 Good afternoon. Welcome. Welcome to CSIS. Delighted to see a nice healthy crowd here on a beautiful Wednesday afternoon. You're all very welcome. I also would like to say welcome to our online audience. I know we have a good following there. You can follow us on Twitter at CSIS, and there's a hashtag which I always forget. CSIS live, which you can you can follow us at. I am Matthew Goodman. I hold the Simon chair in political economy here at CSIS and I'm really pleased to see you all here for this conversation about the US and China in the global economic order. We're going to have a discussion up here with the panel who I'll introduce in a second for about an hour or in a bit, including some questions from me and then questions from you, and then we will take a short break. There'll be coffee on the Samnon terrace behind us, and then we will have undersecretary of the Treasury Nathan Sheets to give a keynote presentation. So we're all ready to go and hope you are as well. Let me just frame the discussion by saying that in the Simon chair we have coined a phrase for a new initiative here, which is it's really the initials we use for our work on the global economic order, which is one of the central things that we spend our time working on and thinking about, and those letters G, the initials, GEO, global economic order, conveniently make the word GEO, and while that sounds a little cute, it actually does have some relevance to this conversation in the sense that these issues I think of as sort of in geological geographical terms, that is there are tectonic shifts going on in the global economy, obviously the rise of emerging economies, globalization itself, technological change, these are the big things that are happening that are changing, and then you have sort of atmospheric things going on, struggle for growth in the economy, financial instabilities, challenges of energy, security, climate change, and development challenges, and many others, and all of this is in something of a shifting nature right now. There's a lot of movement and churn in the global economy, in the global economic order, and in this atmospheric situation, geological and atmospheric situation, you have these institutions, this set of institutions that were created at the end of World War II to manage the global economic order, and they're broadly known as the Bretton Woods institutions, though they're now, they've spawned many offspring, but essentially the three core institutions of the IMF, the International Monetary Fund, the World Bank, and what became the World Trade Organization's WTO, and these still remain really the central pillars of the order. And for 70 years, those institutions in that order has produced tremendous prosperity, unprecedented world prosperity, including for 600, 700 million Chinese so far, and so this order has been quite successful, but it is under strain, and under these shifts, some of these pillars and buildings, and not to stretch the analogy too far, are shaking a bit, and they're questions about both the effectiveness of these institutions and about their legitimacy, and so that's, that's the sort of backdrop to this, but there have been changes in this order of the, among other things, there's been a shift from a G7-centered world for managing the global economy to a G20, centered world, at least in terms of management of the international economic, economy or management of international economic cooperation among the major economies. You've had reforms to some of those existing institutions either announced or actually implemented in the World Bank and the IMF, obviously famously the U.S. is the only country in the G20 not to have followed through and implemented, ratified the IMF governance reforms that it championed in the G20. There have been a lot of developments on trade, the Trans-Pacific Partnership, which is on many people's minds, particularly this week with Prime Minister Abe visiting the Trans-Atlantic, Trade Investment Partnership, the Regional Comprehensive Economic Partnership, lots of super regional, mega-regional agreements, and then most recently you've had creation of new institutions, including famously, if you don't know the initials, AIIB, then you probably haven't been reading the newspaper recently, the Asian Infrastructure Investment Bank, which has been recently initiated by China and about 57 countries have so far signed up for this, not including the United States. So against that backdrop, you have the U.S. and China, the number one and number two economies in the world, depending on which counting system you use, we're still number one and two. Whichever order and we are obviously the center of all these developments and one way or the other, we are responsible for what happens in this global economy for good or bad and for deliberate calculation or for just by our mistakes or accidents. We're responsible for a lot of what goes on in this order. So that's why we've assembled today to have a conversation about what the U.S. and China think about that emerging order and what we're doing about it and what we can work together on and where we can't agree on how we can manage those differences. And we have a fantastic panel here to help discuss all these issues and I am just delighted to have a great group, which I'll start with to my right. Cheng Dongxiao is the president of the Shanghai Institutes for International Studies, which is a leading think-tank in China covering obviously international affairs. They are a partner of CSIS. We have many initiatives with them. We have fellows here regularly staying at CSIS from SIS and we've worked on them on these questions of global economic order. So I'm just delighted to have President Chen with us. He's an expert on China's external relations and on U.S.-China relations among other things. So he's a terrific anchor for this panel. To my left is Fang Jin, who is deputy secretary general of the China Development Research Foundation. He's also a fellow at the Development Research Center of the State Council of China and he is an expert on China's external economic relations with the rest of the world. So he brings a particular expertise to this thing. He's also I think a well-known figure in Washington. He has many friends before he came here. A lot of people said I should make sure to say hello to him because he has many friends in Washington. Then to Jin's left, your right end of the counter of the panel is Clay Lowry, old friend and colleague from the U.S. Treasury. He ultimately was assistant secretary of the Treasury for International Affairs. He's now vice president at Rock Creek Global Advisors and he's also a senior advisor, a non-resident, though he's often here to this Simon chair at CSA. So we're delighted to have Clay with us. And down at the my far right, your far left is Evan Fagenbaum, also an old friend and colleague. Evan is vice chairman of the Paulson Institute in Chicago. And he's also a former, well, he's a China scholar, PhD in China Studies and also served in the U.S. government for many years, including as deputy assistant secretary of state for Central Asia. So Evan brings, particularly when we get to the AIV conversation, I think you'll find that he has a lot of interesting insights into that set of issues. Okay, I have talked a lot. Let's get started. We're going to do a sort of Davos style interview here and then we'll open it up to questions from all you. President Chun, famously people have talked about the Fusitides trap, this notion that rising powers and established powers sort of inevitably come into conflict at some point. And over two thirds of the countries that have been studied in the last 500 years have ended up in some state of conflict. But some things are different from maybe what was going on in Thucydides' time, including the fact that while the U.S. is the established power, it's not really the other day Bob Zelik gave a talk in which he said, the U.S. is not a status quo power. We're actually a dynamic power. We're often wanting to change and reform things. So that's a little different, perhaps. And then China, while it may be a rising power, is not necessarily a disruptive power. For the most part China has been pretty compliant or following the existing rules-based order. And then the other thing that has changed is that we are so integrated economically that it's, you know, one wonders whether, given the economic interdependence between us and with other countries in the region and the world, whether, you know, it's inevitable that we have to, have to end up in some form of conflict. So I wonder what your perspective, the Chinese perspective on these issues is. Do you think this is a problem ahead or is there something different, and particularly in economics, is there something that may be different? Well, first of all, I'm very glad and honored to be here. And I think that as just you have given us trajectory of how the world order, or economic order have been involved from World War II, from the Britain rules to the G7 to G20. It means that the only thing unchanged in this world is changed itself. So I agree with you on one side that no country actually has a categorically status quo power because we just could not define what is the status quo itself. Dynamic, yes, it's right. I think that for both the United States and China, we are trying to transform itself as well as try to make themselves, themselves, respectively, to be adaptable to the changing circumstances around us. So in that respect, I think that the bilateral relationship has been more, between two sides, has been more comprehensive and complex, and has been also manifested in its interaction on what you said, the global economic order. I think that when I was young, I always remember the GRE, the GEO, I think that it's right that I want to make two points. Number one is that overwhelmingly speaking, China and the United States, we share a lot of common interest of concerns in maintaining the capable and stable and well-representative world economic order. We definitely would support a more open and increasingly liberalizing trade system, which is very crucial, critical for both countries' growth and prosperity, of course, for the whole world, despite of some of, you know, difference, despite that we could not, at present, see eye to eye, how to link those sub-regional trade arrangement, connect each other. I think that still there's a lot of room for our consultation. And on the financial system, I think that we all support a more efficient and more robust and more capable financial system, which is also very critical for a more inclusive growth for the world as a whole, despite the fact that Beijing made some extent to be a little bit upset by the slow reform partially because of the great lack of politics here, which has now passed the IMF voting power package, reform package. And from Washington side, my best knowledge is that you are also quite concerned that whether, as you said, those newly initiated or newly emerged banks, AIIB, for instance, would be really functioned as a complementary to the existing multilateral institutions. But generally speaking, I think that we all work for the existing principles and norms and institutions, but try to make it much more capable and well-representative. This is the point number one. Number two is I think that how to understand the competition because there's both sides really have differences on that. And this is those differences of interest. Some of them are structural. Some of them are perception. But they are the source of the suspicion. They are a source of the even conflicts if mishandled. But how to understand those differences or even competition? I think that we should put them into a broad picture, both through the prison of a globalized perspective or globalization perspective, as well as from the domestic reform perspective. At the global level, globalization level, I think that many Chinese, this is the mainstream thinking, believe that now we have entered in what we call globalization 3.0. 