Transcript of Under Secretary of the Treasury for International Affairs John B. Taylor Press Conference

Beijing, China
May 11, 2004

Posted on May 18, 2004

TAYLOR: Thank you very much for coming. I’ve had a very productive visit to China in the last couple of days. I just had a very good lunch with Governor Zhou of the Central Bank and met with Mr. Li Riugu of the Central Bank, Mr. Li Yong of the Finance Ministry and with a number of economists, bankers and with others from the private sector. It has been a very good set of discussions ?very candid and very productive.

I have also been joined with Ambassador Speltz, who is Secretary Snow’s special envoy to China on financial issues and exchange rate issues.

This trip to China for me represents the first stop of three stops in Asia. I’ll be going to Tokyo this afternoon and then back to Korea later in the week. The trip comes at a time when the world economy is actually doing remarkably well. The United States economy is establishing a strong recovery, jobs are being created and GDP is accelerating. In addition, Japan is doing very well. Much of Europe ?not every country in Europe ?but many countries in Europe are doing well. Russia is growing rapidly. A number of countries in Latin America, and of course Asia is growing rapidly as well: China, Japan and much of Southeast Asia.

The fact that the world economy is performing remarkably well now is good news. One of the issues on this trip is to talk to policy makers about how this world economy can continue to grow and create jobs in the years ahead. There has been lots of talk about the overheating in China. We had good discussions about that issue in my meetings. It is important of course for the world economy to grow that China continues to grow. We noticed that China’s strength has been important for the economic growth in Asia going forward. So, it is important to make sure that the recovery continues and that inflation is contained and that the efforts to deal with the overheating are strong and taken in a timely manner.

We did of course discuss the exchange rate issue extensively and candidly. The Chinese Government has indicated previously to us that the move to a flexible exchange rate is one that they are moving ahead with. On that basis we had good, candid discussions of how that might occur ?what the timing might be and, in particular, how a move to a flexible exchange rate may interact with the rest of the world economy. Because it is so important for the growth of the world economy, the growth of China, the growth of Asia, for China to move towards a flexible exchange rate in the future.

So, it was a very good set of discussions. We looked at things like the development of more extensive futures markets, the importance of strengthening the banks, the importance of dealing with non-performing loans ?issues that are very essential to continued growth of the Chinese economy.

With that short statement, I’d like to say that if there are any questions, we’ll take them.

QUESTION: I have two questions. The first question is that the Chairman of the European Union Mr. Prodi said that he would make a preliminary judgment about China’s market economy status in June. When will the United States admit the position of China’s market economy? What are the fundamental aspects concerning the market economy according to your standards? Another question is what do you think about the influences on foreign trade between China and the United States.

TAYLOR: The issue of the market economy is one that we are now working with China on. It is part of the discussions between our countries that have improved in the last few weeks. It is part of the talks that went on in Washington a week or two ago. It is important for us to work on this. It is an area where we can continue to cooperate. The exchange rate issues are part of that. So are labor market issues part of that. The move towards a market economy is something we are working with China on, and I think it is productive.

Your second question, which I’ll address, which is just general United States-China relations in the economic area, which I think are showing some good signs of improvement: the talks that occurred in the trade area last week and the week before were good. This visit illustrates working very hard on these financial market issues. I talked to bankers here doing business in China about the issues. So, I think it is going well. I think Ambassador’s Speltz?appointment by Secretary Snow is indicative of how we want to continue the discussions. I could add to that: we agreed on this trip that next month, in June, there will be a second meeting of the technical cooperation program between the Finance Ministry here and the Central Bank and the U.S. Treasury, which has to do with developing the financial markets in ways that could make the flexible exchange rate implemented. We also had some discussions about the upcoming visit of Vice Premier Wang to the United States in July. These are just examples of some very substantive things that are happening.

QUESTION: I was wondering if you can give us a little more detail about what you talked about with the currency issue. If, for example, you were given any specific time frames on when it is going to be resolved. By the end of the year? By next year?

TAYLOR: No, we didn’t focus on time frames. For that matter, time frames are not something that you want to hold front and center on something like an exchange rate issue. We talked more about the development of markets that help determine the price in foreign exchange, the possibility of encouraging more forward markets or futures markets to help with the determination of the price. We talked about the reforms in the banking sector ?dealing with non-performing loans that are related to it. Those are some of the specifics that we addressed.

QUESTION: In your discussions with Governor Zhou of the Central Bank did he discuss the effectiveness to date of government efforts to control overheating? Did he indicate to you any additional measures the Bank might be taking ?particularly an interest rate hike?

TAYLOR: No specific discussions that pinpoint upcoming decisions about interest rates. More generally, we had good discussion of the efforts that the Central Bank has been taking and this is also true of discussions that occurred at the Central Bank yesterday. The efforts to widen the range that banks can charge borrowers on their lending. The range was increased from 30% above the base rate to 70% above the base rate. There was a discussion about the increase in reserve requirements. There was some data reported to us about how the most recent inflation numbers show some sign of coming down and some other signs that the measures are having effect. I would say that the general conclusion of our discussions is that if additional actions are necessary to try to control any incipient inflation that they will be taken.

QUESTION: What aside from the G-7 Finance Ministers?statement is the U.S. doing to get international support for currency reform in China? And my question for Ambassador Speltz is, this is your first trip as the personal emissary, is that correct? Could you tell us with what kind of frequency you’ll be visiting China, and what you accomplished during this first meeting.

TAYLOR: The question about the cooperation with other governments in currency reform is a very good one. There’s been discussion in the last year in groups such as the G-7, but also groups like the G-20, where China participates, about the importance of flexible exchange rates. The most recent example of that I would say would be in the communiqu?put forth by the G-7 ministers in Washington just a month ago, where they stated that it is important for large countries that do not now have flexibility to have flexibility in their exchange rates. So I think there’s quite a bit of discussion, and this I think symbolizes the importance that China has in the world economy. The strong growth of China is important. Efforts to continue and sustain that are important. Flexible exchange rates are part of that.

