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March 28, 2002
Speech by the Honourable John McCallum, Secretary of State (International Financial Institutions), to the Canada China Business Council
Beijing, China
Check against delivery
I am extremely pleased to be here today to speak to the Canada China Business Council (CCBC). Your organization is a crucial link between Canadian businesses and their potential partners in China.
With the help and support of the CCBC, Canadian firms are enjoying significant success in China. The best evidence of this support came a little more than a year ago, when Prime Minister Jean Chrétien visited China as leader of the largest Canadian trade delegation ever – Team Canada 2001. Hundreds of contracts, agreements and memorandums of understanding, worth a total of $5.7 billion, were signed during that trade mission.
Your Council played a key role in the success of the trip, especially here in Beijing where a number of seminar sessions and networking events were arranged for trade mission participants as part of the CCBC’s annual policy conference. These events allowed Chinese business people to meet with the mission delegates both formally and informally, and I am certain that further business contracts and agreements were realized as a result of those meetings
So, to the Council and particularly your Chairman, André Desmarais, and your President, Howard Balloch, our thanks for the excellent work you have done in the past and the support that we know you will continue to offer in the future.
And the future certainly looks quite promising. China’s economy grew by 7.3 per cent in 2001, making this country one of the few areas of the world that posted a significant economic improvement last year. This growth took place despite a slowing global economy and the terrorist attacks of September 11 in the United States.
Last December China became the 143rd member of the World Trade Organization (WTO). This move represents a significant step forward in China’s effort to further integrate itself into the global economic community and has been a source of pride for China and its citizens. It also presents China with a host of challenges to ensure its economic infrastructure is ready to deal with the impact of a host of foreign competitors in a number of economic areas, including the financial services sector.
Today I would like to focus my remarks on three specific topics: China’s accession to the WTO, the implications for the financial services sector and increased co-operation between Canada and China in the years ahead.
China’s Economy and the "Opening Up" Debate
As I mentioned a moment ago, China enjoyed strong economic growth during the past year, and indeed has outperformed many of its Asian neighbours over the past several years in terms of gross domestic product (GDP) growth.
This impressive level of growth can be largely attributed to the market-oriented reforms that the government has undertaken since 1978. By loosening restrictions on foreign investment, reducing the economy’s exposure to more cyclical industries, such as agriculture and commodities, and boosting domestic demand for goods and services, China has seen a remarkable expansion in its manufacturing industries and in its service sector.
China has also adopted a cautious approach in the area of capital flows, and evidence has shown that this "go-slow" approach has many beneficial aspects. Prior to the Asian financial crisis of 1997, there was a belief that global financial market reforms, including the liberalization of currency trading and capital flows, should move ahead swiftly. But as the Asian situation unfolded, it became clear that China was less severely affected than other Asian countries. China’s approach to capital account liberalization likely played a very important role.
Now many economists are revising their thinking on the process of "opening up" financial markets. While there is no doubt that the free movement of goods and capital is an essential part of today’s global economic climate, it is also important to ensure that a nation’s financial infrastructure is fully prepared to meet the challenges of "opening up" without compromising stability. This appears to have been China’s strategy.
However, with accession to the WTO now completed, China must decide how it can move forward with financial sector reform while avoiding the pitfalls experienced in other nations. It is important to bear in mind the distinction between liberalization of restrictions on capital flows and allowing greater participation of foreign financial institutions in the domestic market. I will have more to say about this later.
This will be one of the many challenges that China will face in the coming years. Nonetheless, the implementation of the WTO commitments will provide a framework for liberalizing the financial services sector while allowing China to continue its program of economic reforms, maintain its rapid growth and play an increasingly important economic role in the world.
China Joins the WTO
China’s accession to the WTO last December represented the successful culmination of more than 15 years of discussions and negotiations with countries around the world, including Canada. It represents a significant achievement for China, the WTO and international economic co-operation.
The WTO is responsible for managing an internationally agreed set of rules to govern the international trading system among all member countries. Central to these rules is the principle of non-discrimination in international trade in goods and services.
As a WTO member, China must now ensure that it lives up to its commitments to open and liberalize its economic structure to better integrate into the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. This presents unique challenges for China’s economy, as Premier Zhu Rongji made clear in his remarks to the National People’s Congress earlier this month.