3.0, globalization 1.0, mainly led by Great Britain, was mainly led. Globalization 2.0, mainly led by the United States. Now the globalization 3.0, I think that it's a much more complex scenario that a number of newly emerged emerging economy plus those emerged economy. They will work together and how to make this globalization 3.0 to continue to make those global economic order work within the current system while at the same time to upgrade it to make it more adaptable to the new reality. That is the challenge. I think that anyway we have seen a lot of encouraging uses that the China and the United States work quite hard to try to improve that, including what you said that G20 is the primary platform to not only to respond to the crisis itself but also play a key role in managing those global economic governance. But at the domestic level it's also very important that both the United States and China at its critical stage of transformation reform, that if you just check China's domestic reform you will see that we have seen that since 2016 we actually actually in the new era of opening and reform 3.0. We have seen that. If the shopping opening up we call it a reforming opening up 1.0 and then since 1992 and then join the WTO it's kind of opening up 2.0. Now we move into the 3.0. It's not more complex domestic agenda for us but anyway China has, Beijing has initiated a lot of quite ambitious reform, unilateral liberalizations including opening up those free trade zone areas in Shanghai, Guangdong, Fujian and Tianjin, all those very most advanced areas economy economic development areas in China. I think the logic of rationale behind those reforms quite clearly. Just like the 1990s when China believed, argued that by linking with the international trade by joining the WTO it will bring more impetus, bring more stimulus for domestic reform. This kind of logic is still there. We try to open up reform in a new way to bring more forces to dissuade those resistance forces at home or to try to force those established vested interests who resisted reform to keep them reform. So I think that this is, in that case you will see that China's reform and unilateral reform as well as China's FTA agreement, initially FTA agreement with Australia, Canada, South Korea, all the United States alliance to try to make the domestic reform connected, linked with those more advanced level of standard of economic or trade assistance. So in that case I think that it's, generally speaking, China is still on the track of liberalization open. And so, well, that's what we should understand those so-called institutional competition but in more broad pictures. We are still on the same page. Okay, excellent. A lot of things in there that I want to come back to. But let me turn to Feng Jin for a second and ask about what China's sort of real beef is or what the complaint is about the existing order, the existing institutions and is this a concern about the effectiveness of the existing institutions or the legitimacy, the fairness of the way these institutions are run or something else? What is the main concern in your view from China's perspective? Actually, it's both. And I think actually China's view reflects similar views held by other big emerging market economies. As you mentioned in your introduction, the current national economic order and three pillars were set up 70 years ago under very different circumstances and the world has changed a lot since then. Those institutions work pretty well for the extended period of time. But given the new developments, given the new conditions of the world economy today, we feel that first elect the next legitimacy by not accommodating the rise and voice of big emerging market economies. And secondly, it hasn't been able to deal with a lot of the important issues, world issues that affects both developed countries and undeveloped countries. And in some sense, I think these two problems are interconnected. Because of the lack of legitimacy, they lack support and also perspective or input from emerging market economies. So it becomes incapable of resolving a lot of important issues. Because of disappointment in slow progress of reform in the existing institutions, so I think some big countries, including the U.S., including China and other big emerging market economies, they want to work outside the system. And this I think is in danger of creating a vicious circle. The more the big countries want to work outside the existing institutions, the more they become incapable of resolving issues. So this becomes a vicious circle. So my proposal is that we need leadership at this moment and we need to change. Can I not to interrupt you, but I want to do a round of analysis and then we'll come back and hear the prescriptions. But if you want to finish up the point, you're welcome to, but is it okay if we come back to the question of what you want to do about it? So maybe let me do that and turn to first to Evan and ask about, you know, the AIB has been all over the news and I don't want to revisit history in the sense that how this, the U.S. response came about. I think that's been well documented or covered. But I do want to ask a bit of a historical question in the sense that this is not the first time that an Asian-only initiative has been launched in Asia. The one that doesn't initially start with the United States. I mean, you had Mahatir's plans many years ago for Asian venues of one kind or another. You had the Asian Monetary Fund proposals by Japan. You had Kevin Rudd's proposals for an Asia region, although I'm not sure that he excluded the United States from that. You know, the U.S. has on one hand an interest perhaps in encouraging Asian institutions to be developed. But on the other hand, as James Baker said, we don't want to draw a line down the middle of the Pacific. We want to be part of Asia-Pacific developments and economic affairs in particular. So talk to us about sort of how this AIB initiative fits into both that timeline and U.S. interest. Well, I'm impressed you remember that Baker article from Foreign Affairs. No, I think a lot of that is still relevant. I think you make an important point that sets it into an important context. The A in AIIB stands for Asia, and I think it's important to see it in the Asian context that you set it into. Because I think, frankly, that from my vantage point the U.S. is facing a competitive challenge in the Pacific that doesn't necessarily start or end with the AIIB. That reflects some longer and more deeply seeded trends, and so it's useful to broaden it beyond AIIB. I guess I'd make a couple of points. First, as you said, Pan-Asian ideas and ideologies and institutions and mechanisms have a long history. This did not start in 2013, and it was not invented in Beijing. Although China, I think it is true, is seeking to leverage some of these trends to its advantage. You mentioned Asian monetary union, for example. On the day when Prime Minister Abe is here, Japan has a very strong trans-Pacific identity. Yet in the 1990s it was Japanese bureaucrats who championed Asian monetary union. We have Asia-only bond funds, Asia-only swap agreements, Asia-only trade and investment agreements. So from an American vantage point we need, I think, to recognize that context because I don't think this is going to be the end of the story. The second point I'd make, therefore, is that I think the United States actually has a pretty uneasy history with these kinds of Pan-Asian formations. And for me, at least the inflection point on that was really the 1997-98 financial crisis in Asia. When particularly in Southeast Asia, I think in a lot of countries the United States was perceived rightly or wrongly, but the United States was perceived as somewhat aloof, maybe a bit arrogant in some countries. And I think in perception terms, at least, the United States paid a price for that in Southeast Asia in particular for quite a few years after that. I mean, you remember, in 1994 the U.S. bailed out of Mexico. And then three years later, it didn't bail out of Thailand. And so quite apart from Thailand, I think, among many ASEAN countries, there was a price to be paid for that, that shaped the debate in Asia about the United States. And the origin of many of these ideas, when Asians began to look to one another for solutions to the economic challenges that had doubled the region, I think really had an inflection point in 1997-98. So that leads to a third point, which is that given all that history, I think it would be most unwise for the United States to conclude that some Pan-Asian formations are not going to be inevitable and are going to move forward regardless of American views and preferences. And that's why I say we have a competitive challenge, because if that's the case, we have a problem that requires solving. And so I wrote an article in Foreign Affairs recently that tried to ask some questions about that, because if that's the case, then I think Americans are going to have to ask themselves some pretty important questions over the next few years. One is what rooms do we have to be in where we're just going to have to bang down the door, because our vital interests are at stake? And where is that maybe less the case? In other words, what do we got to have and what's nice to have? I think you used a European analogy. So are there some things where the proper analogy is just like our support for European institutions, we can support some Asian institutions or not? But that would require a pretty high level of strategic and tactical coherence that I think the United States doesn't have right now. And to make that real for you, just think about the argument that was made around the so-called East Asia Summit several years ago, where the United States signed the ASEAN Treaty of Amity and Cooperation, which was a prerequisite for joining, and joined the East Asia Summit. And a lot of the argument at the time was that it was just unacceptable to have an institution in Asia that the United States wasn't in the room, therefore we had to be there. I would argue fine, but I would argue the East Asia Summit is mostly a talk shop. Now you have this AIIB that is potentially much more than a talk shop. So if that was the argument, then why doesn't that same argument apply? Why be here but not be there? I don't know. I mean everybody may have a different answer to that question, but that's the kind of question I think one needs to ask. The second question