3:30 P.M., EDT 
MODERATOR: Afternoon, folks. Welcome to the Foreign Press Center. Today we are very pleased to have with us from the Treasury Department the Acting Under Secretary for International Affairs Clay Lowery and he's up here for a meeting tomorrow with the Institutional Investors on issues with China. And he's going to make some opening remarks and then take your questions. And please remember to identify yourself by name, the news organization, and we'll go from there.
UNDER SECRETARY LOWERY: Thank you very much for coming. And I will -- I'll talk a little bit about China and U.S.-China on economic financial issues. If you're interested in other issues that are involving the Treasury Department and international economics, I'll be happy to take those questions as well.
As you said, I'm here just to talk to these institutional investors who are looking at the U.S.-China economic and financial relations and financial issues. Obviously, we just had the Strategic Economic Dialogue in Washington last week. It's a good opportunity to talk to the private sector. It's a good opportunity to talk to a lot of people about what we're trying to do.
Basically, when you think of the Strategic Economic Dialogue, I think it's probably best to think of it in two terms. First is the long-term dialogue and relationship. If you think about it we have excellent deep and broad relationships on economic and financial issues with many European countries and with Japan. We don't have them as deep and broad with China and we've been trying to develop this. How do you work with China to build a much stronger relationship on economic and financial issues? And with Europe and, you know, with Japan there are plenty of times where we disagree about subjects, where frankly we rub each other the wrong way. But we have ways of working it out and discussing those issues and sometimes taking trade actions and things like that. But with China we just seem to always have tension, so it seemed like a very good idea to try to raise the platform, so to speak, so that we can have discussions at the highest levels but also have the bureaucracies talking with one voice as opposed to stove piping things based on which subject areas you're an expert on. This seems to be working pretty well.
In Beijing back in December and last week in Washington, we had very high level representation from China and from the United States talking together and looking at priorities for each other, trying to work out problems as they were popping up. So it's not just about the events of December and May, it's about the process that we have going on.
The second way of looking at this is through the lens that everybody likes to talk about which is the tangible results that you get out of these type of events and dialogues. And in the case of the SED and last week, and also frankly the last six to nine months, we feel like we're making good progress and probably making better progress than we would have made otherwise. A lot of people wrote about last week, the civil aviation agreement that we've come to with China. That was a very difficult negotiation. That's been going on for a while. It is not my expertise but it was something that the Department of Transportation was able to work out under this dialogue using the methods that Secretary Paulson has helped set up.
The area that I do work on a lot closer is financial services. Financial services as we all know -- I try to break it out into four categories -- that doesn't mean you have to or anybody else has to. And the four that I break them out into are: banking issues, securities issues, asset management and insurance. Having strong internationally competitive financial services is an important thing for almost any country. It helps with economic growth. That's not going to be China's biggest concern but it also helps with financial stability. And then it helps with creating better competition so that you get better investment vehicles for your companies and for your private citizens.
In last week, and over the last few months, we've been talking to China about these issues and we got a number of commitments which I think were solid, made good progress and created a base for the future. In the area of banking, for instance, China has allowed for some banks -- for foreign banks to have local currency deposits. But those banks did not have the ability to issue credit and debit cards; that's changed and that'll change by the end of the year. And what I think is important about that is it basically allows foreign banks to kind of compete, frankly, with Chinese banks on much more of a full basis of what banks do.
The second area is securities. In securities the Chinese have said by the end of the year they will do two things. First is they will lift their moratorium on new joint ventures coming in from security firms. This is something that they have -- they have had this moratorium in place for a little while. We didn't think it made much sense, but they've said that by the end of the year they will lift it. Probably in some respects even more importantly is what they're allowing the securities firms to do is go beyond just doing underwriting and get into the area of brokerage, asset management and proprietary trading. And this allows -- this will allow securities firms to basically do the things that they're best at which is distribute and work on basically moving money around in a much more efficient manner.
