Public Hearing on China’s Capital Requirements and U. S. Capital Markets

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Mr. Chairman and Members of the Commission:

I commend the Commission for its work thus far and am honored totestify on "China's Capital Requirements and U. S. CapitalMarkets." Anyone who has been following China since the economicreform movement began in 1978 recognizes the important strides thatcountry has made in moving toward a market economy and reducingabject poverty. But one also recognizes the institutionalincompatibility that still exists between remnants of the oldcentral planning system - especially investment planning - and afree-market system based on private property rights and the rule oflaw.

With China's accession to the World Trade Organization (WTO),liberalization will continue. The pace of liberalization, however,will depend on both internal political forces and externalinfluences, particularly U.S. policy. That is why the work of thisCommittee is so vital.

In thinking about China's capital markets, one must never losesight of the fact that the Chinese Communist Party (CCP) seeks touse those markets to "revitalize" stateowned enterprises (SOEs).The real question is whether China can overcome the ideologicalbarrier to large-scale privatization when that institutional changewould end communism and the CCP's grip on power.

If China is to become a world-class financial center, it mustcreate real-not pseudo - capital markets in which the stateprotects private property rights and lets market participants, notgovernment officials, determine the best uses of scarce capital.Until that time, China's socialist capital markets will beinefficient and corrupt casinos in which the Chinese people willsquander their hard-earned savings.

The list of questions the Commission has proposed addressingdeal primarily with China's current and future capital "needs" or"requirements," whether China can meet those needs, and what roleU. S. capital markets can play in that process. Those issues areimportant, but even more important are the questions of what Chinaneeds to do to create real capital markets and what theimplications of further financial liberalization under the WTO arefor U.S.-China relations.

In the following testimony, I shall

  • Discuss China's current capital "needs" with regard to fundingexplicit and implicit government debt.
  • Question the usefulness of the capital-requirements approachwhen thinking about how to facilitate China's future economicgrowth.
  • Take a property rights or institutional approach to analyzeChina's financial sector and show that all the major problems Chinais facing - from the high percentage of nonperforming loans (NPLs)to the large implicit pension debt (IPD) - stem from the dominanceof state ownership and the suppression of the private sector.
  • Consider the reforms that need to be taken to "normalize"China's capital markets by privatizing them and how such reformswould benefit U.S. capital markets and improve U.S.-Chinarelations.

China's Current Capital Requirements

The Commission poses two major questions with regard to China'scapital requirements: (1) How much capital does China need to meetits existing obligations, which stem primarily from theNPLs of the big four state-owned commercial banks and from thelarge IPD of urban SOEs? (2) How much capital is required "tofacilitate future economic growth"? The first question can beanswered directly by looking at the existing data; the secondquestion is much more difficult and I will return to it.

Nonperforming Loans

The politicization of investment decisions and the socializationof risk in China under state ownership has led to a massive wasteof capital. State-owned banks have lent primarily to SOEs, starvingthe emerging private sector of capital, and have based theirlending decisions on politics, not on sound market criteria. Theso-called commercialization of the four major state commercialbanks - the Bank of China, the Industrial and Commercial Bank ofChina, the Construction Bank of China, and the Agriculture Bank ofChina - is intended to stem the tide of bad loans, but ownershipstill remains firmly in the hands of the state, and the bad debtskeep piling up.

Estimates of the true size of the NPLs vary. The officialestimate is that about 25 percent of outstanding loans from the bigfour state banks are NPLs, but that figure is almost certainly toolow. Nicholas Lardy of the Brookings Institution has estimated thatthe cost of bank recapitalization is at least 40 percent of GDP andmay be as high as 75 percent, if international standards areapplied. He bases his calculation on the Rmb 270 billion in bondsthe government has already issued (in 1998) to increase bankcapital; the Rmb 1,400 billion in bonds that the asset managementcompanies (AMCs) have issued (in 1999 and 2000), which have animplicit guarantee by the central government; and the Rmb 2,000 to5,000 billion in NPLs still on the balance sheets of the big fourstate banks (Table 1).

