FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon. It is an honor for me to have the opportunity to address some of China's best and brightest students.

I am also privileged to be making my first trip to China as Deputy Secretary of the United States Treasury. The timing could not be better.

I am here to launch a new effort aimed at transforming financial sectors into economic engines of growth. This is a new Bush Administration international economic policy initiative. We are calling it "Engines of Growth."

Why is this important to the United States?

Friends, we stand at the leading edge of a new millennium. Now in the 21^st century, the fate of all our economies is intertwined. World economic growth is not a zero-sum game. When the United States grows, Asia grows. And vice-versa. It's that fundamental.

For China, the consequences of this new economic convergence are profound. Access to new markets abroad means rapid economic growth. Export-led growth alone, though, exposes China to the changing winds of the global economy. One way to offset this vulnerability is to diversify. And one way to diversify is to find additional fuels for growth.

In my opinion, China's great economic challenge in this decade will be to transform its financial sector into modern, efficient engine of growth. The importance of having a deep, flexible and resilient financial sector cannot be overstated. Gone are the days when a national airline or heavy investments in manufacturing are the badges of economic development.

In the United States, our financial sector is the backbone of our domestic economy. During last year's U.S. economic slowdown, for example, it was our financial sector - in addition to tax relief measures and monetary easing - that helped ignite the economic recovery we are currently experiencing. It was access to innovative mortgage products and sophisticated debt instruments that kept U.S. consumers spending and businesses investing.

Developing China's financial sector into an engine of growth will be a challenge. It will require enlightened policymaking, a deep commitment to openness, and the very best regulatory oversight and enforcement. Nevertheless, I am confident that China can succeed.

In developing its financial system, there are many possible configurations from which it can choose.

But, the importance of openness to trade and investment in financial services is undisputed. China's WTO commitments in financial services represent a healthy start. It is in China's self-interest to do more.

Let me be clear about one thing before going any further. Opening a financial system to freer trade in financial services is different from liberalizing the capital account. Allowing foreign firms to compete on equal terms with domestic firms can and should be independent of decisions on regulating portfolio capital flows. Just as there can be foreign direct investment in manufacturing without capital account opening, there can also be FDI in financial services. This is true for the whole panoply of financial services, including retail banking, investment banking, brokerage services, asset management, insurance and pension advisory services.

However, I don't want to be understood as supporting capital controls. They retard long-term economic productivity. Look around the world. No major developed economy maintains capital controls.

The fastest way to financial sector modernization for China will be to open to trade and investment in financial services. Increased trade and investment in financial services will bring in needed foreign direct investment and expertise. It will induce better management in domestic firms. And, it will increase the rates of return for those who invest in domestic Chinese firms.

Don't just take my word for it. A 2001 World Bank study found that countries with fully open financial services sectors grow on average one percentage point faster than other countries.

These results corroborate an earlier World Bank study estimating that more open and competitive financial services markets increase national growth rates by 1.3 to 1.5 percentage points. Likewise, a recent WTO study of 27 emerging market countries found that allowing foreign financial firms to establish locally and to engage in a broad spectrum of financial activities contributed to greater financial sector stability.

This should not be news to many of you. Here in China, for example, the very promise of a new, more level playing field in financial services is already beginning to speed the development of securities trading, new insurance services, and financial information services.

Implementation on these commitments is important. Particularly on the issue of transparency, China should continue to apply new, transparent methods of creating and applying regulations. Regulators should seek out the insights of the private sector before creating the rules of the game.

We use these methods in the United States. The U.S. Federal Reserve, for example, regularly publishes proposed regulations and asks for comments from the private sector in a reasonable period of time. During the implementation of our Gramm-Leach-Bliley bill -- which fundamentally reformed the US banking, securities and insurance sectors -- the U.S. Federal Reserve sought out and received hundreds of comments from foreign banks. As a result, it made several significant changes to accommodate the many international banks doing business in the United States. Rules that specify how regulations will be implemented and how applications for licenses will be granted or denied are just as important.

My mission here in China this week has been to engage key policymakers in a dialogue on building momentum for financial sector liberalization. Economic policymakers need to collaborate and share best practices if we are to pull back restrictions on international trade and investment in financial services.

I hope many of you here today will take the time to study your financial sector. You are China's future financial leaders. You have an important responsibility to help develop China's financial sector into a strong, efficient engine of growth.

Thank you.