In the area of insurance, we basically have been able to get China -- China had said that branches -- they have encouraged branches to become -- to get into the subsidiary, become subsidiaries. But the companies -- foreign companies that have been putting in their applications have actually been held up for months; actually years. And even though they had a regulation that said that they would try to act on these things within 60 days, basically last week we got agreement that the Chinese will clear out their backlog. There are nine firms. This is not just U.S. firms. In fact, about only 33 percent of them are U.S. firms. There are Japanese firms, there are European firms and they will clear this out by the end of July. And in going forward they will stick to their 60-day regulation about when insurance firms ask for their branches to become subsidiaries, they will try to clear that out in 60 days.
Within the area of asset management, China has basically tripled or has agreed that it will triple what are called the QFII, qualified financial investment -- and I can never remember the name, I get it for you in a second. But the -- basically this allows foreign asset managers to invest in equity shares over in China. Right now there is a quota overall of $10 billion which is basically almost used up by roughly 50 firms. By tripling it, it'll expand how much money can be invested in China in their stock market as well as in their corporate bond market.
Anyway, so those are a few of the things that were achieved over the last few months. We look forward to working in the future, so this -- again, this is a good base. We have a lot more work to do but I think that from a longer-term perspective we're also establishing a much better relationship with China on economic and financial issues. And with that, I'll take any questions you have.
And it's Qualified Foreign Institutional Investors, QFIIs. Sorry about that. Thank you very much. You know, I guess if -- when you ask your question, if you could identify yourself and what news organization you're with.
Yes, sir.
QUESTION: Hi. My name is Hajeme Matsuura with Nikkei of Japan. I'm a (inaudible) correspondent. I have a question -- two questions. The first question: I think the New York Stock Exchange and NASDAQ are now trying to open a new office in Beijing.
UNDER SECRETARY LOWERY: Mm-hmm.
QUESTION: And you mentioned four sectors, which sector exchange will fall into?
UNDER SECRETARY LOWERY: Well, I guess for NASDAQ and the New York Stock Exchange basically -- this was actually agreed to in December, which is that they would -- if the SED won, they would be able to open up representation offices. That basically kind of crosses over into what I would say asset management and -- it's basically -- it's a way of allowing people to invest in our stock exchanges and being able to broadcast and explain what they're trying to do in our stock exchanges, so asset management or securities.
QUESTION: I believe it's not open yet, so I was wondering if --
UNDER SECRETARY LOWERY: It's not. What they had to do -- China had to basically put in place regulations, so they have put out the regulatory language and they had to wait for comment on that, but it should be in place fairly soon.
QUESTION: So it's just a matter of procedure?
UNDER SECRETARY LOWERY: Yeah. They have to make sure that they follow the right procedures from their own regulatory -- not procedures -- process.
QUESTION: And my second question is: I'd like to know your opinion on the creation of Chinese sovereign wealth fund and also related to the Blackstone investment. What is the position of the United States on this issue? And related to that, I would like your opinion how this creation of huge fund, as an investor, would impact on the global market, including currency, bond and equity?
UNDER SECRETARY LOWERY: All right. Hold on. You asked one question with many parts. (Laughter.)
All right, first of all, let me -- I'll take the easiest part of that first.
QUESTION: The first is sovereign.
UNDER SECRETARY LOWERY: It was actually the second part of your question, which is I'm not going to comment on a specific transaction. I just don't think I should do that.
QUESTION: Oh, okay (inaudible) the Blackstone.
UNDER SECRETARY LOWERY: So that was about the Blackstone because I'm just not going to comment on that. But in terms of the sovereign wealth fund, if you look at the dynamic, it's actually interesting. If you look around the world, there are sovereign wealth funds being created in a lot of places -- the Middle East, China, and they're playing off of a variety of models. Probably some of the best models are the one in Singapore. I want to say Norway actually has a very strong model. I mean, I've listened to actually some Norwegians talk about it and the checks and balances that they have put in place to prevent what could become, frankly, corruption if you don't watch yourself, are amazing. I mean, and Norway has some of the best practices out there and it's actually a discussion that we have been trying to hold not just with China but with kind of on the global basis both in the G-7. In fact, we -- back in April we had some of the biggest countries that have been doing this in to talk with the G-7 finance ministers.
In May, just a month ago, I hosted along with the Federal Reserve and the Central Bank of South Africa a group to talk about this very issue and get some of the best procedures, how does Norway do this, how does Singapore do this, so that countries that are putting these in place can at least follow some good models out there. I mean -- and China's not the only that's setting one up; Russia's talking about setting one up as well.