Compounding the NPL problem of the four state commercial banksis the dismal condition of the three policy banks, the loans in thefinancial system that cannot be recovered, the insolvency of therural credit cooperatives, and the undercapitalization of many ofthe trust and investment companies. The World Bank estimates (inits September 27, 2001, East Asia Brief) that China'scontingent liabilities, or "hidden debt" due to the weak conditionof the financial sector, are more than 50 percent of GDP. Moreover,those liabilities continue to grow at a rate of at least 2 percentof GDP per year.

Table 1: The Cost of Bank Recapitalization inChina
Policy Action or Condition Cost (Billions of Rmb)
1. Government bond issue to increase bank capital, 1998 270
2. Implicit guarantee of AMC debt, 1999-2000 1,400
3. NPLs still held by four big state commercial banks 2,000 to 5,000a
Total Cost:
Rmb (billions) 3,670 to 6,670
US $ (billions) 443 to 806
Percentage of GDP, 2000 40 to 75
SOURCE: Nicholas Lardy, "China's Worsening Debts,"Financial Times, 22 June 2001, p. 13.
aThe larger figure applies when international accounting practicesare used

Implicit Pension Debt

The figures stated thus far do not include China's IPD, whichthe World Bank estimates to be nearly 100 percent of GDP (more thanUS$1 trillion). That is the amount of money China would need todayto pay off current and future promised benefits. The existingpension system is clearly not sustainable, and that is why China ismoving toward a multi-pillar system with a public PAYGO componentand a private fully funded component. Some individual accounts havebeen established, but they are "notional" accounts. Funds allocatedto them have already been used to help cover the deficit in thePAYGO pillar, which amounted to Rmb 40 billion (US$ 4.8 billion) in2000 and will climb steadily in the future.

China's current pension system covers only urban workers inSOEs. Many of those workers are not receiving their promisedpensions. Local governments and the central government are alreadystrapped for revenues and cannot afford to bail out pension funds.Raising payroll taxes from an already high level of 24 percent ofwages would serve only to further alienate overtaxed workers andreduce actual taxes collected because of noncompliance. What isrequired is fundamental reform that will give workers secureproperty rights to future income.

China's current capital requirements cannot be met within thepresent system of widespread state ownership. SOEs are parasitesthat suck the capital out of state-owned banks and waste it onpolicy-directed investment rather than market-directed investment.Nearly 80 percent of bank lending goes to the state sector, whichproduces only about 30 percent of industrial output value. If Chinacontinues to adhere to market socialism and fails to institutemarket liberalism, total government debt will continue to grow.Indeed, Lardy estimates that government debt, excluding IPD, couldreach 110 percent of GDP by 2008.1

How Much "Capital" Does China Need to FacilitateEconomic Growth?

The question of how much capital is required for China's futureeconomic growth is a difficult one to answer. If one were to askthat question at the level of an individual firm, one couldconstruct a capital budget and project capital needs over time toachieve growth of plant capacity. But one would have to make manyassumptions, including that consumers' preferences for the firm'sproduct do not change adversely, that demand grows, and, mostimportant, that there are no unexpected changes in theinstitutional and policy environment. At the level of the nationaleconomy, it is virtually impossible to accurately predict capitalneeds to fuel future growth. Moreover, such an approach divertsattention from the complex nature of a market economy and the realmeaning of capital.

The Market Economy as a Complex System

The market economy is a complex network of trust relations heldtogether by a system of property rights and the rule of law. Incontrast to central planning, the market relies on millions ofindividuals pursuing their own interests to generate a spontaneousorder based on freedom of contract and private property rights.Government exists to protect individual rights, including the rightto own property and to exchange property rights to increase wealth.Property rights are human rights.

In a market economy, no one plans the total amount of saving andinvestment. Individuals are free to choose how much to save and toinvest, and those individual decisions - not government planning -will determine the rate of capital accumulation and futureproduction and consumption opportunities. The institutional, orproperty rights, arrangement (including tax and regulatorypolicies) will shape incentives to save and invest and therebyaffect future economic growth. For that reason, I shall focus onChina's current institutional arrangement and show that it is thelack of private property rights and the absence of the rule of lawthat are at the root of China's financial difficulties.

