well, there and supposing people in China 

are buying your products and we are doing very well financially, 

and then China—because this is the way they were brought up— 

flips it and says, ‘‘Get out.’’ What do we do? How do we protect ourselves? How do you protect yourselves on the business issue going 

in? 

But that is the natural mistrust I would tend to think that certainly the Chinese people have been brought up with, and certainly 

the American people have been brought up with. Even though I 

have been to China—and I need to go back there again because it 

has been 10 years—those things to bother me when I think about 

it. And when I think about what is going on in the world, North 

Korea, what is going on in the Asian Sea. These are things that 

we are involved in. 

Anybody? 

Mr. LARDY. Let me just briefly make one comment, and that is 

we should recognize that American and other foreign firms have invested about 1.6 trillion U.S. dollars in China. There haven’t been 

any expropriations that I have been aware of. 

And the other thing that is quite interesting is, even though the 

business environment could always be improved and we could come 

up with a long list of things to do, very, very few companies ever 

disinvest. They would like to have the regulation be more transparent. They would like this, that, and the other thing. But the environment is not so bad that very many firms are disinvesting. 

Only a handful of foreign firms have ever disinvested from their 

operations in China, and the money continues to go in there. 

So I think the chance of expropriation, if you look at the footprint 

that foreign firms have in China, they are not going to be removed. 

They are producing almost 25 percent of the manufactured goods 

produced in China. They are producing about 30 percent, 40 percent of the exports. They are fully integrated into the Chinese econVerDate Nov 24 2008 15:39 Sep 17, 2012 Jkt 075732 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\75732.TXT TERRIE
29 

omy in many respects, and the Chinese would be shooting themselves in the foot to push foreigners out. 

Mrs. MCCARTHY OF NEW YORK. I agree, if they were shooting 

themselves in the foot, but I believe it was Mr. Nichols who said 

that China is only going to do what is good for them. I believe that 

was—I am sorry, Mr. Lowery—that they will only do what is good 

for them. And when things come to the point of where it would be 

very good for them to be more involved, to take over, they are just 

not mature enough yet. I guess that is my question. 

Mr. LOWERY. I guess my argument would be that I do think 

China will do what is in China’s interest, and I think a lot of people in China are recognizing that it is more and more in their interest to allow this type of investment or to allow the type of trade 

flows that we have seen. So if you look at just statistically the 

stock of trade from the United States to China is still not that big 

for as big an economy as it is, but the flow is quite good, which 

suggests that there are more and more Chinese who are liking 

American products and services. 

The second point which I wanted to make which is related to the 

discussion you and Mr. Lardy were having, this is why one of the 

good things we saw at a recent S&ED was an agreement to move 

forward on trying to get a Bilateral Investment Treaty (BIT). 

A Bilateral Investment Treaty does a few things. 

First, it basically helps provide market access, the way we do Bilateral Investment Treaties. 

Second, it provides protection for our companies against the type 

of issues you are talking about. It is a hard negotiation. 

Third, it provides a service, which is basically finding out where 

China is on some of these issues and actually having a real negotiation which becomes a binding legal agreement. 

I think that those are all very positive things. 

I think you raise some very good points. But we are chipping 

away at it, again, as I think all of us have said, although probably 

not at the pace we would like. 

Mr. STRONGIN. I would just like to support Mr. Lowery point. I 

think as businesses are in there and investors, legal certainty, predictability become incredibly important, particularly as you have 

longer-term investments. And I think what Clay was pointing out, 

that is why the BIT is critically important, to move forward on 

that. And also it is why we have in some cases the WTO, right, 

where we could actually take WTO, we could take them to dispute 

settlement. 

It is the problem with the S&ED that they are commitments of 

a sort, but they are not binding commitments. So that is somewhat 

problematic, not only getting the Chinese to live up to those commitments, but then they aren’t what they call bound, so the Chinese could pull back. So we do have to find a mechanism where, 

once we achieve what they give us within the S&ED, they can’t 

claw it back as you are suggesting. 

Mrs. MCCARTHY OF NEW YORK. My time is up. Sorry. I have one 

more question. 

Chairman MILLER OF CALIFORNIA. Mr. Carson, you are recognized for 5 minutes. 

Mr. CARSON. Thank you, Mr. Chairman. 