In terms of investment in the United States, we welcome it and we welcome investment in the United States. The President just put out a statement -- I want to say it was three weeks ago -- that basically said that that's exactly what the United States should be doing, which is welcoming foreign investment. It is the first time a statement has been issued like that in 15 or 16 years, which is a big deal.
The issue, I think though, is when -- we do welcome foreign investment, obviously, we want to make sure that if that investment creates any concerns from a national security standpoint, those must be looked at and we will always do that. You know, As a government official my first and foremost responsibility for allowing the taxpayers to pay my salary is to basically try to protect national security whenever possible. But even in a foreign -- in a national security context, we clearly welcome foreign investment.
In terms of how it affects bonds and how it affects equities and currencies, there's a variety of analyses on that. It's actually hard to predict. It is understandable that China is trying to diversify its asset base and its portfolio. I think that how that will affect U.S. markets is still undetermined.
QUESTION: But you say the Chinese would diversify their allocation, that means that they are selling U.S. Treasury or they might stay in the same currency, but it will give another impact on your (inaudible) cost.
UNDER SECRETARY LOWERY: Well, it depends on -- I mean, the U.S. bond market is very liquid, quite broad and a very -- I mean, it's a very deep and broad market. And so there are -- there's buying and selling of Treasury bonds all the time and, you know, is it going -- I mean, we watch carefully official sector flows and private sector flows into U.S. markets. Actually official sector flows are not nearly, nearly as high as -- I mean, official sector flows aren't nearly as high as private sector flows into the U.S. Treasury bills, it doesn't mean that we don't watch it, of course we do. But I'm not sure it's going to create a diversified or asset base at some point. I don't know if it's going to create a big storm in the U.S. Treasury bill market.
QUESTION: Yes. I have a question about the relationship of U.S. and China.
MODERATOR: Can you identify yourself.
QUESTION: Okay, sorry. Ronda Hauben, Ohmy News International. It's a South Korean newspaper.
UNDER SECRETARY LOWERY: Surely.
QUESTION: And if the U.S. is trying to build a good relationship with China, I'm curious about what's happening with the BDA, the Banco Delta Asia. Because I have found in a -- there were some references I think in the McClatchy report, something about some hearings and some different things. Essentially what was said was that some of the aim of what's happening in Macau with the bank is directed at China and Chinese banks. And so there was even the phrase, "kill the chicken to scare the monkeys." And so -- are you familiar with that?
UNDER SECRETARY LOWERY: I'm not.
QUESTION: Okay. Is there a way to get some insight into that?
UNDER SECRETARY LOWERY: I mean, it's hard for me to comment on a quote I'm not sure about.
QUESTION: It was a hearing from China's proliferation to North Korea and Iran and its role in addressing the nuclear missile situation in both countries.
UNDER SECRETARY LOWERY: But who said what --
QUESTION: This was at -- oh, it's from David Asher.
UNDER SECRETARY LOWERY: David Asher, I believe, is a private citizen.
QUESTION: Yeah, but he was, I thought, within the Administration and so it sort of was an explanation of why what's happening with Banco Delta.
UNDER SECRETARY LOWERY: I don't think -- I think that I would probably do this, one, I'm not an expert on Banco Delta, actually, let me just say that. And secondly, I'd say that I think that I'd fall back probably -- I know that Stuart Levey, our Under Secretary, and I believe Adam Szubin have testified on these issues. I'd probably just fall back on their statements. I think that the Banco Delta Asia was much more about North Korean than it was about China.
Other questions? Let me try this gentleman here.
QUESTION: Yeah, I'm with People's Daily from China.
UNDER SECRETARY LOWERY: Uh-oh. (Laughter)
QUESTION: You mentioned in (inaudible) in the dialogue, strategic dialogue with Chinese. The Chinese side promised, you know, take a lot of actions in the financial sectors.
UNDER SECRETARY LOWERY: Mm-hmm.
QUESTION: How this will affect U.S. investment in China?