The Meaning of Capital

The concept of capital cannot be understood in an institutionalvacuum. Capital is not merely physical assets (e.g., machines andbuildings); it is the net value of those assets and ideas toconsumers as determined in private markets in which individualshave the right to specialize in ownership and risk bearing, arefree to buy and sell capital values - so that future expectedprofits can be capitalized into their present values - and are ableto prevent others from violating their rights. Physical and humancapital mean little if the institutional infrastructure permitsproperty to be plundered rather than protected.

Hernando de Soto, author of The Mystery of Capital, is rightwhen he says, "Capital is that value, that additional value, thatcomes from things that are duly titled;… capital is alsolaw."2 Countries are poor when their leaders preventprivatization and fail to abide by the rule of law. Hong Kong isrich because it adheres to the rule of law and hasmarket-supporting institutions, not because it has abundantphysical capital.

The more secure rights to future income streams are, the moreconfidence individuals will have in the future, the more breadthand depth capital markets will have, and the more liquidity will becreated. Likewise, any attenuation or weakening of private propertyrights - including the rights to use, to sell, and to partitionproperty - will mean less trust, less liquidity, and less wealth.Figure 1 shows that nations with stronger private property rightshave a much higher average level of real GDP per capita thancountries with less secure rights.

Figure 1
Stronger Property Rights Equal Greater Wealth

SOURCE: Lee Hoskins and Ana I. Eiras, "Property Rights: The Keyto Economic Growth," in 2002 Index of Economic Freedom,ed. G. P. O'Driscoll, Jr., K. R. Holmes, and M. A. O'Grady(Washington and New York: The Heritage Foundation and the WallStreet Journal, 2002), p. 40.

China's physical capital infrastructure is expanding rapidly,but its institutional infrastructure is still weak. If new valueand wealth are to be created, China needs real, not pseudo, capitalmarkets.3 People must be free to choose their owninvestments, including foreign investments, and state ownershipmust give way to widespread privatization if China is to developworld-class financial markets. Injecting more funds intostate-owned banks to lend to state-owned enterprises is a recipefor disaster.

China's Pseudo Capital Markets: The Costs of CapitalRepression

China's listing of SOEs on the two major stock exchanges inShanghai and Shenzhen, as well as listings in Hong Kong, New York,and London, gives the appearance of a vibrant capital market, butthe emperor has no clothes. The listed companies are stillcontrolled by the central and local governments. Those companieshave no transparent balance sheets or financial reports that informindividual investors about the true profitability of the underlyingassets, and the lack of fully transferable shares means that it isimpossible to discern real capital values. The stock markets inChina are really casinos to raise funds for struggling SOEs, notefficient capital markets.

The CCP's ideological bias against private free capital marketsplaces a heavy burden on the economy in terms of the value lost tosociety from the misallocation of scarce capital resources. Therepression of the private sector means that the savings of theChinese people are directed into low-interest deposit accounts atstate-owned banks or rural credit cooperatives and then invested inSOEs. The SOEs benefit from the low cost of their funds but have noincentive or flexibility to direct capital to its highest-valueduses.4 Since local protectionism is rampant in China,capital is held hostage by local politicians and mostly wasted onnonviable projects. That is why returns to investment are so low inChina.

The costs of capital repression in China are evident in (1) thestock market bubble, (2) the heavy reliance on foreign directinvestment (FDI), and (3) the fact that China is a net exporter ofcapital. What appear at first as strengths of the Chinese marketsocialist system are upon reflection serious defects. Let us seewhy.