then is, has these things arise? Do they supplement or supplant institutions and forms and agreements that the United States may prefer? And to the extent that they supplant them, we would need to think about a pretty robust toolkit for dealing with them. And to the extent that they just supplement, then you can think more broadly about minimum living with them, but more than that maybe finding ways to shape them or even work with them. Not necessarily directly, but maybe more creatively as well. We can come back to that in the prescriptive part. And then just the last thing I'd say is, and that also means the U.S. frankly has to be in the game itself. And I, you know, they had to be so it's going to do large scale project finance. I mean the U.S., a lot of this debate has been about multilateral development banks and international financial institutions. It hasn't been about the United States doing large scale government directed project finance. And there's a reason for that. We're not, we don't do it the way China's done it. Or even for that matter really the way JBIC has done it in Japan. And so, but in the full sweep and scope of Asia institutions, agreements, functional areas, you know, clearly the United States, if it's going to adapt and compete, has to compete with something. And so whether it's the debate that's going on in town now about TPA and TPP, where we're either in the game in Asia or we're not, or quite apart from trade on investment rules on technical standards. You know, what do we bring to the table? Because I think we're going to be facing this Asia only pact, Asia only technical standards, Asia only agreements. These things are going to come up again and again. So we need to adapt, but we also need to compete. Okay. I'm going to come back to you on the infrastructure question themselves, but let me get Clay into the conversation by asking about the IMF set of issues. And, you know, we can talk about IMF quota reform if you want, and that's okay, although I think everybody on this panel has agreed that those reforms need to go forward. I think we've even signed letters to the Americans on this panel advocating that that move forward rapidly. So we can talk about that if you want. But let me throw two other things into the mix here, which is the Chinese objective and ambition of internationalizing the remedy, their currency. And then the other issue which is related but different about the special drawing rights at the IMF, SDR, sorry, every club has its acronyms. And unfortunately, there are a lot of them in this area, so bear with us. But SDRs and whether the RMB ought to join the dollar, euro, yen, pound in the SDR and how soon that should happen and how on what terms and conditions that should happen. If you could talk to us about both of those things, how they're related, what the pros and cons of those things are from a U.S. or a global perspective as well as a Chinese perspective and what it would take to make those things happen. Thank you very much for having me here. I love being at CSIS because I was a treasure for a long time and the word Thucydides never once came up. But in terms of the IMF issues, the internationalization of the RMB is not really an IMF issue. It is related because the IMF is supposed to help with the international monetary system. To internationalize your currency is an interesting thing and in fact what China is launching on is almost an unprecedented experiment. The reason I say that is because it's largely being driven by the government actors. So the dollar became an internationalized currency but it kind of came about through a variety of mechanisms but it wasn't really necessarily the government in the United States that drove that. And so because of that it'll be interesting to watch and to see whether or not the United States can play a positive role. And when I mean positive role, do we want this? So the dollar is clearly the main currency in the world for lots of different purposes. Is it good that we diversify? My own view is it is for a variety of reasons. One is what the panel has been talking about a bit which is China is I believe the largest trading country in the world, the largest trade flows. Second largest economy in the world. But it's not a major actor in its currency or in international markets. In order to get there their currency has to change and that actually goes towards a point Evan kind of briefly hit on which is our trade agreements. There's a huge debate right now about whether or not we should have trade promotion authority going on so that we can do a trade, the TPP. Probably the biggest issue is about whether or not currency manipulation should be dealt with in a trade agreement. While there are some that have done that because they believe that Japan is a problem and Japan would be part of the TPP. I think most politicians when they're thinking about this think about China. That's not the point. My point is if we want China to do what it says it wants to do which is move towards a more market determined exchange rate then we probably need to work with China on what are some of the tools out there that can help them. Better monetary policy tools. Opening up of its capital account. Having a when you open up your capital account so you don't run into big problems making sure that you have a sound strong financial regulatory supervision system. The US obviously has its own work to do on that front but probably getting the basics right is something that we can certainly help the Chinese on. Now will there be some controversies over this yes and because it means that you're adding another currency to the system and it will take a while and I promise you there will be problems and something will go wrong. But I do believe that it is definitely within our interest in the United States for the political reasons I just was sort of mentioning. It will make the reninbi a more market determined exchange rate. It probably won't float right away. It will open up opportunities for financial liberalization and competitiveness in China which I think will be in US interests. It will open up the opportunity for China has to for a variety of reasons for its internal purposes but it's actually helpful for external purposes to rebalance its own economy. The Chinese have talked about it a lot. The World Bank did a big study with the Chinese about this and there's a lot of debate out there. There's some people who say they'll never make it just won't make it. And the reason is because it's hard to rebalance your economy to be what we would say you know one of the it's actually funny. We want them to rebalance in a way that we actually worry about for ourselves which is towards a more consumption based economy than an export driven lead economy. I think that that actually is something that is in China's interest and it's actually in the United States interest. So my own view is this is I mean oh I'm not supposed to be doing policy thoughts. So in my own view it would be helpful. In terms of the SDR basket so that's a little more of a esoteric weird issue. So SDRs for those in the room that don't know what they are and it's not like I do either are our special drawing rights. OK so it's an it's a fake asset that is held at the IMF and it's made up of a basket of currencies which Matt just mentioned what they are. It's not every major currency in the world. The Swiss franc is a major currency. It's majorly traded and so forth. Swiss franc is not part of it. China has said that they want to be part of this. I think that that's a good thing in many respects. And there you know I don't want to get into China's rationale but I think that again it goes towards what needs to be part of the SDR basket. A more open capital account a more usable currency. It may not be necessarily convertible but it's used in international transactions both financial as well as trade transactions. And I since I already said I think that that is in our interest as well as China's interest. It seems like being able to join the SDR could be a good thing. Now I say could be because there's a bunch of technical criteria involved in being an SDR currency which I think the IMF has to work its way through. When I say the IMF I don't just mean the technicians and staffing management there. But also the shareholders in the United States is still despite our IMF quota issues is still by far the biggest shareholder in the IMF. So I think that we would want to work with China. That doesn't mean and so this is where it's going to get tricky. SDRs are up for renewal this year in terms of what's involved in the basket. Can China produce the type of data that the IMF is going to require in order to make a determination. I don't know. I'm not sure that they can. And it's not because the Chinese are incompetent or anything like that. It's because it's just not something that they've been having to pay attention to. And so it's interesting I listened to a former central bank governor from China mentioning this and saying some of the data is really not. We don't have it as well as we can. So the IMF is going to have to go around the world and find out is there are and be a part of your reserves in any country around the world. They don't know this. People I mean countries haven't reported this. So there's something that the IMF is going to have to get on top of and something the Chinese will have to get on top of. Can that be solved within the next nine months. I don't know. But I think it's certainly something we the United States can work with the Chinese on as well as with the IMF on. Will it be a positive thing. Maybe in a minor way. Given what has just happened that Matt mentioned on the AIB and our own delays on IMF quota. I would certainly if this is something the Chinese want. It doesn't seem like a humongous deal. I would certainly be working with them as opposed to working against them. OK great. That's probably enough IMF for the first round. It's never enough. Welcome questions in the thing. But let me come back to infrastructure in Evan. So there's there's something that I think everybody agrees on that there's a lot of need for infrastructure in Asia. Even the president yesterday President Obama yesterday said you know we agree that there's a big need for infrastructure. But is the problem a problem of money is a problem of capital. Is it another type of problem that creates this so-called infrastructure gap. What's the solution. And why are people talking about standards when you talk about financing infrastructure. And what does that mean. And what should we be working towards in a nutshell. Well I think it's I think we have to be careful not to over generalize because infrastructure needs are different from country to country. And the obstacles and hindrances are different from country to country. And I've seen this. You mentioned I was deputy executive secretary for Central Asia. So you know there was pipelines and roads and power projects and water projects. I was also deputy executive secretary for South Asia. And India was in my account and we all know that the Indians have got a big infrastructure deficit. And a lot of the obstacles in India are not just about capital. They're about land acquisition and labor positive. This is