SPELTZ: Thank you very much for your question. Yes this is my first visit here with regard to this position, representing the Secretary. However, I’ve been visiting this country for many years and actually ran an operation here starting in the 70s. As a businessman, it gives me a very deep pride to be able to come back here on behalf of my government and be working on this. As far as what we achieved today, I think that Dr. Taylor covered it quite well. In the last couple of days, the message that we’re passing is that we are wanting to continue the constructive engagement in these discussions. As far as when I’ll be back, I’ll be back here next Monday, and I’ll be here all next week, and I’ll be back here as often as needed. Thank you.

QUESTION: You mentioned that you discussed the NPLs [Non-performing loans] in relation to moving toward a more flexible exchange rate. Is this a big barrier? If so, then how soon can it realistically be expected that they will loosen the exchange rate, because the NPL problem is enormous? Secondly, did you talk about the diversification of China’s investments in foreign-exchange reserves investments? We have heard recently that they’re buying more in Europe and more in Asia in terms of bonds, and perhaps proportionately less U.S. Treasuries. Is that a concern?

TAYLOR: There was a discussion of the non-performing loans as I indicated, and of course the soundness of the banking sector and their ability to create markets and deal in foreign exchange and have the strength to deal with changes in exchange rates are all very important. The non-performing loan issue is the one that is ongoing and doesn’t need to be completely resolved from the point-of-view of the flexible exchange rate. A flexible exchange rate is, as we’ve learned here, something that can actually help with stability in China, help prevent overheating. Those are all good things that can help with the non-performing loan problem as well.

With respect to the portfolio, we had a good set of meetings with the people from SAFE, State Administration of Foreign Exchange bureau, but not the specifics about reallocation of the portfolio. It’s a fine group of people we met with. We’re quite impressed with the sophistication of dealing with this very large portfolio. We’re not concerned at this point about movements in the portfolio. The exchange markets have been quite orderly and it’s not an issue we addressed.

QUESTION: You’re pushing for a more flexible exchange rate in China, but how do you think a stronger Yuan will impact the numerous American manufactures that make products here to sell back to the U.S.?

TAYLOR: The flexible exchange rate is what we focused on, because we have felt and have in our dealings with the Chinese authorities felt that that’s the focus, and that’s what the international community has emphasized, the flexibility in this particular environment. Predicting which way the exchange rate will go is something that we did discuss a lot, and people actually have differences of opinion. Right now there’s a lot of interest in purchasing RMB, and that’s some indication of which way the currency may go, but there’s other factors that would be taken into account in the movements of the Yuan. That’s why we’ve focused on the flexibility itself.

QUESTION: China’s been a big buyer of U.S. Treasuries, and some link it to their having to maintain the peg. Are you concerned that if there was a revaluation, if you got the flexibility you wanted, there would be a falloff in Treasuries that would perhaps threaten U.S. interest rates?

TAYLOR: No, the United States bond market is broad. It’s resilient. The performance has been very good, and the flexibility in itself creates a greater degree of stability in the world economy, which should be beneficial. It tends to have the kind of factor that reduces risk and can help with stability and therefore shouldn’t have a negative effect at all on interest rates.

QUESTION: Based on your discussion with the Central Bank and finance officials, are you now more confident that the Chinese Government will be in a position to avoid a hard landing?

TAYLOR: I had a good discussion about the issue, on the overheating, and know that there’s a lot of focus on that and trying to keep the growth of the economy continuing, but perhaps not at a pace that would cause inflation. So I do have a greater degree of confidence that the issue is being addressed and is one that is of importance, and that as I said earlier, if actions that are taken now are not sufficient, I think there’s every sense that additional actions would be taken.

QUESTION: About the overheating, do you think it’s necessary or do you think it is possible for the Chinese government to raise its banking rate of loans in the next few months?

TAYLOR: What they did already of course was raise the amount by which banks could charge on loans above the base rate. It’s been raised from 30% above the base rate to 70% above the base rate. We heard nothing to suggest that it was necessary to widen that at all. With respect to particular interest rate decisions, I really can’t comment on what those are likely to be.

QUESTION: When China goes to a flexible exchange rate, what is the worst impact that could have on the U.S. economy? What can you do to stop that, to overcome that?

TAYLOR: I don’t see any negative impact on the U.S. economy. It’s basically what we have emphasized and what many of the other governments have emphasized is that flexibility of the exchange rate in China is something that would help stability. We’ve talked not so much about whether it should happen, but the mechanisms that need to be put in place. We very much feel that it would be a positive rather than a negative. We haven’t looked at negative impacts.

QUESTION: At what point do you think it would be useful to have China sitting at the G-7 financial meeting table as a full-fledged member, and if it’s not now, under what conditions do you think that should happen.

TAYLOR: China is already participating with the G-7 countries in this G-20 operation, which is a very good group. It’s the Central Bank Governors and the Finance Ministers meeting together, good exchange on issues that are common to emerging marketing countries, common to the major industrial countries. It seems to me that we’re establishing the importance of such communication, and we’re going to do more of that. So I would very much see that those kinds of interactions with China in the G-7 could take place. Because it’s already happening, it’s just a matter of finding other ways for it to happen. I can’t emphasize how important it is. Almost all discussions of the world economy these days involve China. China is a major economy in the world stage, and so the more interactions that policy makers in other countries can have with policy makers in China the better. My visit here, Ambassador Speltz?appointment is indicative of that. I expect that more and more will occur in the future, including the possibility of what you mentioned.

Thank you.