FROM THE OFFICE OF PUBLIC AFFAIRS

It is a great pleasure to speak with you today. I am honored to have been invited to a university which has a long and distinguished history of educating young men and women charged with some of the most important tasks China has faced.

We meet today at a time when all of us are learning to adapt to enormous change.These are changes that were simply unimaginable in my studentdays. Today, I want to talk about those changes and about theopportunities of the new global economy, the challenges theUnited States and China face in the years ahead, and the mutualinterests of our two great nations.

My impressions ofthese changes are based on experiences I have had in my career inboth the private and public sectors. I spent twenty-six years atthe heart of the world’s financial markets as a trader andthen as a managing partner in a major investment firm on WallStreet. During that time, I worked with developing countriesaround the world as they became part of a global economy. Fiveyears ago, I left the private sector to join the ClintonAdministration and that has given me the opportunity to take allthat I have learned about markets and the global economy in theprivate sector and turn that to the larger economic issues of ournation and our nation’s interaction with the rest of theworld.

When I began on WallStreet, investments were recorded by hand in a ledger and each ofus had a slide rule. By the time I left, intricate networks ofcomputers recorded and accounted for the flow of billions ofdollars every minute. When I started, most developing countrieswere extremely poor and were seen only as the recipients offoreign aid. Now, the developing world contains some of the mostdynamic economies on earth -- and these nations are the recipientof 40 percent of U.S. exports. Back then, U.S. businesses focusedlargely on the American market. Our nation certainly did not viewitself as an integral part of an international economy. Then,many governments were committed to protectionism, stateenterprise, and closed markets. Now,

almost all largebusinesses function internationally and there is broad-basedagreement among governments on the importance of strong freemarket fundamentals. Clearly, we live in a period of dramaticchange that has produced a global economy.

In the midst of thisnew world stand China and the United States, the largestdeveloping nation on earth, and the largest industrial nation. Inthe not too distant future, we will be the two largest economieson earth -- and building strong relations is absolutely criticalto global prosperity and stability. Each of us has an enormousinterest in the success of the other and a steady and strongrelationship, which requires working together on bilateralissues, but also on issues of the global economy, and, morebroadly, the issues of the post-Cold War world.

Let me now say a fewwords about some of the elements, based on my experience, that Ibelieve are essential to economic growth in developing countriesand are among the challenges China faces as it moves forward.

First, is theimportance of market forces, an issue that your recent PartyCongress addressed in a very dramatic way. Market forces triggercompetition which unleashes private initiative and fosterseconomic growth. There is no question that there are some tasksthat government must undertake because the market simply cannotaccomplish them effectively. But it also very clear that in mostareas of an economy, government-managed enterprises tend to beinefficient and ineffective, and developed and developingcountries are learning that privatization is enormously importantin fostering economic growth. China faces a great challenge inprivatizing these state-owned enterprises but it is crucial tothe long term well-being of China.

Second, as you lookacross both developed and developing countries, one of the commonfeatures of economic success is strong financial markets.Conversely, when you see economic difficulties, almost alwaysthey are caused by or greatly exacerbated by problems infinancial systems. We have learned this lesson very clearly, forexample in our own savings and loan crisis. Building financialsystems is extremely difficult, but it is critical to an economy.We have very advanced financial markets and would like to helpChina meet that challenge.

Third, is the freeflow of information. This is absolutely crucial to the well-beingof financial markets and an economy as a whole, as the example ofHong Kong clearly demonstrates. Indeed, poor disclosure bears aportion of the blame for the current financial crisis inSoutheast Asia, and for the problems Mexico experienced two yearsago. In this regard, I am delighted that the Xinhua News Agencyis close to finalizing an agreement that will allow foreignproviders to provide financial information in a way that willenable them to serve their customers’ -- and theeconomy’s -- needs. It suggests to me that the Chineseauthorities appreciate that you cannot have financial marketswithout access to the latest and best financial information. Butthe free flow of information is also critical to a society atlarge. Economists, scientists, doctors all need the free flow ofinformation to stay on the cutting edge.

Fourth iseffectively combating corruption. I think it is clear, based onwhat I have seen, that corruption is corrosive with respect todevelopment. Corruption results in poor allocation of resources,and it undermines financial systems and governments. Combatingcorruption is a moral issue -- but it is also at the heart ofpromoting economic development in all countries. The UnitedStates has taken the lead in urging the World Bank and theInternational Monetary Fund to place the fighting of corruptionat the heart of their development efforts. We have also pressedour fellow OECD members to criminalize bribery and eliminate thetax deductibility of bribes. I know that the 15th Party Congressput great emphasis on effectively combating corruption.