precisely what the Indian government is dealing with with the new land acquisition bill. The prime minister in the range of Modi has now said he supports. So I think first we don't want to over generalize. I mean I guess here I'd say a few things. One again to come back to the I.B. So the I.B. as I understand it the subscribe capital is a hundred billion. So nobody's going to be building infrastructure all over Asia with a hundred billion dollars. Especially if as we've been told there's a 10 trillion dollar infrastructure deficit in the region. So that suggests some interesting things one of which is that there's a potentially important and useful role for the private sector. Because at some point the I.I.B. and others have to go to capital markets. And so there's going to be potential for market participant participation and otherwise. And that's going to get you into sort of the relationship between the bank and the debt markets and bonds. But it also is why people are going to watch very closely not just this question of standards that's been phrased in terms of environmental standards. But also things like procurement rules. You know is this just to you know what's the role of Chinese companies versus other companies just exporting over capacity and so on. So but I do think there's going to be this role for the markets and for private capital in that context and others. The second thing I'd say is that point about standards is interesting because you know in the infrastructure area. You know if you think about like a an energy efficient building and a LEED standard you know you walk around town and you see the signs as LEED. Like the CSA. The CSA. But I mean for every type and segment of infrastructure and damn an ultra high voltage power line there aren't necessarily agreed technical standards. And then you also have this issue of different practices around environmental standards. So you mentioned the Paulson Institute. So we're not really a think tank but we're a publisher of other people's work. So I published a paper a couple of years ago by a guy at Boston University who's looked at the issue of environmental standards in policy bank lending in China. So this is the China Development Bank and the China X Bank. And then he compared their practices to the World Bank and the IFC. And so he did this across you know nine or ten different types of environmental practices. These are things like X anti environmental impact assessment or X post environmental impact assessment. Is there a grievance mechanism. How do the banks consult or not with communities of stakeholders. And between China Development Bank and China X Bank the practices are different between the World Bank and the IFC some of the practices are different. So one thing that's interesting is that this is going to evolve in the AIB context in ways that hopefully if it's fluid choices will be made that can be shaped. So things like a grievance mechanism which is not really central to what the Chinese Development Banks do. As we've seen in some projects around Asia that becomes particularly important. That's one of the big issues in India for example which gets to my last point. So if you want if you look at these other obstacles besides just it's not just a capital problem. You know to take India the issue of land taking for infrastructure projects or for building a factory is incredibly contentious and controversial in India. So quite apart from the political risk that you see in places like Central Asia that you're going to see around these projects. Or I saw when President Xi went to Pakistan the other day they're talking about power sector projects and other projects. I mean political risk in Pakistan will be quite significant. So apart from political risk think about India on land acquisition. I mean until 2013 India was operating off land acquisition legislation from 1894 1894. And then the last government the United Progressive Alliance government introduced amendments to that legislation that were controversial even in that context that included things like. I think it was 80 percent consent of community stakeholders for private sector land acquisition related either to a factory. The current government the NDA government is trying to potentially lower that threshold to make infrastructure development easier. That's in a domestic context not in an AIB context. So quite apart from the issue of capital and how you raise capital on the equity side of the debt side. I just think a lot of these issues are going to come up quickly. And that's about standards in the abstract sense. It's going to be what kind of practices and then how you relate to conditions locally on the ground. But I think that's very much what I'd say is very early innings on this. So it's going to be very fluid and there's going to be a lot happening country by country. OK. You've done a little prescription but let me turn back the function. And since I interrupted you before why don't you carry on with your point about what would you suggest we do about about this. And maybe link it to trade which was the other pillar we didn't really get into the WTO system in particular. OK. I said to reform the existing international economic order of leadership from both China and U.S. Even though this is a global economic order but since we are the two biggest economies we have the most gain. If we have a good effective efficient international economic order and we have the most loose we have a disorder. Because essentially international economic order is public good since there is no higher authority to force every country to contribute then we need these big players to step forward to provide leadership to effect change. By change I mean two things we can do. We can either reform the existing institutions from within by making them more legitimate by increasing the voices and shares of big emerging math economies. And we can also reform the rules for decision making and implementation to make them more efficient and effective. And secondly we can set up new institutions because reforming existing institutions can take time and we need to consult every member of that institution as the slow progress in MF voting rights reform has shown can take a lot of time a lot of obstacles to overcome. So in that sense we can set up new institutions to speed things up like initiative. You mentioned that the U.S. is a dynamic power. It has initiated a lot of new institutions besides the president would system in the past for example the establishment of G7. I think it has been a very good example of setting up new institutions in time of emergency to deal with the issues at the time. And also TVP and among others and also the proposal to transform G20 from a ministerial level meeting to leaders summit in the aftermath of the global financial crisis. Which really helped to gather world leaders to cooperate to tackle the financial crisis. So an example would be AIB you just mentioned. I will try to actually answer the question you asked why previous Pan-Asian initiatives have become obsolete and AIB garnered so much support in such a short space of time. Probably three factors contributed to that. One is the subject of cooperation infrastructure investment. I think it has proven to be a very effective channel for economic growth. So it made sense to everyone involved both the China and U.S. developing countries developed countries. They all think infrastructure investment is very important. It is certainly a huge gap for increasing investment in this area. And secondly I think timing is also very important. You mentioned about the Asian-Mantra Union the idea of having an Asian-Mantra Union. But at the time I don't think the Asian economy was that integrated. And the idea of a Mantra Union had never been tested in reality. So even though it was thrown out by Japan in late 90s not many people already subscribed to that. But now the Asian economy is so integrated. So I think the time for cooperation is right. And thirdly I think the initiator of such projects is also very important. I think China being probably the first or second most important trade partner with most of its neighbors and has a lot of other economic relationship and political relationship with its Asian neighbors. So when China proposed this it made sense to a lot of countries both inside Asia and outside Asia. Great. Well I want to bring the audience in but let me ask Chen Dongxiao one more question which is about what you think the U.S. and China can do to work together on these issues and where would you identify some specific areas that they could work together. Mindful of a couple of upcoming forums in which they might be able to talk about these issues the strategic and economic dialogue which we're going to talk to under secretary Sheets about a little bit later which is coming up in June. And then China's I don't think anybody actually explicitly said China is taking over the hosting role for the G20 on December 1st of this year and will hold that hosting role for a year ahead. So those provide opportunities for the U.S. and China to talk about cooperating on any of these issues and what would you single out as areas that might be productive for economic cooperation. Well I think that one of the most remarkable change in terms of interaction between U.S. and China including on economic terms is that these two countries have already transcended their agenda from a categorically bilateral issues stuff towards more regional and multilateral issues. And I think that to show the collective leadership is the most important message that both sides should work together to tell the international communities. Having said that does not mean that we advocate so-called G2 because this G2 has been already demonized. But I think that we really face the challenge of the dilemma of lack of the leadership of these communities and the international communities. So I think that through those bilateral or multilateral forum whether it's S&ED or those upcoming G20 I think a number of agendas on our side. I think it's very important. For instance this year there will be an important interstate negotiation over the sustainable development agenda negotiation initiated by the United Nations. And I think that those negotiations will set agenda for the next decades of how the development agenda should look like. Following on to the millennium development. Following on to the millennium and touch upon those most important issues including the poverty, the elimination and the inclusive growth, the equality. Equality and I think that sustainable development all these things. I think that the World Bank itself has already transformed its agenda in responding to those direct issues. And I think that those IMF itself in terms of its monetary aspect should also transform it in responding to those new agenda. And I think that for US China we should work together to really assume those kind of leadership to push forward those negotiations really successful. So I think that this is very important message we should show to the world. Of course we have a long list of those issues we can talk. But climate change of course and we need to reaffirm our announcement last year and try to figure out the roadmap and more