The Stock Market Bubble

The extremely high price/earnings ratios (P/Es) on China'sdomestic stock exchanges - stocks on average are selling at morethan 50 times earnings - reflect the low expected earnings of SOEs,not bullishness about the future of those companies. The quality ofinformation about SOEs is poor, and investors rely mostly on gossipto make their "investment" decisions. The 50 million Chinese whogamble in the stock markets do so only because their investmentoptions are so limited. If they could freely invest in foreignmarkets, their funds would quickly leave China-unless ownershipreform took place. Placing SOEs in the hands of private ownerswould transform those companies and redirect capital to moreproductive uses. Earnings would rise and P/Es would fall to normallevels. Without ownership reform, share prices are bound to fall tobring about more normal P/Es.5

The government has been trying to boost share prices by delayingnew listings of SOEs, by injecting capital into dying SOEs, and bytrying to talk up the markets. But those are stopgap measures andwill only worsen the long-term problems. Delaying fundamentalownership reform will make it more difficult to bring about theinstitutional changes necessary for long-run stability andgrowth.

Heavy Reliance on Foreign Direct Investment

China is the second largest recipient of FDI in the world. In2000, FDI in China amounted to nearly $41 billion. But instead ofreflecting the strength of the Chinese economy, it reflects aninherent weakness-the inability of private firms to acquire thecapital necessary to expand their market share. Privateentrepreneurs are not allowed to enter the equity markets to raisecapital, and they stand at the end of the line when it comes tobank loans, so they must turn to foreign investors. Those investorsacquire the assets of private firms and SOEs through jointventures. The newly created foreignfunded enterprises (FFEs)increase allocative efficiency when they take over SOE assets, butprivate domestic firms are not allowed to bid on those assets, sothe prices are less than they would be in a competitive openmarket. Privatization would allow private entrepreneurs to acquireSOEs and to have greater access to the savings of the Chinesepeople, so more of China's assets would belong to the Chinesepeople.

Yasheng Huang of the Harvard Business School has emphasized theabove points and concluded that, because of the ideological biasagainst private enterprise:

There have been huge losers in the Chinese reformprocess, notably private entrepreneurs who have foregone businessgrowth opportunities [by not being able to raise capital or toacquire SOE assets] and lost control over their businesses [throughjoint ventures]…. These foregone benefits are financiallyequivalent to actual losses. Thus, the argument for gradual reformis a political one, not an economic one.6

What is needed is to allow private Chinese firms the same rightsas foreign firms, but that change will not occur without politicalreform.

Net Capital Outflows

Although China has attracted large net inflows of FDI, thoseinflows of private capital have been nearly offset by the outflowsof portfolio and other investments (e.g., trade credits and loanrepayments). Moreover, when one takes account of China's largeaccumulation of foreign reserves (now approaching $200 billion)together with the substantial illegal private capital outflows asseen in the errors and omissions component of the balance ofpayments (which amounted to nearly $50 billion over the last threeyears and more than $100 billion from 1991 through 1998),7 one seesthat China's current account surpluses have been financing netcapital outflows.

In a recent article in the Cato Journal, John Greenwood, chiefeconomist at Invesco Asia, Ltd. gives a detailed view of thisphenomenon and argues that for a poor country like China, it makesno sense to be a net exporter of capital. Indeed, by holding suchlarge stocks of foreign exchange and using them to acquire foreignassets (e.g., U.S. Treasury securities), China is misallocatingcapital and denying its citizens the right to earn higher returnsoverseas. According to Greenwood, "The accumulation of foreignassets by the [Chinese] government in place of the private sectoramounts to the backdoor nationalization of what would otherwisehave been potentially profitable overseas investments by privateindividuals and businesses."8

The fact that China denies its citizens the right to freelyinvest abroad or at home provides them with a strong incentive tofind higher returns illegally. The lack of capital freedom is amajor cause of corruption in China.

It is also true, as Huang points out, that

foreign exchange reserves are China's claims on dollarassets. When FDI inflows are financing the growth of China'sforeign exchange reserves, that amount of FDI is not usedproductively to develop the Chinese economy….This is surelya strange outcome. The Chinese are striving to give up theownership of their economy only to use the capital surpluses toinvest in low-yielding government bonds inAmerica.9

The combination of discrimination against the private sector (asevidenced by China's high dependence on FDI), the ban on fullconvertibility of the renminbi (which has been maintained bycapital controls), and the undervaluation of the renminbi (asevidenced by the large accumulation of foreign reserves) indicatesthat China cannot get out of its current financial situationwithout ending its repression of capital and allowing greatercapital freedom.