Fifth, perhapsnothing is more important to the functioning of a market economythan the rule of law. Issues such as the enforceability ofcontracts are critical to promoting development and attractinginvestment. I have visited many developing countries as Secretaryof the Treasury and I always meet with the American Chamber ofCommerce in order to gain an understanding of the problemsbusinesses face in those countries. Among the issues theymention, predictable rules and mechanisms to resolve conflictsare always at or near the top of the list.

The sixth element istransparency. One of the things I hear time and again frombusiness people who are trying to do business in China is thegreat difficulty in knowing how decisions are made. And thatcreates great uncertainties in the business climate, and is adeterrent to the attraction of foreign investment that couldprovide such an impetus for economic growth. Greater opennesswithin China would complement China’s openness to theoutside world.

Finally, an areathat was also emphasized by President Jiang at the 15th PartyCongress -- is greater openness and integration into the globaleconomy. This requires both opening markets to trade andinvestment and engagement in international institutions. AndChina has become much more active in such institutions in thelast few years, playing important roles in the IMF, World Bank,APEC and in the recent financial support package for Thailand.

These elements --market forces, strong financial markets, free flow ofinformation, absence of corruption, rule of law, transparency,and openness -- are central to economic success. But free marketsare not the answer to all of a society’s problems. There aresome issues that free markets, by their nature, will not dealwith effectively. And let me briefly describe two that both theUnited States and China face.

First, while themarket economy creates benefits for the greatest number ofpeople, the rapid changes of a free market economy will dislocatepeople. There the government has an important role with respectto training and to enabling people to quickly re-enter theeconomy. That is in the interest of the individual, but also inmaximizing the health of the economy.

Second, developmentand economic growth also can harm the natural environment.Sustainable development -- economic growth that does not takeplace at the expense of the environment -- must be the goal forevery society, because destruction of the natural heritagerepresents a step back, not a step forward. Environmentalprotection is an economic issue as well as a quality of lifeissue. Ultimately, damage to the environment is very expensiveeconomically.

As I said earlier,we in the United States have an enormous interest in a successfulChina. As China becomes more integrated into the global economy,and our economies become more closely linked, we need to worktogether on a wide range of fronts.

Having said that, wewill have our differences. Let me mention one area ofdisagreement in particular: human rights. The United States has atraditional commitment to human rights and liberty that goes backto the founding of the republic. Throughout our historywe’ve been a strong advocate of human rights throughout theglobe. No nation can claim perfection on these matters. Butrespect for human rights is part of our identity as a people andwe believe these rights are universal. Within that context, thisissue will continue to be an important part of our dialogue withcountries around the world, including China. I might add thatrespect for human rights leads to more open debate, more vigorousexchange of ideas -- and therefore promotes economic development.

One thing iscertain: we will only understand each other further by engagingin continuing dialogue and I hope my visit contributes to thateffort. One purpose of my visit is to co-chair this year’smeeting of the U.S.-China Joint Economic Committee, a dialoguebetween experts on economic issues of importance to bothcountries. Next month we will have a landmark opportunity asnations to exchange views, when President Jiang visits the UnitedStates, which we expect will be a major step forward in advancingthe dialogue between our countries and our common interests.

For myself, my visitto China has given me an enormous appreciation for China’sgreatness as well as the challenges it faces. In the last twodays, a very brief visit, but my first ever to China, I have beenfortunate to have been able to observe elements both ofChina’s dynamic present as well as its magnificent past. Onmy way to Beijing I spent a day in Xi’an, where I visitedthe extraordinary terra cotta army dating from the Qin dynasty.As a citizen of a country with a history only of a few hundredyears, I was impressed to observe a bit of a history that is afew thousand years old. In Xi’an I also visited a factorywhich had turned to the capital markets to expand and to createjobs and prosperity in the heart of China, where they are soneeded. In one trip I have seen the old and new China, the gloryof its past, and the enormous potential for its future.

One lesson fromChina’s history has been the centrality of education as thesource of China’s strength. As students, you representChina’s future: you are China’s leaders of tomorrow.And you will soon be entering the work force of a country -- anda world -- undergoing rapid and immense change. In some respects,as our two countries continue to grow and strengthen ties, youwill play a key role in America’s future, too.

I hope you willconsider something. One of the great opportunities I’ve hadis to take what I learned in the private sector, and make acontribution in the public sector. I would urge you to considerwhat you can do for China at this moment of enormous importanceand promise in China’s history. Thank you very much.