exact action plan which is linked to those objectives because the devil is in the details. So I think that that's very important. And also I think that if China and the United States can show their leadership we could also bring more members of their communities, European colleagues. Japan I noticed today, even India of course, put on the same table to push forward the climate change really because this is really a challenge for us. Excellent. Well, lots of food for thought. I want to get you all into the conversation here. So we're going to take questions. There are microphones so please wait for the microphone. Please do identify yourself and ask a question. And we can start right here with this gentleman. Yeah, Bill Jones, Executive Intelligence Review. I would stress in the AIIB, not so much the Asian but the infrastructure that there's a different directionality, that the difference between what the AIIB is intending to do and what the Bretton Woods system does is much different because although the World Bank was created for infrastructural development in 1944 it has moved away from that by and large and doesn't do the job that was meant to do. The IMF unfortunately with the development of the world economy has become more of a debt collector than a monitor of keeping balances between countries as was the initial stages. The economy we have now is deeply in debt. The debt has grown stratospherically compared to the growth of GDP to the extent that we're at a point that we can never repay all of this debt even with the massive austerity which is being imposed. We have this contrast between the Western world, Europe countries like Greece and Portugal going down the tubes. The United States not in much better shape. I mean, what we're doing in California has shown that we lack the capacity to really keep our economy moving in our thinking. And on the other hand you have what China is doing which is a model of what they have done in their own country, massive infrastructural investment to raise the level of the population in that part of the world. That's why everybody joined the AIIB. I think China was very surprised. I think they did want an Asia infrastructure investment bank and because it did represent a different principle, a different direction, everybody started to join it. So in getting it together my question is that there has to be what President Clinton used to call a reform of the international financial architecture in such a way that this debt is brought under control or moratorium conducted or something like that so that there is a capability for conducting a global infrastructural development of the world economy. Then I think you can bring these two together and I think that's the issue for the G20 is how do you reform the international system in such a way that the whole world can join this type of a development. Okay. You want to try to take that on Clay? I mean, the G20 has talked about international financial system architecture and has tried to get at questions of debt, sustainability within the G20, but what do you think they ought to be focusing on in the Chinese year, for example? There's a lot there. Okay. Pick a piece. I'm going to take a couple of pieces of it. First, let me just say I think the Chinese will I'm sure do a very good job of chairing the process next year. If I was them I would say don't focus on solving every problem in the world. One of the problems I see in the G20 is that the chair wants to sometimes seem to solve too many things and do too many things. I think the key of being a good chair is continuing to move the balls along that are already moving. Pick another one or two things that you think are really important and try to deal with those. You can't boil the ocean. In terms of your comments, I'm not sure I agree with all of them if I know I don't. The World Bank does do a fair amount of work on infrastructure, so does the Asian Development Bank, but Evan and his points made a very good point which is there's a huge financing gap and how are you going to address it? These multilateral institutions are dropping the bucket. They'll continue to be a drop in the bucket. The private sector will be very important, but a lot of infrastructure is done through domestic finance and that means tax revenues, fiscal spending, et cetera. The mobilization of those financial resources in a more effective and efficient manner is something that I think is in all of our interests, particularly developing countries' interests, but not just developing countries. So if I had to say where I would be trying to focus my attention as we go through, the President mentioned a bunch of different forums that are going to be coming up this year, including the Global Development Finance Corp, which is a follow-up to the Monterey meeting about 12 years ago, I'd be focused a lot on how do you get domestic resources mobilized in a more effective way so you get better returns for your populists so that you may take on debt, but that debt is done in a much more investment-friendly type of way. So I think that there's a lot to do in that space alone, but if you had to boil your question down, that's probably what I'd focus on. Let me just emphasize one thing at the beginning of what you said that I agree with, which is that as advice to China, don't do too much. It's important that people can get behind and then try to, what I say, build bricks in the road towards those objectives, little things that are significant, difficult, but not impossible to move the thing forward and then hand it off to the next host to take it and build the road further along. There was a gentleman in the very back there. Hi, Michael Kirsch, U.S. Econ Solutions. This question is directed to Evan Feigenbaum. I thought you made a really good point about the project finance, international development, banks and institutions. It's largely discussed from what's going on in Asia. You said the U.S. is not doing the same way that China's been doing it. My question is, what lessons can be learned from China's infrastructure building and its large-scale project finance with respect to the banking system? Is there anything that can be learned? AIV aside from the general use of China's banks and development of the last 20 years, maybe not the form but the mechanics of the banking. Bill Schuster yesterday, the head of the transportation committee in the U.S., said that the federal government needs a much bigger role in infrastructure. Is there anything to be learned from the government financing side? And a short question to Nathan Sheets. Can you expand more on what you mean by a need for a capital account with China? If you mean Clay, we Treasury officials are all looking similar. Nathan has less hair than I am. Tell us a part. Evan, did you understand the question? You want to clarify the question? On the banking system, you meant lessons for the Chinese banking system or for the American banking system? In other words, what I thought I heard you asking was, can the U.S. emulate and replicate China's infrastructure building experience? Is there anything to be learned from China's use of its central bank and the general way in which its banking system has been able to finance its growth over the last 20 years that our own banking system perhaps hasn't used? I doubt it. I'm not an expert on U.S. infrastructure, but my impression is that there are a lot of reasons that the U.S. doesn't have the infrastructure that it can and should have and a lack of capital is not necessarily the principal one. There seems to be lots of private capital that we'd like to invest in U.S. infrastructure if some other regulatory and other things were changed. But anyway, it's not my area. In terms of the Chinese side, I think the lessons of China's infrastructure buildout are complicated and mixed. As somebody who first went to China in 1985 as a student over 30 years, you can't help but be impressed by a lot of the infrastructure buildout. On the other hand, there are many elements of the nexus between infrastructure development, the financial system, state-owned enterprise, overcapacity and other things that have saddled China with a legacy that's partly at the center of the reform agenda that came out of the third plenum and the reforms. So this growth model that's depended not solely but very heavily on investment in fixed assets is clearly that it's not a new phenomenon. If you go back to the 12-5-year plan, Chinese leaders have been talking about ways to alter elements of this for quite some time. It's actually a somewhat mixed legacy but since you asked in the context of U.S. infrastructure maybe Nathan Sheets down there can answer that. Being compared to Nathan Sheets would be a true honor. He really is a great public civil servant for our country. Two things. One, a little bit on the infrastructure you're actually hitting the point that I was trying to hit which is it's a lot about domestic issues. So for the United States whether or not we should have a public infrastructure bank in this country it becomes a political football one way we're actually hurting infrastructure finance is the way that we've actually we're doing banking and financial sector regulation where we're actually harming the ability to take longer term risk and so long because a lot of infrastructure takes longer term risk and there's good reasons for why we're doing that because of the financial crisis we had a few years ago so we've increased our capital standards and we've done some other things. Is anybody thinking about these issues? No, not really I mean that's because we put such an emphasis on building resilience into our financial regulatory system I would suggest that maybe we need to look at that. As to the capital account liberalization what I mean by that is if you were a Chinese citizen it would be very hard for you to invest overseas and by the way it's not that easy to invest in China. In fact actually so one of the proposals out there from a think-tank down the road about how to stop the Chinese on currency manipulation is for us to actually basically do the go in and intervene into the Chinese market in terms of their currency but we really can't even do that. You would have to go through a very convoluted mechanism in order to do that. By the way I think it's a silly idea but that's up but if you're going to internationalize the RMB I have to start opening up some of these avenues for financial flows and that doesn't mean it will be a pure capital account liberalization which pretty much the United States has but I think Chinese will be making steps in that direction which in the end I think will actually have a better impact on how the exchange rate movements work a lot more so than creating legislation on something fairly arbitrary. Okay thanks as a lady in the back there. Yeah that's you. So, oh hi. Anne Kocas, University of Virginia. Thank you, it's wonderful to see all of you and this has been really interesting. So I'm interested. Yes I know, Nathan it's lovely to see you too. You gotta get off the Nathan thing. No I'm sorry Clay, you're doing a great job. So my main interest is in this, so we've talked a lot about institutions and multilateral institutions yet a lot of the major policy movement in