April 7, 2006
JS-4172
Remarks of
Treasury Under Secretary for
International Affairs
Timothy D. Adams
to the Asia Society and Houston Society of
Financial Analysts
Houston, Texas
Thank you for coming today. I've come to Houston with some very good news. The American economy created 211,000 new jobs in March. That makes March the 31st consecutive month of uninterrupted job growth. Since President Bush signed the Jobs and Growth Act in May 2003, the American economy has created almost 5 million new jobs, two million of them in the last year alone, more than all the rest of the G7 combined.
The performance of the U.S. economy has been greatly underappreciated. By any measure, our economic performance is strong. Gross domestic product grew 3.5% last year – well above our historical average over the last 20 years of right around 3%, and particularly strong when compared with GDP growth in other developed economies: Germany (1.1%), France (1.5%), Italy (0%), UK (1.8%).
What is more, our growth is broad-based: hourly productivity in the non-farm business sector has risen at an average annual rate of 3.2% since 2001, faster than any five-year period in the 1970s, 1980s, or 1990s. Unemployment is down to 4.7%, running lower than the 70s, 80s, and 90s. Real disposable incomes have risen 2.2% over the past 12 months, and since 2001 real after-tax income per person has risen 8.2%, providing continued support for consumer spending. And according to the Federal Reserve, over the past 12 months total industrial production rose 3.1%, and manufacturing industrial production rose 4.5%, with 33 consecutive months of growth in manufacturing activity.
This robust economic performance is reflected not just in income flows, but in asset values as well. Real household net worth is at an all-time high of $51.1 trillion and home ownership is at 70%, another all-time high. And these asset values are neither being driven nor eroded by inflation: core inflation is a little over 2%, well below our 20-year average of a little over 3%.
It is important to remember, however, that we are not growing in isolation. As the President noted in the State of the Union: "Keeping America competitive requires us to open more markets for all that Americans make and grow." The American economy is increasingly integrated into the world economy and America and Asia together are driving global growth with the U.S. and China by themselves accounting for almost half of global growth since 2000.
About a month ago I wrapped up a two-week trip through Asia. My message on that trip is the same one I bring here today: Asia is of central importance to the United States and to the global economy. In fact, five of our ten largest trading partners are now in Asia. Today, on a purchasing power parity basis, over a third of global GDP is contributed by Asian countries and three of the world's four largest economies are in Asia. Asia is the most dynamic region of the world, and its importance to us will continue to grow in the future.
My trip started off with a swing through three important southeast Asian nations – the Philippines, Malaysia, and Singapore. The common theme in these countries was a commitment from the political leadership to the policies that are needed to bolster faster domestic growth. Already we have in place a strong free trade agreement with Singapore, which took effect in 2004 and contributed to a 12% increase in trade in one year. We will begin negotiations with Malaysia, America's 10th largest trading partner, later this year. In the Philippines, the government is reducing their fiscal deficit and making efforts to reform the power sector to stop the drain on public resources. And in Malaysia, the government has recently allowed greater exchange rate flexibility and is committed to structural reform, investment climate improvement, and financial sector modernization.
While I was in Southeast Asia, the President was in India, the world's largest democracy and clearly a rising economic power. Last November I visited India and saw firsthand the progress that country is making to open up its economy to world markets and expand economic freedom. Since 1985, a time when India began dismantling trade and foreign investment barriers, trade has risen by almost 7 times in nominal terms and more than doubled in India as a share of GDP. Foreign portfolio investment has also risen dramatically, and FDI flows, while relatively modest, are poised to become stronger. India's strong growth has led to an 11 point reduction in the poverty rate since 1987, lifting tens of millions out of poverty. While India has made impressive progress, further steps to open the economy and improve the investment climate will be needed to maintain these trends.
Another country that is returning to vibrant growth after a long and difficult period is Japan. The United States and Japan are the two largest economies in the world and what takes place in our two economies is critical to supporting global economic growth. While in Tokyo, I was encouraged by Japan's strengthening and notably, domestic demand-led recovery. The fundamentals of the Japanese economy now stronger than they have been for some time. Large corporations' capital investment in the fiscal year that ended last week was projected to have increased by over 10%, the largest rise in 15 years. Labor markets are tightening -- the average unemployment rate in 2005 was the lowest in 7 years and there were 104 job offers per 100 applicants in February 2006.
Japan's challenges now concern the longer term – how to reduce a fiscal deficit of 5.6% of GDP in a way that maximizes growth and how to meet the challenges of an aging society. Raising Japan's long-term growth rate will be critical to meeting these challenges. Privatization of the nation's postal savings system, the largest financial institution in the world, should help. But, many more bold reforms will be required to open sectors to more competition and encourage greater labor mobility.
I also stopped in Beijing where I continued Treasury's intensive engagement with China on introducing greater exchange rate flexibility, reforming and opening China's financial sector, and achieving more balanced and sustainable growth.
The U.S. relationship with China may be the single most important economic relationship of the 21st century. More than twenty-five years have passed since China began its transition to a market economy, and China has seen its standard of living surge. The growth of China's income per capita is much faster than that of any region in the world, and especially noteworthy considering the country's size and extreme regional differences. Rural poverty has declined significantly, dropping 89% from 1978-2002. China is now the world's 3rd largest economy on a purchasing power parity basis and the 3rd largest trading nation. The United States has benefited from China's growth: U.S. exports to China have grown at four times the rate of our exports to the rest of the world since China joined the WTO, and China has risen to become our fourth largest export market.