The combination of discrimination against the private sector (asevidenced by China's high dependence on FDI), the ban on fullconvertibility of the renminbi (which has been maintained bycapital controls), and the undervaluation of the renminbi (asevidenced by the large accumulation of foreign reserves) indicatesthat China cannot get out of its current financial situationwithout ending its repression of capital and allowing greatercapital freedom.

Creating Real Capital Markets in China: The Benefits ofCapital Freedom

Piecemeal reform has helped China move slowly toward a more openmarket. China's entry to the WTO will help speed the pace of reformand bring about greater liberalization. Foreign banks will havegreater market access, and foreign companies will

Reform Measures to Increase Capital Freedom

Creating real capital markets in China will require thefollowing measures:

  • Removing restrictions on private ownership and on internal andforeign trade;
  • Allowing interest rates to be freely set by demand andsupply;
  • Allowing SOEs to go bankrupt;
  • Allowing workers to have private pension accounts that areseparately administered by private firms, whether foreign ordomestic;
  • Allowing full convertibility of the renminbi;
  • Allowing full transferability of shares in SOEs so that wealthcan be maximized by those individuals who wish to specialize inownership and risk bearing.

Some of those reform measures have already been initiated andwill be advanced by China's accession to the WTO; others, such asprivatization, need to be pushed much further.

Selling off SOEs to privatize pensions would be a step in theright direction. Private pensions would create new capital thatcould help China grow in the future. Moving to a fully fundedpension system is economically feasible. According to PekingUniversity economist Zhao Yaohui's estimates, the cost of moving toa fully privatized system - thetransition costs plus the costs offunding individual accounts-would be 15.8 percent of payrollcompared to the current 24 percent.10 Full privatizationis gaining support and may become politically feasible in the nearfuture. But the obstacles are still substantial.

Individuals would have a strong incentive to participate in afully funded system, whereas they have little incentive toparticipate in the current PAYGO system. As Zhao notes:

The best alternative in solving the financial crisis isto give individuals incentives to participate. The best way to giveincentives to individuals is to put all pension contributions (fromemployer and employee) into individual accounts and make sure thatthe investment earns competitive returns. This gives individualsthe property rights to these accounts. Otherwise, individuals wouldbe better off saving and investing the money on theirown.11

If SOEs were transformed into private companies in whichindividuals held saleable shares, the stock market would reflectmore accurately the present values of the listed companies, andP/Es would come back to normal levels. Chen Mingxing, seniorresearcher with the State Information Centre, recognizes this factand has recommended more rapid ownership reform. As the ChinaDaily's Business Weekly reported, "Chen said that thegovernment should leave the adjustment of share prices to marketforces, but put more effort into establishing a marketplace that is'just, fair and transparent,' and reforming the ownership systemsat the listed companies."12

By failing to create real capital markets, China is failing totake advantage of the gains to be had from specializing inownership and risk bearing. The socialization of risk under thecurrent system of state ownership reduces incentives to innovateand create wealth. The value of Chinese firms is below what itcould be if capital were free to flow to its highest-valueduses-and there is no way to discover those uses without competitivemarkets, which depend on private property rights. That is why Chinahas had to rely so heavily on foreign capital to fuel the growth ofthe economy.

Benefits of Capital Freedom

Privatizing state-owned banks and allowing interest rates to beset in private capital markets would depoliticize the allocation ofbank credit and increase investment returns to the private sector.Allowing both Chinese and foreign investors access to China'scapital markets would put China's vast pool of private savings tobetter use than they are under the current discriminatory system.One of the key lessons from the Asian financial crisis, as FederalReserve Chairman Alan Greenspan has observed, is that "diversitywithin the financial sector provides insurance against a financialproblem turning into economy-wide distress." Thus, "the difficultground work for building the necessary financial infrastructure -improved accounting standards, bankruptcy procedures, legalframeworks [to protect property rights] and disclosure - will paydividends of their own."13

Privatizing SOEs and state-owned banks and creating privatemarkets for distressed assets would help China solve its NPLproblem. Moreover, as Greenwood, emphasizes:

If China's capital markets and its industries werenormalized (through deregulation, proper implementation of the ruleof law, the encouragement of private markets, and extensive privateownership), then China's balance of payments would no doubt undergoa major transformation. The balance of payments would witness aswitch from current account surplus and capital outflows to currentaccount deficit and capital inflows.14

He recommends, as a first step in that direction, "the adoptionof a progressively more flexible nominal exchange rate regime."Such liberalization need not create instability provided Chinacontinues to liberalize on other fronts and maintains domesticmonetary stability. The renminbi would then gradually appreciateagainst the dollar, and the current account would gradually moveinto a deficit position as exports slowed and importsincreased.

