Prepared Remarks of Richard E. Thornburgh,
American Chamber of Commerce in Shanghai
April 15, 2004
Introduction
Thank you … I'd also like to thank the American Chamber of Commerce in Shanghai, China's largest "AmCham," for your invitation. My thanks, too, to Nancy March and Walter Honeycutt, the chair and vice chair of the AmCham's Tax and Finance Committee.
I'm honored to be the first chairman of the Securities Industry Association to speak in China on behalf of my industry. SIA brings together more than 600 U.S. securities firms – including investment banks, broker-dealers, and mutual fund companies – to support the continued health of a capital market system that creates substantial value every day for organizations and investors of all types. SIA members are active in all phases of corporate and public finance and in virtually every market in the world – the seven largest firms earn 25 percent of their total revenues overseas.
My own firm, the Credit Suisse Group, where I am the Chief Risk Officer and a member of the Executive Board, exemplifies our industry's global nature. We have major businesses based in both Zurich and New York, and offices in more than 30 countries – including right here in Shanghai, as well as Beijing and Hong Kong.
In China, we've recently been involved in many of the region's most significant capital market developments – including some of the largest initial public offerings. In the past six months, we have served as global coordinator on major equity offerings in China. We were named "Best Foreign Investment Bank in China for the year 2003" by Asset magazine and we hope to be among the first firms to be licensed for derivative transactions.
There's clearly no need for me to persuade anyone in this room that China is an amazing growth story. GDP is expected to grow more than 8 percent this year … it's the largest M&A market in Asia … nearly 800 companies are listed on the Shanghai Stock Exchange …and in the fourth quarter of last year new listings on the Hong Kong stock market hit $6 billion U.S. dollars. By some estimates, China will be home to the world's largest economy within the next 40 years.
However, we all know that continued expansion of global trade, investment, and capital flow is an essential ingredient if China's full economic potential is to be realized.
That is why it's worth stepping back for a moment to consider the U.S. economic and political environment, and, specifically, the challenges for global firms of being internationalists today.
Those challenges include the debate, taking place during a Presidential election year in the United States, on "outsourcing" … and the growth in isolationism in response to fears of terrorism.
It is also important to discuss two of our industry's key international priorities – regulatory transparency and broader access to capital markets, because how those issues are addressed will have significant consequences both for China, and for world trade in general.
News from Home
First, "the news from home." In our industry, the news has been good. In the most recent quarter, securities firms posted near-record profits. Hiring is improving, and the outlook for public offerings is strong. We expect that upward trend to continue this year.
U.S. corporate underwriting last year set a new record, hitting $2.89 trillion. For the quarter that just ended, U.S. equity underwriting was up 181 percent from the same period last year, and IPO issuance increased 229 percent.
And, this good news has not been limited to the U.S., as private-equity investment in the Asia-Pacific region hit a record $17.5 billion last year and shows no sign of slowing down.
The securities industry's improving outlook coincides with signs of growth in the U.S. economy. More than 300,000 new jobs were created in March, the first major gain in many months. The Conference Board says confidence among U.S. business leaders is stronger than it has been for 20 years. The tax cuts Congress passed in 2002, with SIA support, are having a clear effect.
Global Fears
But while there are many reasons to be optimistic about America's economy, there is reason for concern if you believe in nurturing the growth of global markets. Global markets are a key priority for our industry, of course … and an essential factor in China's continued growth.
Yet there is a strong undercurrent of opposition to globalism in the United States today. There are fears of new terrorist attacks. Many Americans are also increasingly worried that their jobs may be "outsourced" overseas – not just manufacturing jobs, but higher paying services jobs such as accounting and computer programming. These concerns have given rise to isolationism, and have been the catalyst for politically expedient calls to toughen the U.S.'s position in trade relations across the globe. In turn, these fears tend to make it more difficult for the U.S. to aggressively pursue market-opening trade agreements.
This anxious political mood is the backdrop as President Bush continues to work to deepen and improve our relations with China. He has held an unprecedented five meetings with China's president since he took office, and, of course, Vice President Dick Cheney is in Shanghai today. A delegation of China's Vice Premier Wu Yi will be headed to Washington April 21-22 for Joint Commission on Commerce and Trade discussions.
While there are major challenges to overcome, the Bush Administration also realizes the mutual economic benefits of a strong U.S./China relationship.
China is, after all, the fastest growing market for U.S. exports with an increase of about 25 percent last year after a 15-percent gain in 2002. The country's economic growth will not only raise the living standards of the 20 percent of the world's population that call it home, but will also benefit the other 80 percent of the globe's population.
As our relationship with China demonstrates, we cannot afford to let isolationism prevail. We know that all economies ultimately benefit from the expansion of international trade in goods, capital, and services. Competitive, efficient global markets improve the allocation of capital to borrowers and users, which provides fuel for job creation and economic growth.
In the global economy, open and fair markets are essential to ensuring that markets operate efficiently so that investors can easily and quickly conduct securities transactions across borders, while businesses can access the broadest pool of capital at the lowest cost. The international financial system has been a major and contributing factor in the marked increase in living standards of those countries that participate in it.
That is why SIA has long supported open, fair, and transparent capital markets, and has strongly advocated liberalization in U.S. multilateral and bilateral trade discussions.