For example, many sectors of the Chinese economy will now face direct foreign competition and must strive to adapt to this new reality. Evidence in other countries, including Canada, has shown that this process is not without some short-term pain as industries that are not internationally competitive may be required to take difficult steps in order to survive. But in the long run opening up to foreign competition will be beneficial to China’s economy, not least because this will increase foreign direct investment, something that Canada has benefited from tremendously throughout our history.
At the same time, the Chinese government is analyzing thousands of existing laws, regulations, codes and other policy measures to be sure they meet WTO requirements. This too is an immense task and one that, in some sectors of the economy, will have to be accomplished in as little as two years.
Canada’s experience has shown that a high degree of flexibility, coupled with a strong commitment to live up to the spirit and the letter of multilateral agreements, is key to successfully adapting to a new and more competitive trading environment. We wish China success in its endeavours in this area.
Financial Services Sector Reform
One challenge that China faces as a result of its accession to the WTO is the continuation of the long-standing effort to reform and revise the regulatory structure of its financial services sector. This issue is one of particular interest to me, both as a former chief economist for Canada’s largest bank and in my current role as Canada’s Secretary of State for International Financial Institutions.
Financial development in China started from a very low level, since the financial sector was almost non-existent 20 years ago. Seen against this background, China’s record of financial sector development is impressive. Nonetheless, its agenda for further reform remains challenging.
As part of its WTO accession agreement, China committed to a substantial liberalization of its financial services sector, particularly in banking and insurance:
- all geographic and client restrictions on the establishment and operation of foreign banks in China are being phased out over the next five years;
- similar restrictions are to be eliminated for foreign non-life insurance companies over two to three years;
- foreign life insurance companies, through joint ventures with Chinese companies, will have full access to China’s life insurance market within three years after accession;
- restrictions will be relaxed on the activities of foreign securities firms relating to share underwriting, government and corporate debt underwriting and the launching of mutual funds, through minority joint ventures;
- foreign financial institutions established in China are to be treated no differently from Chinese institutions; and
- the financial sector regulatory process is to be open and more transparent, in line with requirements established by global financial regulatory agencies.
These commitments, while necessary for China to achieve its full potential as a WTO member, will nevertheless present challenges for Chinese companies and the nation’s securities regulators. There is no magic formula for the creation of rules and regulations on complex issues such as corporate governance, capital adequacy, risk management, business conduct and consumer protection. But there is no doubt that a sound regulatory environment is a crucial part of maintaining investor confidence in capital markets.
As we in the West have seen, the growing number of people who invest both directly and indirectly in financial instruments, coupled with the demand for more sophisticated products and services, has placed greater and greater demands on financial regulators, who must ensure the integrity of the sector as a whole. Chinese regulators, and indeed Chinese financial service providers, will undoubtedly face many of the same pressures.
Above all else, the gradual easing of restrictions on foreign participation in the financial services sector will mean that Chinese firms will face increased competition from international providers. This competition will require Chinese financial institutions and service companies to be more innovative and efficient, and to be prepared to learn from their new foreign competitors
We believe this competition will provide benefits for all parties – a "win-win" situation, as it is commonly called in North America. Foreign financial institutions will gain access to a potential customer base that numbers in the millions. In turn, these foreign institutions hire and train Chinese staff who will, over time, pass on their skills and knowledge to local Chinese financial institutions. Similarly, Chinese financial regulators benefit, as they must increase their skills and knowledge to provide effective regulatory supervision for these entrants into China’s financial marketplace.
Canadian financial institutions can play an important role in the development of China’s financial sector. They are internationally active, financially sound and well supervised and regulated in their home country.
Canada’s financial services industry employs over half a million people and is a significant contributor to our GDP. The International Monetary Fund stated in its Financial Sector Assessment Program report that "Canada has a highly developed, well diversified, and sound financial system."
Canadian financial institutions are playing an increasingly large role on the international stage. Our banks, insurance companies and other financial firms now have operations in the U.S., Europe, the Asia-Pacific region and here in China itself.
A number of Canadian banks have established either branches or representative offices in China. On Monday I will be attending the opening ceremonies for the Bank of Montreal’s new offices here in Beijing. Other Canadian financial institutions, including the Royal Bank of Canada, The Bank of Nova Scotia and the Canadian Imperial Bank of Commerce, also have a presence in China. Together, these companies represent some of the most prominent names in the Canadian financial services industry.
Two of Canada’s best-known insurance companies, Manulife and Sun Life, have established joint ventures with Chinese companies, while AGF, one of Canada’s largest mutual fund companies, has established a representative office in Beijing to monitor Chinese companies and seek investment opportunities.