the Sino-US relationship has come through bilateral talks and bilateral trade agreements and I was wondering how each of you, particularly a representative from our wonderful Chinese guests and also from our American speakers how you would view the movement of that as we move forward. So what should the balance be in terms of bilateral talks and multilateral institutional collaboration? President Chendi, so she's saying that we have dealt with a lot of these issues or the issues between us in bilateral forums and through bilateral agreements we're now negotiating a bilateral investment treaty. We're dealing with a lot of current trade issues and so forth but we've been talking about multilateral conversations you know, is there a balance to be struck here? Can we do all of this? Well I think that that depends sometimes I think that those multilateral forum meetings some of them are just kind of like gala show you know, a lot of leaders out of the domestic agenda concerns they just try to show how tough they are or how they are responsible to their domestic audience and therefore some of those international forums has been a waste of time actually and I think that in that regard bilateral dialogue particularly through a in-depth and one-on-one dialogue is very important because that will I think as long as the leaders from both sides can make a decision and then delegate their power to their working levels to deal with them, I think that's more important nowadays for those multilateral forums a lot of at the level of working levels they could not solve the problems they just have all those troublesome issues to the top levels and ask leaders to make final decision at the final minute last minute it's almost quite tough for the leaders to do that but in that case I think that we should focus we should have the potential of those bilateral talks with those bilateral talks and by talks focusing on those multilateral very important issues so in bilateral talks we should be talking about multilateral cooperation but not necessarily as a G2 we shouldn't be coordinating so that we then tell everybody else that you know it's China the United States if you just keep a part and then all internet companies will be concerned about the relationship but if you come too close also there's concern so that's the reality I think that sometimes we need to be comfortable with those more close relationships consultation people don't want the elephants fighting or making love did you want to say anything function? I would like to echo President Chen's suggestion that even in bilateral settings we need to talk about regional and global issues and even when we talk about bilateral issues we need to be mindful of what we talk about have a global indication I would like to close by analogy I think China and the US are like two star players on the sports team they just play to the best of their own abilities and the team may lose interesting I know there are a lot more questions but I am told that Nathan Sheetz has actually arrived in the building the real Nathan Sheetz you know they're going to call him Clay Lauer so I'm afraid we're going to have to wind this session up there will be a brief break as I say we will reassemble at 4.30 up here we need to get the stage reset and things will be back there feel free to have some of that but please be back by 4.30 thank you very much thank the panel for their great that's funny you should hear it then we're going to sit there never heard of that guy it should be good enough to pick up that's exactly if everyone could take your seats again are we on here yeah if everyone could take your seats please at least temporarily suspend conversation welcome back everyone got some refreshments I hope okay so we're going to move on to the next part of our program and I am just delighted to welcome to CSIS the Undersecretary of the Treasury for international affairs Nathan Sheetz Nathan was confirmed in that position last September and is responsible he's the senior official at the Treasury Department responsible for advising the Secretary on all international economic policy issues I am always honored to introduce an Undersecretary of the Treasury since I used to work for several and it's actually quite intimidating to have someone from that position up here but this is the key position in the U.S. government for dealing with a lot of the issues that we talked about on the panel before whether it's the IMF issues the ADB issues the World Bank and importantly he's responsible for the economic side of the strategic and economic dialogue and so that's what he's going to talk about in a second Nathan was global head of international economics at city group before he took this position and he worked at the Federal Reserve Board for 18 years as an economist and in a number of other positions and so he has tremendous experience in Washington and policymaking world and of course international economics and he has some credibility with a Ph.D. from a obscure institute in Massachusetts that his initials are MIT so he's got a lot of credibility on these topics delighted to welcome Nathan up here and we'll have a little conversation after that Nathan please, there's a stairwell here thanks so much well Matt thank you for that very kind introduction but actually I'm Clay Lowry it's a great pleasure to be here among so many proponents of economic engagement with China I know many of you have devoted a good deal of your careers to this endeavor in particular Matt the work that you and CSIS have done over the years has been enormously helpful as we try to improve our strategies and tactics for engaging with China bilaterally and multilaterally in that context I will focus my remarks today on an important mechanism for this engagement the strategic and economic dialogue or S&ED around this time of year the question we are asked most often about the S&ED is when is it going to be held and we usually say as I will today that we will announce the dates later but here's a more accurate answer the S&ED is actually held every day in reality the S&ED is much more than just two days of meetings in the early summer it's not an event but rather a mechanism a mechanism for managing and building the relationship between the world's two largest economies and it's powered by day in and day out interactions so as I speak about the S&ED I hope it will be clear that I'm really talking about the ongoing functioning of our underlying relationship now let me start with the basic question why do we need an S&ED first because the stakes are high together the United States and China account for a third of global GDP and 40% of recent global growth we have an enormous stake in each other's economic performance and we each have a strong interest in a joint responsibility to pursue policies that support the global economy and uphold the global economic and financial architecture second is the complexity of the issues and the breadth of the players policies and interests involved on both sides for example China has taken approaches on a number of trading investment issues that are at odds with globally accepted rules of free and open commerce recent examples include regulations for ICT equipment purchases by the banking sector and concerns regarding China's enforcement of its anti-monopoly law such cases help illustrate why this work is so challenging and why it is so important to underscore the role of the S&ED the presidents of our countries have named the co-chairs for both the strategic and economic tracks special representatives with authority to coordinate the agencies in their respective governments this level of presidential commitment and empowerment is unique among our bilateral dialogues as many of you know the economic track of the S&ED evolved from the strategic economic dialogue the SED that former Treasury Secretary Hank Paulson initiated in 2006 but let's begin by looking back at how we framed our economic engagement with China even earlier in the years before the SED President Carter and Deng Xiaoping created the U.S.-China joint economic committee soon after the establishment of diplomatic relations it was initially chaired by the Treasury Secretary and a Chinese Vice Premier and designed to serve as the primary mechanism for coordinating economic relations at first the JEC agenda was broad in 1982 for example it included proposals for bilateral investment and for what became the Joint Commission on Commerce and Trade or the JCCT over time however the JEC evolved to concentrate mostly on financial issues while JCCT covered commercial issues trade policy was handled in the WTO accession negotiations and then increasingly added to the JCCT agenda as our relationship grew so did the modes of engagement by the mid-2000s the U.S. government had dozens of bilateral dialogues with China many of them with an economic focus but there was no overarching mechanism for ensuring that the right participants across our respective governments were at the table or for addressing the economic challenges in our relationship in his new book Secretary Paulson writes that in creating the SED he quote focused less on particular policies and on the process itself what was the most efficient way to build trust and get things done how to concentrate on shared interests and avoid getting bogged down by ad hoc disputes unquote the SED held its first meeting in December 2006 and met twice a year through the end of 2008 in October 2008 a number of thoughtful experts including a CSIS task force co-chaired by our moderator today analyzed the modalities of U.S. economic diplomacy with China and other Asian countries these experts offered valuable recommendations to the incoming administration the Obama administration chose to broaden the SED adding the strategic track so they became the strategic and economic dialogue as a whole of government dialogue the SED has proven to be a powerful tool for engaging across an array of complex issues in our relationship from trading investment to cyber security and pandemic response to development finance and climate change we have seen some notable successes including last year as the SED brought together foreign affairs energy and economic agencies on both sides to advance our work on climate change and cleaner energy cooperation of course the ultimate test of the SED's value is not the structure of the dialogue but the quality and results of the interactions so how has the SED worked in practice as I noted earlier a key ingredient of the SED is the work that is done on a regular day in and day out basis notably Secretary Liu frequently interacts with his counterpart Vice Premier Wang Yong the Secretary visited Beijing last month and speaks regularly with the Vice Premier by phone they discuss not only bilateral issues but also global economic developments and broader strategic issues Secretary Liu also interacts frequently with other Chinese leaders such as Finance Minister Lo and People's Bank Governor Joe and the frequency of interactions increases as we go down the line I've spoken with my Chinese counterparts many times in the last month and our S&ED team talks with their colleagues at the Ministry of Finance essentially every day indeed our S&ED group may be the most