Often lost in the debate on the global marketplace is that at least 6.4-million U.S. jobs have been created by foreign companies located in America . . . California is home to nearly 714,000 of these "insourced" jobs, while New York boasts roughly 481,000 such jobs. In addition, U.S. investors hold more than $2.3 trillion in foreign stocks and bonds. The U.S. is inextricably linked to the global economy. So we are hopeful that protectionist undercurrents in the U.S. will be overcome to avoid erecting trade barriers, and that our country will resume its leadership role on trade matters.
Regulatory Transparency
The SIA has identified two priorities that are key elements in combating capital market isolation. The first is more transparency in the regulatory process of countries . . . and the second is widening market access.
And why is improved regulatory transparency so important? Financial services firms are often confronted with non-tariff barriers in the form of regulatory restrictions, and the lack of transparency in the implementation and application of regulations. In the highly regulated financial services sector, these barriers prevent access in much the same way as tariffs.
So, we have urged regulators and trade negotiators worldwide to set standards, adopt best practices, and make legal commitments to enhance regulatory transparency globally. SIA is not alone in supporting enhanced regulatory transparency – other organizations endorsing it, include the Organization for Economic Cooperation and Development, the Bank for International Settlements, the World Trade Organization, the International Monetary Fund, the World Bank, and the International Accounting Standards Board.
At SIA, our approach to regulatory transparency is based on the belief that the process of enacting and enforcing rules is equally as important as the actual substance of those rules. Our focus is on creating a system through which rules – good rules – have the best chance of being adopted … known to all … and applied consistently and fairly. Proposed and approved regulations must be clear, understandable, and publicly available. Clarity is key to true regulatory fairness.
Good rulemaking also requires that regulators use an open, public process for consultation. The United Kingdom set a standard for regulators worldwide earlier this year when it amended its Code of Practices on Consultation. The revisions require all government departments and agencies to consult widely throughout the process of developing policies and regulations. It allows, for example, a minimum of 12 weeks for written consultation and calls on policymakers to provide feedback regarding responses received. That action, and similar proposals in other localities, demonstrates that the current trend is for more comment, not less, when considering regulatory proposals.
And, last, but certainly not least, regulations must be enforced in a fair, non-discriminatory manner. Markets, and market participants, need certainty. They need to have confidence that market rules are being applied fairly and equitably, to all participants, whether local or foreign. Consistency of regulatory enforcement has to be a core value of any market. Anything less jeopardizes the flow of investment capital.
The benefits? Clear, understandable regulations provide market participants with predictability and the knowledge to comply with regulations. Regulatory clarity helps companies develop a more accurate portrayal of the costs and returns associated with their business, and serves the healthy goal of requiring regulators to articulate their regulatory objectives. Opaque or ambiguous regulations and rulings create uncertainty – and uncertainty is an enemy of the capital markets. In summary, transparency makes for better regulation.
China – Opportunity for World Class Capital Market
Another priority for the SIA is to build on the achievements of the WTO trade talks … to improve access to capital markets. Unfortunately, many countries around the world use a variety of approaches to restrict the operations of foreign-based firms, including limits on foreign ownership. The SIA firmly believes that the participation of non-domestic securities firms is highly beneficial to investors and issuers in any market. The benefits include technology… capital … innovative products and services … and best practices. The increased competition between local and foreign firms inevitably reduces the cost of capital… increases investment … and leads to job creation and economic growth.
China has taken important steps in this regard. These commitments permit foreign firms to participate in the securities business in China through minority-owned joint ventures, but with ownership levels capped at 33 percent. Similar to the access of foreign banks and insurance companies, we would encourage Beijing to permit foreign firms to establish a securities company in China, either through a wholly owned entity or other business ownership structure, with the power to engage in a full range of securities activities. The participation of foreign firms can accelerate and strengthen the development of China's capital markets.
In fact, I believe there is a great opportunity for China to build a truly "best of breed" capital market structure. By incorporating the lessons learned – both positive and negative – from experiences in established markets like London, New York and Hong Kong, China can create the liquid, deep, and transparent capital markets that will drive the country's long-term economic growth.
No one market or regulatory system is perfect, but commitment to the two principles of regulatory transparency and fair market access is essential if China's great, long-term opportunity for economic growth is to be realized.
Conclusion
So what are the next steps in the U.S./China relationship, particularly as it relates to enhancing capital markets and investment?
First, there is cause for concern in the United States about the potential for isolationist sentiments curtailing our economy's participation in global markets. But the evidence of benefits resulting from accessible global markets is overwhelming, and we need to keep pointing to that evidence in responding to the isolationist critique.
Second, we have much work to do in the international arena, to gain commitments through the WTO signatories to improve the transparency of their regulatory processes.
And, third, we need to work to help China realize the enormous benefits of its membership in WTO. Randall G. Schriver, the U.S. deputy assistant secretary for the bureau of East Asian and Pacific affairs, recently outlined the key steps in doing so. These include: ongoing high-level meetings to follow up on the U.S. report on China's compliance with its WTO obligations; China's completion of policy changes, including legal protection for private property rights and the nine-point program for capital market reforms that was announced earlier this year; and, third, building momentum for a new round of WTO trade talks.
I encourage you to contact and work with SIA. You can play a vital role in supporting transparency and broader access to capital markets – and help underscore the mutual benefits that the open flow of capital and business activities provides to the U.S. and China. That's one last reason why it's such an honor for me to be here today.
Thank you.