UNDER SECRETARY LOWERY: Well, I think that's a very good question and I think that U.S. investment in China it will probably be positive in this foreign respect. You're basically allowing firms that help investment flows -- that's why they're financial services firms and financial intermediaries to have greater access and allow for more competition. This creates a few things. First, it creates better financial stability for the country. Secondly, it usually results -- and this is what the literature shows you -- in a better regulatory regime. As you get a better regulatory regime and a better investment climate, this actually attracts more investment into a country. Now, can I predict exactly when that would happen? No. But that's the idea. It usually -- both the theoretical and the empirical evidence from a variety of countries shows that that is what happens.
Do you have a question? Did you have a question?
QUESTION: Yeah, I saw you raise your hand. (Laughter.)
QUESTION: What about last week's discussions between China and the U.S? Was it a fiasco? Was it good, was it bad? We don't know.
UNDER SECRETARY LOWERY: And you're from --
QUESTION: The Borsen, which is a Scandinavian newspaper.
UNDER SECRETARY LOWERY: The what --
QUESTION: Scandinavian newspaper.
UNDER SECRETARY LOWERY: Oh, okay. Yeah.
QUESTION: We got so many different views from newspapers and we hear from television. How was it?
UNDER SECRETARY LOWERY: Well, I mean, everybody has their opinions, right? But the -- (laughter) --
QUESTION: That's what I'm asking about.
UNDER SECRETARY LOWERY: We thought that it was actually good progress. I mean, we had -- I don't know who called it fiasco; that person's wrong. So --
QUESTION: Success?
UNDER SECRETARY LOWERY: Success in the fact that we're continuing to move an overall dialogue forward. I think that people, if you focus on a three-day thing as opposed to focusing on creating a long-term relationship and also making tangible progress which are the two things I tried to mention. If you focus on those things my view is that we made some good progress. At the same time we also saw that, look, we do have some issues with China. There's no question about that. Some of those issues are played out through the Administration, some of them are played out through our Congress.
One of the things we tried to do is make sure that the Chinese had a good chance to sit down with congressional leaders from the House and the Senate, which they were able to do, to discuss some of the issues and to discuss the different viewpoints to create, frankly, a better dialogue between our Congress and the Chinese. I mean, our Congress is a separate institution in the U.S. Government and we need to make sure that China and other countries understand how it works compared to the Executive Branch. And, you know, there are clearly issues that raise concerns, including currency. Currency is the one that gets the most attention, but I mean, look, a lot of it is some of the areas that we've talked about, which is -- you know, I talked about some of the positives of financial services.
We also asked for raising caps on foreign investment in the country. In other words, in securities firms basically what you're joint -- in China, if a U.S. or -- where are you from exactly, Norway? Scandinavia you said?
QUESTION: Denmark.
UNDER SECRETARY LOWERY: Denmark. But if a Denmark securities firm wanted to open up in China, it could only take a 33 percent stake. So we had actually talked to the Chinese about the idea of lifting these caps. They don't make a lot of sense and actually we think it would be better for the Chinese themselves, but -- you know, China has to be convinced of that and we've shown that, frankly, China's one of the few countries on earth that has these caps and it seems to have worked for these other countries, but we didn't achieve that. So overall was it a success? Yes. Were there sides that we didn't make as much progress on as we wish we had? Yes.
MODERATOR: Okay. We have time for one more question.
QUESTION: Can we make it two?
UNDER SECRETARY LOWERY: Yes, we can make it two.
QUESTION: I'm Wailin Wong from Dow Jones visiting here in the States. Just wondering if you could comment on any progress that was made on the currency front out of SED?
UNDER SECRETARY LOWERY: Well, I think that on currency issues, I mean, there's a few things. The big progress -- no. The progress that is being made has been things like China putting in place more expertise and more to create a market that can eventually become a flexible market, and including within their central banks so that they can run sound monetary policy and a flexible exchange rate regime. As we saw just a few days before the SED, or a week before, they actually expanded the ban that they're going to trade in. That's something that we think that they should be willing to do as kind of almost like a roadmap to getting to a flexible exchange rate. The Chinese have said they want to get to a market-based exchange rate. The difference, I think, in opinion is basically with the pace of that.
For the United States we just think that you can move much faster and we think that their roadmap points on the way and, for instance, could you expand the ban faster and could you allow the extra currency to float up to the tops of that ban and the answer is yeah. And that's the thing that we -- so they made some progress, but not as much or as quickly as we would have liked.