The benefits to China and to foreigners from liberalizing thefinancial sector are great: China would achieve a more efficientuse of its capital and attract new investment; the Chinese peoplewould have an important part of their human rights - the right toown property - protected by law; and foreigners would be able todeal with private firms and offer more options to China'ssavers.

Implications for U. S.-China Relations

Improving capital freedom in China by securing property rightsand liberalizing capital markets and capital flows would increasewealth in China and increase the demand for U.S. goods, services,and investment. As China's internal markets expand (because ofprivatization and liberalization), so will U.S.-China trade.Increasing economic freedom is a win-win strategy - both the UnitedStates and China can gain.

As economic ties strengthen between China and the United States,as well as China and other nations, the increase in economicinterdependence will help lessen the chance of conflict. Expandingthe private sector will help shrink the relative size of the statesector and exert pressure for political liberalization, as hashappened in Taiwan.

Empowering China's workers by allowing them to have propertyrights in their pensions will create a huge positive force in favorof private enterprise and capital freedom, just has happened inChile.15 U.S. investment firms and insurance firms wouldbenefit from such a regime change.

China is a rising power that the United States must watchclosely. Economic liberalization has not yet had a substantialimpact on the political regime. But that can change. China'saccession to the WTO will accelerate capital freedom and, with it,political reform. Indeed, leading intellectuals are advocating lawsto protect property rights, and one can even read about theimportance of property rights in the China Daily. Forexample, that government-backed newspaper recently carried articlesthat stated:

  • What China needs "is a 'rule of law' system to fuel theformation of a freer market, instead of increasingcontrols."16
  • "The main purpose of the [new] property rights law is to defineand specify rights of possession in China, according to WangLiming, a professor of civil law at Renmin University….Moreover, it is the basic rule for the regulation of a marketeconomy because the prerequisite for any transaction is theownership of property and the result of the transaction is theshift of property rights, he added. The lack of basic rules intangible property rights has hampered the functioning of currentlegislation such as the Contract Law and the Guarantee Law, Wangsaid. [The new law] is expected to encourage and stimulate peopleto create more wealth for society by giving equal protection toproperty under different ownership."17

China's adoption of a genuine rule of law-protecting life,liberty, and property- would benefit both the Chinese people andthe United States. That is why one of China's leading liberalthinkers, Liu Junning, when asked about the future of China,replied, "Whether China will be a constructive partner or anemerging threat will depend, to a very great extent, on the fate ofliberalism in China: a liberal China will be a constructivepartner; a nationalistic and authoritarian China will be anemerging threat."18

Conclusion

Private property makes owners responsible for their actions.What China needs is a system of property rights that assignsliability to individuals, not to the state. That means a system ofrights that also allows individual owners to benefit fromallocating resources where consumers - rather than CCP officials -want them. The main barrier to large-scale privatization in Chinahas been the fear of the rulers that privatization will mean theend of Party rule, and they are right. They hold on to Marxistideology in the hope that the people will listen, but more and morepeople are beginning to see the benefits of private property andfree trade. The United States can best help the Chinese people gainpolitical freedom by first supporting economic freedom. IsolatingChina would only further empower the hardliners.

At base, capital value depends on freedom. By opening marketsand sharing ideas (e.g., through student and faculty exchanges,conferences, etc.), and standing by our founding principles, theUnited States can help to promote peace and prosperity in China andat home.