These companies are in the vanguard of what we hope will be the development of a significant Canadian presence in China’s financial services industry.
At the same time, Canada can also provide technical assistance and support to Chinese regulators.
Over the past several years, missions from all of China’s major financial services regulators have visited Canada to pursue dialogue with their Canadian counterparts on regulatory standards and procedures. We welcome these visits and look forward to more of them in the future. Canadian monetary and regulatory agencies, such as the Bank of Canada, the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation and the Canadian International Development Agency, all stand ready to offer advice and assistance in their particular areas of financial expertise.
Does Canada have all the answers? Of course not. We have made mistakes in the past in regulating our financial services industry and we have learned from these errors. What Canada can and will offer to China is our sincere commitment to working together to develop solutions that take into account the unique realities of China’s emerging business climate, while ensuring that WTO commitments with regard to market access, national treatment and transparency can be met.
Canada/China Partnership
But Canada’s relationship with China is about much more than just the financial services sector. It is also about a unique partnership between two nations with strong and growing economic and cultural ties.
Canada and China enjoy a mutually beneficial trading relationship. China, including Hong Kong, is Canada’s third largest trading partner, with two-way trade between our two countries valued at $20 billion. Canadian companies also have a significant stake in China’s economic future. Direct investment by Canadian companies in China now totals more than $734 million and is continuing to grow. These numbers will undoubtedly grow at a much faster rate in the years to come, as China opens its markets as part of its WTO commitments.
China is playing a larger role on the international stage as well, and our two countries have also enjoyed positive collaboration in this area. We have been very pleased with China’s constructive role in the G-20 group of nations. Formed in 1999, the G-20 promotes discussion, and studies and reviews policy issues, among industrialized countries and emerging markets to promote international financial stability. My colleague, Paul Martin, Canada’s Minister of Finance, served as chair of the G-20 from its inception until late February of this year, and he welcomed China’s co-operation and assistance in the organization’s work. We look forward to China’s continued participation in the work of the G-20.
The relationship between Canada and China is about people. Our two nations have a long history of mutual co-operation and respect, which serves as an important guidepost for future relations.
In 1960 Canada made its first grain sale to China, an act that helped end China’s international isolation. Thanks to the efforts of a man of vision, Prime Minister Pierre Elliott Trudeau, Canada established diplomatic relations with China in 1970 – two years prior to U.S. President Richard Nixon’s celebrated effort in this regard.
Over the past 32 years several of our prime ministers, including the Right Honourable Jean Chrétien, have visited this country on numerous occasions to exchange views with their Chinese counterparts and promote closer ties between our nations. In 1994, shortly after our government took office, Prime Minister Chrétien led the first Team Canada trade mission to China. The Prime Minister also visited China in 1996 and 1998 before returning with our highly successful Team Canada delegation last year.
At the same time, Chinese leaders, including President Jiang and Premier Zhu, have visited Canada for discussions with Canadian officials and to enjoy our unique Canadian hospitality.
Canadians of Chinese heritage have made significant and lasting contributions to our country. In fact, the number of people of Chinese ancestry living in Canada is, on a per capita basis, larger than in the United States.
But above all, the people in this room, both the Canadian business people resident here in Beijing and your Chinese guests, represent the best evidence of the continued strong relationship between our two countries. By establishing operations here in China, companies such as AMR Technologies, Nortel Networks, Greystone Energy Systems and Innovative Board Technologies have shown that our expertise and commitment to quality can compete and succeed in a highly competitive marketplace. These companies and dozens of other Canadian firms are in the forefront of what I hope will be an even more substantial Canadian presence in China in the future.
The challenges are formidable, but China’s accession to the WTO also provides opportunities for Canadian companies to expand into the world’s fastest-growing consumer market. With the support of agencies like Export Development Canada and the Department of Foreign Affairs and International Trade, as well as organizations like the Canada China Business Council, I believe the best is yet to come.
Conclusion
In closing, I wish to pay tribute to the spirit of co-operation that has helped to forge the strong links between Canada and China.
Our countries share a common commitment to the formation of a secure, peaceful and prosperous global community.
With accession to the WTO, China is now closer than ever to fulfilling its potential to become a major participant in global affairs. Canada stands ready to assist China in meeting the challenges of WTO membership.
The time is now to take on the future – together.
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| Last Updated: 2003-01-17 |
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