MODERATOR: Okay, thank you, Melinda (ph).
QUESTION: I think your department is heavily involved in the new (inaudible) force, CFIUS and which --
UNDER SECRETARY LOWERY: Ah, yes.
QUESTION: -- national security --
UNDER SECRETARY LOWERY: Yes.
QUESTION: And we were also -- we recall this incident when C note tried to buy UNOCAL two years ago.
UNDER SECRETARY LOWERY: Yes.
QUESTION: And it stirred up a national security issue.
UNDER SECRETARY LOWERY: Yes.
QUESTION: How come this time, after 15 or 16 years, nationally, the President has welcomed this investment? What has changed? And -- the other hand, on Capitol Hill, there's a new bill going to pass.
UNDER SECRETARY LOWERY: Yeah. All right. First of all let me just set the record straight, CFIUS, which for everybody that doesn't know what it is -- and I'm glad you do -- is the Committee on Foreign Investment in the United States, C-F-I-U-S. And everybody knows it because of something called Dubai Ports World.
Now, in terms of the C note transaction, C note actually never came before CFIUS. CFIUS never had looked at it. The transaction was a transaction in which there was a private competitor that was based in the United States and a foreign government controlled entity in China trying to buy UNOCAL. It created a political storm -- this is back in mid-2005, I believe -- and at some point the C note decided that this wasn't worth it and they walked away. That was the background for those that -- if you want to pay attention.
That transaction, as well as Dubai Ports World transaction and some other things have created concerns that the United States is not as welcoming to foreign investment as was the case. And I think that why -- one of the reasons, this is not the only reason, but one of the reasons why a welcoming of foreign statement came out from President Bush was the fact that we wanted to make sure people did understand that we still welcome foreign investment.
And let me go through a few ways that's been the case, so, I can give a very long-winded answer here. The first is after Dubai Ports World there was a lot of concern -- so what do we need to do about that? First, is let's fix the CFIUS process that we have in the Executive Branch to give Congress the confidence that we're looking at transactions in a way that is accountable to the highest levels and that we communicate well with Congress. I think that we've been able to achieve that over the last year. In fact, I can say in 2006 CFIUS cleared, cleared more transactions than they had in 2005 and 2004 combined, so -- or maybe it's equal -- maybe it's equal. So those two years equal basically 2006.
Second, we needed to work with Congress on getting a bill passed to take a law that exists from 1988 and update it in a post-9/11 environment and I think that that's what we've tried to do. There is a bill that's been passed now by the House and there's a bill that at least has passed out of committee in the Senate, and I can't remember if it's passed the whole Senate. Both of these bills are a step forward. They will provide, I think, the investors much more confidence and knowledge about what it is that we're going to try to do when we look at national security issues. I think that it's key that the United States does not have a national screening process for an investment. And let me say that again, does not have a national screening process. Some countries do, actually a lot of countries do. We have a process that looks at national security issues.
And I think the third is to make sure that people understand we do welcome foreign investment and that's why the President put the statement out there. Secretary Paulson worked, along with Deputy Secretary Kimmitt, to basically try to go out into not just Washington but out to St. Louis, Missouri to explain kind of how important foreign investment is to the United States. It's important because it helps creates jobs. It's important because basically it helps creates jobs that pay better for Americans -- actually significantly more than better. It helps creates jobs that are actually in a sector that I know a lot of Americans worry about, which is our manufacturing sector. Foreign investment actually is -- usually has a much higher percentage in manufacturing than in just regular American investment. So I think that all those things were one of the reasons we wanted to be very welcoming, while at the same time, of course, protecting national security. So I just gave you a very long answer to your question. (Laughter.)
QUESTION: You know, revamping a competitive edge to the U.S. capital markets is huge especially since Paulson is really buying this. And do you think this issue also had an influence -- the welcoming of potential new investment?
UNDER SECRETARY LOWERY: Absolutely. Look, your competitiveness of capital markets is something that I think Paulson has taken on with vigor. But he's also taken on the idea that competitiveness of the United States is very important. Welcoming foreign investment is part of taking on and making ourselves more competitive.
MODERATOR: All right. Thank you.
UNDER SECRETARY LOWERY: Thank you very much.