Thus, in closing, I recommend that the Commission in its reportto Congress:

  • Stress the importance of trade liberalization and capitalfreedom for improving U.S.-China relations.
  • Recognize that ultimately the Chinese people must determinetheir political future and that liberal trade policies will helpgrow civil society and create incentives for politicalliberalization.
  • Permit more Chinese students and scholars to study in theUnited States, especially law, economics, and the humanities. Visaprocedures should be reexamined. So long as individuals pose nothreat to our national security, they should be encouraged to learnabout our free society firsthand.

Free trade and privatiztion can help normalize China andtransform it into a modern economy and a civil society under therule of law. China will then have one country and one system. TheUnited States must be patient and not lose sight of the long-runbenefits of a firm commitment to the principles of marketliberalism and capital freedom.


Notes

  1. Nicholas Lardy, "Fiscal Sustainability: Between a Rock and aHard Place," ChinaOnline, 16 June 2000 (http://www.chinaonline.com).
  2. D. Fettig, "An Interview with Hernando de Soto," The Region, 15June, pp. 23, 26. Published by the Federal Reserve Bank ofMinneapolis (www.minneapolisfed.org).
  3. See James A. Dorn, "Creating Real Capital Markets in China,"Cato Journal 21 (Spring/Summer 2001): 65-75 (https://www.cato.org/pubs/journal/cj21n1/cj21n1.html).
  4. See David D. Li, "Beating the Trap of Financial Repression inChina," Cato Journal 21 (Spring/Summer 2001):77-90 (https://www.cato.org/pubs/journal/cj21n1/cj21n1.html).
  5. See Zhang Dingmin, "Ownership Reform to Deflate Stock Bubbles,"Business Weekly (Supplement to China Daily), 30 October -5 November 2001, p. 15.
  6. Yasheng Huang, "Internal and External Reforms: Experiences andLessons from China," Cato Journal 21 (Spring/Summer 2001): 62
    (https://www.cato.org/pubs/journal/cj21n1/cj21n1.html).This article is based on his forthcoming book, Selling China:The Institutional Foundations of Foreign Direct Investment duringthe Reform Era (New York: Cambridge University Press,2002).
  7. See Dong Fu, "Beyond the Border: Capital In and Out of China"(http://www.chinaonline.com) 4April 2000, and William Dudley, "The Emperor's New Clothes," in The2001 Guide to ForeignExchange (London: Euromoney Institutional Investor PLC, 2001),p. 15. Published with the September 2001 issue of Euromoney.
  8. John Greenwood, "The Impact of China's WTO Accession on CapitalFreedom," Cato Journal 21 (Spring/Summer 2001): 92(https://www.cato.org/pubs/journal/cj21n1/cj21n1.html).
  9. Huang, p. 51. He notes that about 40 percent of China'sreserves are invested in U.S. Treasury bonds.
  10. Zhao Yaohui, "The Feasibility and Benefits of a Fully FundedPension System," paper presented at the Cato/CCER conference on"China's Pension System: Crisis and Challenge," Beijing, 8 November2001, p. 3 (forthcoming in the Cato Journal).
  11. Ibid., p. 1.
  12. Zhang, p. 15.
  13. Alan Greenspan, "Lessons from the Global Crises," remarksbefore the World Bank Group and the International Monetary FundProgram of Seminars, Washington, D.C., 27 September 1999, p.10.
  14. Greenwood, p. 93.
  15. For a discussion of the Chilean pension system and itsimportance for China, see José Piñera, "EmpoweringPeople: What China Can Learn from Chile," in China in the NewMillennium: Market Reforms and Social Development, ed. J. A..Dorn (Washington, D.C.: Cato Institute, 1998).
  16. Zi Xun, "Nobel Theory No Panacea for China," BusinessWeekly (Supplement to China Daily), 30 October-5 November2001, p. 15.
  17. Meng Yan, "Draft Law to Protect Property," ChinaDaily, 3 September 2001, p. 1.
  18. Liu Junning, "The Intellectual Turn: The Emergence ofLiberalism in Contemporary China," in China's Future:Constructive Partner or Emerging Threat? ed. T. G. Carpenterand J. A. Dorn (Washington, D.C.: Cato Institute, 2000), p.60.