overworked team at Treasury given the time difference their job requires literally an around the clock schedule 12 hours of work for DC and 12 hours of work for Beijing the daily interactions of our attachés in China and by other agencies that participate in the S&ED process is also significant the relationships among American and Chinese officials at all levels forged by working together in the framework of a common mandate have helped us better understand each other's perspective challenges and goals that will divide us but over time we've been working to build up the level of trust needed to work through difficult problems these relationships have proven to be indispensable for example the global financial crisis presented acute challenges to US and Chinese economies and highlighted the importance of our working together it also called into question the US financial model and threatened to weaken Chinese reformers Premier Wen publicly expressed concern about China's dollar holdings at the 2009 S&ED which I attended as the Feds International Director Treasury Secretary Geithner Fed Chairman Bernanke at NEC Director Summers discussed with Chinese leaders some of the lessons learned from the Great Recession and the administration's policy responses there were similar conversations between US and Chinese officials at all levels drawing on the relationships and trust that we had established the episode I just described suggests an answer to another question that has often been asked about the S&ED is it bringing the right people together this is admittedly a challenge given the differing structures in the US governments designating the S&ED co-chairs as special representatives of our presidents it's not quite a magic one but it has given them and their staffs authority to convene a broad range of agencies within each government and to solicit their responses on policy issues this is especially important given the Chinese ministries report to several different vice premieres the convening authority of the S&ED also helps to set priorities on each side there's a spirited yet collaborative process in which agencies collectively determine priorities for the S&ED the result is more focused engagement on both sides most of you have seen the end product of the S&ED negotiations a joint fact sheet with dozens of outcomes to my knowledge the S&ED is the only bilateral dialogue between the United States and China that has always negotiated concrete outcomes in writing this is a painstaking process that takes months of effort and culminates in bleary-eyed 2am negotiating sessions on the eve of the formal meetings but it disciplines our discussions helps us focus on concrete objectives and ensures accountability for what has been agreed with the broad reach of the S&ED and the relationships it has helped us build with economic policy makers and regulators we've been able to successfully tackle important medium term issues and also deliver immediate benefits to stakeholders here in the United States and in China for example in each S&ED China has made commitments that are helping to accelerate and shape macroeconomic reforms to increase income to Chinese households and help alleviate the economic imbalances and trade distortions that ultimately harm workers here in America one important commitment that China has made is to significantly increase the transfer of S&ED profits to the central government budget where it can be used to augment social welfare spending or to fund education exchange rate adjustment in China's move to a more market determined exchange rate is a critical part of these reforms since 2010 the RMB has appreciated by about 30% on a real trade weighted basis and last year's S&ED China committed for the first time to reduce intervention in the foreign exchange market China's intervention has in fact declined significantly since the last S&ED although the real test will come when the market again pushes for RMB appreciation and much work remains to be done for China's exchange rate to become fully market determined at a late night negotiating session during the 2013 S&ED we reached a breakthrough regarding a proposed bilateral investment treaty that had been discussed since the early 1980s the understanding was that the bit would cover all phases of investment including the market access phase and all sectors of the Chinese economy except for a set of limited and transparently negotiated exception the so-called negative list such an agreement could be a game changer in terms of unlocking new opportunities and leveling the playing field for US firms and investors the S&ED will continue to support the bit negotiations and investment liberalization improving the business climate and promoting the rule of law including strengthening regulatory transparency have been areas of constant focus in last year's S&ED China affirmed that the objective of competition policy is to promote consumer welfare and economic efficiency not to boost individual competitors or industries this outcome along with further engagement and a JCCT commitment on Chinese enforcement of its anti-monopoly law is benefiting US companies doing business in China the actual S&ED meetings are like no other US bilateral dialogue on one side of the table are members of the US cabinet and on the other side members of the Chinese cabinet the discussions here leverage the day in and day out of the work of the preceding months in last year's S&ED six cabinet level secretaries traveled to Beijing and nearly 40 US and Chinese government agencies and institutions participated in the economic track the S&ED culminated in capstone meetings with President Xi and Premier Li the US and Chinese principles were committed to addressing not only the challenges that exist but also to finding new areas of cooperation this was perhaps best exemplified by a joint session on climate change which brought together participants from both the strategic and economic tracks at Beijing State Guest House Senior American and Chinese officials laid important groundwork for the joint announcement on climate change that was reached by our respective presidents in November this year the relationships and open communication developed in the S&ED will play an important role in paving the way for the president's meeting in September let me just briefly highlight several issues of particular importance first on climate change we will seek to build on the momentum established by the recent agreement between our presidents we look forward to continuing to facilitate cooperation on climate change between the United States and China to create favorable conditions for climate agreement in Paris in December second, you have no doubt read about China's new regulations regarding secure and controllable information and communications technology creating a fair and open environment for innovation and trade and technology products while addressing cyber security concerns in a smart way that is consistent with global best practices is a key part of our conversation this year China's recent suspension of its ICT rules in the banking sector is a very promising development but we need to continue to work on this issue third, we will continue to advocate for further exchange rate reform building on the commitment last year to reduce foreign exchange intervention as conditions permit as well as for measures to increase the transparency of China's reserve holdings and foreign exchange market operations we also hope to see further moves toward domestic financial sector reform and interest rate liberalization as well as prudent steps to liberalize China's capital account and promote greater integration with international financial markets and finally a central goal of the S&ED has always been to support China's emerging role in the global economic and financial architecture and to strengthen its sense of ownership of and responsibility for the international system as Secretary Liu said recently in San Francisco the United States welcomes China's growing involvement in the global economic architecture and as China assumes a more significant role on the international stage it falls on China to assume more significant responsibilities China has announced a number of international initiatives recently including the proposal for the Asian infrastructure investment bank or AIIB we agree that there is a need for additional infrastructure investment in Asia and as President Obama said yesterday China's willingness to put capital into infrastructure development around the region is a good thing and should contribute to regional economic growth the United States welcomes new additions to the international development architecture including the AIIB provided that these additions complement existing international financial institutions and share the international community strong commitment to genuine multilateral decision making and ever improving lending standards and safeguards these standards and safeguards are designed to foster sustainable development by curbing corruption preventing environmental damage and ensuring protection of both workers and affected communities we will continue to engage directly with China and other countries to provide concrete guidance on how the AIIB adopt and implement high quality international standards this ties to a broader point at a strategic level we would like to see China contribute more not less to addressing regional and global challenges this is why we will work with China to support strong, sustainable and balanced global growth augment and extend an open and rules based operating investment regime and engage on norms for cyberspace these are all areas where cooperation between our two countries supports global prosperity areas that will continue to put the S&ED to the test, thank you terrific, have a seat right here, thanks excellent, thank you Nathan very rich presentation about the S&ED which many of us think we know about but don't really know as much as we think when we hear a presentation like that so I learned a lot from that and I'm going to ask you a process question about that in a second but let me ask just a quick substantive question first about the agenda so the Chinese themselves have laid out financial reform domestic financial reform is a key priority in their own internal third plenum reforms and they link that to the need of their economy to more consumption led services led growth and they link it to their international objective of a more internationalized RMB and that sort of makes sense to me for them why is this issue of interest to us and why do we talk about it we do talk about it in the S&ED why are we interested beyond the issue the obvious issues of the direct impact of this stuff on our banks you know in China what are the sort of broader implications and why is this an issue when I worked for one of your predecessors several of your predecessors actually many years ago we had conversations like this with Japan and we're often criticized for getting in their business and telling them how to run their lives but why is there a US stake in this so the 30,000 foot frame that I would put on this that I think is useful is for the G20 we've agreed with China and many other countries that are members to