30 

Unlike the Federal Reserve, China’s Central Bank often uses reserve requirements as a means of expanding or even contracting 

the money supply. According to CRS, China’s Central Bank increased the reserve requirement ratio 6 times in 2010 and another 

6 times in the first half of 2011. As of last June, China’s reserve 

requirement stood at around 21.5 percent. To what extent is this 

high capital reserve requirement a barrier to entry for U.S. firms 

that seek access to China’s banking sector? And that is for anyone. 

Mr. LARDY. Maybe I can start on that. 

I don’t think of it as a barrier. It is a restriction or a requirement 

that applies to all banks, foreign and domestic, so it doesn’t tilt the 

regulatory environment in favor of domestic banks. The fact that 

they rely so heavily on the required reserve ratio reflects the fact 

that they do not have market-determined interest rates for the 

most part, so their Central Bank does not rely on adjustments in 

interest rates to control the flow of credit but rather these quantitative restrictions like the requirement to put 21.5 percent of your 

deposits into the Central Bank. 

So it is a very quantity-oriented control mechanism, rather than 

a price-oriented control mechanism. They have talked about moving towards more of a price-oriented mechanism, but, quite frankly, 

I think they are still a long way from being able to do that. 

Mr. STRONGIN. I would just add a parenthetical that I think 

when you talk about restrictions in financial services, it is key to 

focus, though, I think on the ownership restrictions. I sound like 

a broken record, but I think whether you go through insurance, 

banking, securities, or other types of financial products, it always 

starts foremost with the inability to run your business the way you 

want to run it. 

I just wanted to add that. 

Mr. LARDY. Can I just make a footnote to that? 

I think that is certainly true in securities and asset management 

and insurance, but it is a little bit less clear in banking. Because 

there are hundreds of foreign banks that are running their own 

businesses in China, either as subsidiaries or as branch banks. 

They run their business. They can offer whatever range of products 

they are licensed for. They don’t have to worry about talking their 

partner into doing something. 

And I don’t think, quite frankly, very many foreign banks want 

to buy into existing Chinese banks. So I don’t think the ownership 

cap—remember, the banks that have had ownership in China have 

been disinvesting in recent years for a number of reasons. 

So I don’t think there is a big demand on the part of financial 

services for banks to come in and buy up 50 percent or have a 

transaction similar to the transaction that ICBC created with the 

U.S. branches of Bank of East Asia. I think banking businesses are 

trying to build up their domestic networks, and some of them have 

been quite successful. HSBC, for example, operates more than 100 

branches in China. It is trying to develop the retail business. Over 

time, they are expanding their footprint. And they do control all of 

those businesses. They don’t have a foreign partner. 

So I would say in that respect, banking is a little bit different 

from securities and insurance. 

Mr. NICHOLS. One observation, too, just building on that. 

31 

What we are seeking ultimately is an entirely open capital market there, for banking, for securities, for insurance. The Chinese 

leadership says they would like, for example, to have Shanghai be 

a global financial sector. And one thing that we have reminded 

them is you are not going to be able to have a global financial center with a closed capital market that is punitive toward either insurance, banking, or securities firms. So our end goal is an entire 

open capital market like here in the United States. 

Mr. CARSON. Thank you, gentleman. 

Thank you, Mr. Chairman. I yield back. 

Chairman MILLER OF CALIFORNIA. Did the ranking member have 

one question she wanted to ask that I cut her off on? I would be 

happy to yield for that question. 

Mrs. MCCARTHY OF NEW YORK. To very honest with you, I would 

ask a favor from each of you. I am sure you have briefing papers, 

and if you could give a briefing paper that would be not on your 

level, but maybe on my level, so that I could start reading and finding out and then ask follow-up questions to all of you in the future. 

Thank you. That is all. 

Chairman MILLER OF CALIFORNIA. Thank you. 

The Chair notes that some Members may have additional questions for this panel, that they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for 

Members to submit questions to these witnesses and to place their 

responses in the record. 

I want to thank you all for your time, for your talent, and for 

your expertise. Your information was very beneficial, and this is 

something I think we need to stay on top of and monitor and make 

sure the Administration is moving our economy in the right direction with the Chinese economy. 

This hearing is adjourned. 

[Whereupon, at 4:07 p.m., the hearing was adjourned.] 

(33) 

A P P E N D I X 

May 16, 2012 

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