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People in Focus
Special> Sino-U.S. Economic & Trade Relations> People in Focus
UPDATED: May 11, 2007 NO.20 MAY 17, 2007
Competition Builds Strength in Financial Markets
 
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Transitioning from a “planned” economy to a “market” economy may be a long and arduous task for China, but opening its financial markets to foreign competition will help build stability and strength for the Chinese economy, says U.S. Ambassador Alan Holmer. Holmer, who was recently named as Special Envoy for China and for the Strategic Economic Dialogue, answered written questions by Beijing Review on his views of the economic relationship between China and the United States and the reforms he sees as vital to a good bilateral relationship.

Beijing Review: What is your view on the development and stability of China’s stock market and its role in global capital markets?

Alan Holmer: The strong performance of China’s stock market since February speaks to the economic dynamism of China and, more broadly, to a global economy that has been characterized by strong growth and low inflation. To an unprecedented degree, the prosperity of the United States and China is tied together in the global economy, hence the importance of working together on the host of economic issues which impact our two nations and the rest of the world. Half of all global economic growth in the last five years has come from the United States and China, and our two economies will continue to be the drivers of growth in the future.

Regarding China’s securities markets, it is important to acknowledge the significant improvements China has made in this area. For example, more accurate accounting standards were adopted at the beginning of this year. The proportion of non-tradable shares of listed companies has been reduced.

Yet to achieve China’s goals of balanced and harmonious growth, there is much still to do in developing the competitive and efficient capital markets needed to assure China’s future growth. Opening up China’s financial service market to greater foreign participation would be of great help in developing world-class capital markets. As U.S. Treasury Secretary Henry M. Paulson often says, there is no country in the world with competitive, world-class financial markets that isn’t open to foreign competition.

Opening China’s capital markets to global competition and participation would bring many benefits: World-class financial institutions could introduce new technology and products to China, enhance training and transfer of skills, improve market practices and infrastructure, and enhance financial stability.

Some Chinese economists said Secretary Paulson had set expectations “too high” when he urged China to speed the pace of opening up to more competition and financial market reforms, arguing it may affect the stable development of China’s economy. Do you have a response to these economists?

Today, China is transitioning from a planned economy to a market-driven economy and this process will continue for a number of years. But, because of its size and its role in world markets, China is, by definition, already a global economic leader and deserves to be recognized as such. A big part of being a global economic leader is a commitment to open markets at home. China’s record of reform is remarkable by any standard. But much remains to be done. The tasks faced by Beijing are so daunting that the biggest risk our two nations face is not that further market reforms will affect China’s economic stability, but that China won’t move ahead with the reforms necessary to sustain its growth and to address the very serious problems facing the nation.

These problems range from modernizing and reforming the rural economy to providing an adequate pension system and other safety nets, to developing capital markets that can serve the future needs of China’s economy, to freeing up an inflexible currency regime that hinders China’s ability to achieve stable, non-inflationary growth in the short term and the achievement of balanced sustainable growth over the longer term.

Because it is a global economic leader, what happens in China affects the well being of the United States and the rest of the world. China’s continued economic progress will strengthen the international economy, benefiting people around the world, while a hard landing or a significant slow down in the Chinese growth rate will weaken the global economy to our detriment.

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