China's rapid growth and the character of that growth pose challenges – for China and for the rest of the world. China's overall current account surplus has risen sharply, from $17 billion in 2001 to $69 billion in 2004. Estimates for 2005 are near $150 billion, or almost 7% of China's GDP. In the process, China has accumulated massive amounts of foreign currencies. China's holdings are now estimated to total over $850 billion, surpassing Japan as the world's largest holder of foreign exchange reserves. China's current account surplus is now a major component of global imbalances, and its continuation risks undermining support for the open trade policies which have contributed so much to global growth and to China's development.
This Administration has been working this relationship for five years now. Last fall, we articulated the three pillars of what China needs to integrate into the global economy in a manner that maximizes growth and minimizes possible disruptions. These are: (1) adopt a more market-based, flexible exchange rate; (2) shift from investment- and export-oriented growth to a more consumption-based economy; and (3) reform and open up China's financial sector, including its capital markets. This strategy is receiving widespread support and there is an emerging global consensus that it is the appropriate policy agenda. In fact, the Chinese have embraced this agenda, making some important achievements, but they still have much to do.
Exchange rate flexibility, which garners most of the attention, is first and foremost in the China's interest. With a rigid exchange rate, China's monetary policy is effectively set by the Federal Reserve. China must absorb large inflows of capital and can't raise its own interest rates without attracting even larger flows. Greater exchange rate flexibility will strengthen the ability of Chinese monetary policy to help assure sustained growth, avoiding the boom-bust cycles that have characterized Chinese growth to date. Greater ability to control domestic interest rates will also lead to more efficient and prudent financial intermediation, and help avoid credit-fueled investment booms and resulting buildups of non-performing loans.
In fact, in July of last year, the Chinese leadership publicly committed to greater exchange rate flexibility and Premier Wen reaffirmed that commitment just last month. Our engagement with China on exchange rate policy is now not about "whether" but about "how quickly." To date China's progress has been far too cautious. The obstacles are no longer technical; China could easily move more rapidly towards greater flexibility. It should do so now.
The second pillar of our strategy is achieving a better balance among sources of Chinese growth. This is critical to sustaining China's growth in the future and avoiding huge imbalances in trade. While China's growth has been rapid, it has depended too heavily on investment growth and increasingly on net exports. Since the early 1990s increased capital and labor input, rather than greater productivity, has accounted for the bulk of China's growth. China is also increasingly dependent on exports for growth, with 12% of 2004 real GDP growth accounted for by net exports. China's overall current account surplus has also risen sharply, from $17 billion in 2001 to $69 billion in 2004, and estimates for 2005 are near $150 billion, or almost 7% of China's GDP. China is now simply too large to rely on export-led growth to pick up the slack when other sources of growth falter.
The counterpart to China's high investment and its current account surplus is a savings rate of roughly 50% of GDP, which may be the highest in the world. Chinese households save 25% of their income, on average, mostly in the form of low interest-earning bank deposits. These "precautionary" savings reflect the weak social safety net and the limited access to financing and insurance.
What's more, in China, enterprise savings exceed household savings. Chinese companies, whether state-owned or private almost always reinvest profits rather than pay dividends. This has amplified China's inefficient investment, potential build-up of excess capacity, and boom/bust cycles.
China's leaders recognize that achieving more balanced growth is central to current Chinese policy. To spur consumption, China has placed strong emphasis on rural development in its most recent Five-Year Plan, deciding to cut agricultural taxes and eliminate fees for rural primary education. It also plans to direct more capital and social spending to the rural sector. Household savings could be reduced by making insurance policies covering disability and catastrophic illness more widely available, by allowing the creation of financing instruments to finance education and other major expenses, and by making higher return investment options available to households, including those overseas.
This brings me to the third pillar of our strategy – financial sector and capital markets reform. Inefficient financial intermediation remains the Achilles heel of the Chinese economy. To help modernize China's financial system and capital markets, Treasury has identified a number of priorities.
First, we believe it would be in China's best interest to allow more competition and market forces into the sector, in particular, by eliminating ownership caps on foreign stakes and expanding the scope of products they can offer. We are also pressing China to make substantial new commitments in financial services as an essential element of any Doha agreement.
Second, China's regulators and firms need to improve capacity for risk management.
Third, China needs to improve opportunities for private companies to obtain finance so that capital can be channeled to its most productive uses. They need to develop corporate bond and equity markets and continue to privatize their state-owned enterprises. China made impressive progress since 1998, privatizing over half of its roughly 65,000 state-owned enterprises, with privately controlled firms now accounting for over half of output value-added. As this process continues, it will be more and more important to have competitive source of finance for private firms.
Asia is a region of tremendous opportunity and dynamism. From India to Japan and from Singapore to China, this region has shaken off the Asian financial crisis and stands at a moment of tremendous opportunity. The decisions we take in the next few years will guide the U.S. role in Asia over the next generation – and determine the shape and pace of global growth for years to come. It is important that we manage our relations with this region in a way that preserves global growth and maintains broad support on both sides of the Pacific for an open trade and investment policy, which is a "win-win" proposition for both economies.
As today's jobs numbers illustrate, the American economy is strong and growing. But we cannot rest on our laurels, we must continue to pursue the policies – at home and abroad – that foster that growth and will lead to continued prosperity.