pursue policies that are consistent with strong, sustainable and balanced global growth and then we have a discussion about the potential contributions of various countries to that outcome and I think that for China one of the ways that it can contribute to the G20 objective is through an ongoing external rebalancing of its economy and specifically there I have in mind a rebalancing away from very, very high levels of investment so when you look at Chinese investment relative to GDP it's much higher than in other economies and consumption is correspondingly lower so when we start talking about various reforms that are going to support and facilitate this rebalancing and allow the Chinese economy to contribute to our global objectives my sense is reform of the financial sector liberalization of interest rates and so forth is a core central part of that agenda so I see that this is important for China to make its economy help make its economy more efficient but it's also consistent with a global economy that's stronger more robust domestic demand present and a more efficient global economy in general okay and would you just follow up on the because I linked it to R&B internationalization would you agree with our panel before indicated that this is a you know it's important for China's own objective of internationalizing the R&B to reform to open its capital accounts to reform its domestic economy its financial system so it has deeper more liquid capital markets in China would you agree with that and do you think that this is something that ultimately the US is going to be comfortable with when I think of the factors and conditions that will facilitate internationalization of the R&B I very much agree with your view further financial sector reform further capital account liberalization further moves toward market determined exchange rates and so forth so broadly construed reforms of the financial sector I see those as being key contributors and probably a necessary condition for R&B internationalization okay on process-y we in our last panel talked a little about the G2 and the notion of the US and China sort of coordinating on some of these international economic issues and our Chinese partner President Chen said that the G2 had been sort of demonized as a concept because others don't want us to see us too close trying to organize things for everybody else but the S&ED sort of does on the other hand feel like an opportunity for the US and China to actually get together and try to figure out in these global forums and the G20 and other international and even in the individual institutions that we work together and in the IMF and the World Bank and the ADB and other institutions it's a chance to sit down and talk about those things and try to figure out if not common positions at least common understandings of what the challenges are and how we might cooperate and the role there is particularly in light of all this because of our topic today about the global order but just in the developments that are going on in the global economy and the global order that this part of the S&E conversation is as important if not more important than the purely bilateral sorts of things that we talk about so my sense is that the S&ED is important and effective for a variety of reasons which I think broadly echo and encompass your observations as I emphasize my remarks one key area of effectiveness for the S&ED is in the relationships that are built and it paves a way for US officials and Chinese officials whatever the issues are and whenever they arise to be able to interact with each other in a comfortable way and get traction in those discussions and I've seen it historically in my remarks I talk some about our experience during the financial crisis but even very recently I've seen the great benefit of those strong relationships but in addition I think that the issues that we're talking about in the S&ED do give us a powerful mix of issues of immediate salience and immediate importance like last year when there were issues surrounding China's anti-monopoly law or more recently with its ICT regs as they pertain to the banking system that the S&ED focuses and the S&ED process focuses on those sorts of things but the S&ED also has the capacity to be able to think about more medium to long run issues like financial reform that we talked about provides a framework for a bilateral investment treaty in those negotiations provides us a mechanism for engagement with the Chinese on potential reforms in the area of export credits so it provides us the arena to engage on the issues of importance in the relationship so I think it works on a number of levels in my sense is if we didn't have the S&ED we'd need to invent it I have a number of other questions I want to ask you but we have limited time you're busy and I want to make sure you have questions from the audience so I'm going to take a batch of three questions I think initially lady there please again wait for the microphone identify yourself and try to ask a question and then we'll try to take note of those I'm Jennifer Lee with Hong Kong Phoenix TV my question is regarding the renminbi so according to Treasury's latest report to the Congress the renminbi is still significantly undervalued but the assessment is very different from other institutions just the IMF because IMF said the renminbi since last year has appreciate over 10% and it's close to no longer undervalued so I wonder what is Treasury's rationale here and the second is about the SDR we know the IMF is conducting its review the 5-year review of the SDR basket and we know China aim to open up the capital account this year so under what circumstances the United States will support the SDR to be included into the SDR basket okay well you snuck two questions under one but yes sir Pat thank you Mr. Secretary for a terrific presentation my name is Pat McCoy I was on the Senate Banking Committee for many years and a couple of questions one will the strategic and economic dialogue do you oversee the bit negotiations two do you do the bit do you oversee the bit negotiations two there are major sectors of the Chinese economy they don't permit foreign investment in will you look for a reciprocity in the bit three normally bits my understanding is have to be approved by the foreign relations committee and then get two-thirds of the Senate to vote in favor of that is that the track that you're thinking of taking this bit on when you get it approved okay a couple of questions alright and one more over here and then we'll wind it up is there someone on this side of the room yes sir repeat them back thank you thank you for taking my question my name is Dave Thomas I'm a reporter with inside US trade my question is also with respect to the bit last year the US and China committed to committed to agreeing to a core text on the bit by the end of 2014 and submitting negative list offers by early this year it's to our knowledge that neither of those have happened yet I was hoping to figure out I guess what exactly is the hold up and I guess will you be discussing bit negotiate or the progress of the bit there and more importantly why have these things been delayed okay so first there was a question that's sort of two part question about the RMB about you say it's undervalued others say it isn't sort of how do you reconcile all that and then the SDR with the USPs under what conditions with the US support China and the SDR and then a series of questions about the bit are you in charge of the bit are you going to have reciprocity does it require two-thirds vote in the Senate long to get this done and particularly getting the negative list moving forward so on the on the valuation of the SDR it really drags us into a number of technical considerations the bottom line is that China's current account surplus as a result of a number of factors but I would say including the engagement bilaterally and multilaterally of the administration we've seen the current account surplus fall meaningfully but relative to the size of the global economy the current account surplus is still meaningful and we see it on a rising trajectory over the last couple of quarters in addition we've seen a significant drop in global oil prices which is very likely to have caused an appreciation of China's equilibrium real exchange rate in addition as an emerging market economy China enjoys productivity effects that are likely more rapid than those of its trading partners and that also causes an appreciation of the equilibrium exchange rate the final the final point that I would make echo something I said a minute ago is we see this internal rebalancing of China's economy as being of great importance this rebalancing from a significant reliance on investment toward reliance on consumption and analytically there's a strong case that an appreciated exchange rate relative to today's value would support that rebalancing of China's economy so we looked at this set of factors we came to the conclusion that was articulated in the report that China's exchange rate remains significantly undervalued now several of these questions I'm going to be reluctant to provide much detail on specifically on the SDR review what I can say there is that the IMF is scheduled to do a review of the SDR later this year and I'm not in a position to prejudge what you know where that review may come down and I think I'll leave that one there so on the reciprocity two thirds of the senate negative list why so slow so lots of questions on the bet so will it report to the S&ED the genealogy of the bet is linked to an agreement that was reached at an S&ED and it is an item that we discuss regularly at the S&ED various agencies this is a case with other bilateral investment treaties are actually doing the hands-on negotiation with USTR playing its role the treasury negotiates for financial services financial access and so on and so forth but then we regularly report back in and discuss the progress on the bet regarding the fact that it's slow I wouldn't use that characterization what I would say is that the discussions that are on the table are reaching and entail meaningful economic reforms particularly on the Chinese side and as a result of that the process moves in a careful and methodical way but I think that we have reasonably good prospects of making meaningful progress on that in the months ahead and reciprocity in our market is that what you mean are we going to close ours so the way I think about that is what we're trying to achieve with the bet is broad high standard high quality agreement and if there were significant closing off of significant sectors of the economy that would be a signal that we need to continue to negotiate to get the sectoral coverage that's going to be sufficient I'll let you pass on the senate vote you're going to have to consult a senate legislative expert that's what I was going to say about that there's a lot else that I would like to cover I'm sure the audience would as well I hope you'll be willing to come back debrief us on the S&ED as we get ready for the Chinese G20 year we're very interested in what you think about the G20 and what China can accomplish but for now we'll be thanking Undersecretary Sheets for joining us today