Commentary Type

China and the World Economy

Long Yongtu (Former Vice Minister, Foreign Trade and Economic Cooperation of the People's Republic of China)

Fourth Annual Stavros S. Niarchos Lecture at the Institute for International Economics


It is a great honor to speak to such a prestigious audience at this very prestigious lecture in Washington. I am particularly honored to have been introduced by my good friend Hank Greenberg, a respected business leader in China. He was one of the pioneers of foreign investment in China soon after the economy opened up. Our friendship grew out of rivalry during the negotiation of China's WTO [World Trade Organization] accession. The last leg of China's 15-year negotiation took place between me and Hank Greenberg, not the USTR [US Trade Representative]. I still remember that after we finished our negotiation with the United States and signed the agreement in Geneva in September 2001, we still had one thing pending-that is, the insurance problem, which involved granting "grandfather" status to AIG's special right in China. The issue was not resolved after many meetings, so Hank wrote a very tough letter to Premier Zhu. It was so tough that when Premier Zhu got the letter, he was very angry and asked me to his office. He said that he would never see "this old man," but one hour later, he called me and said, "Mr. Long, maybe you should do something about it." He had a good reason behind that. At that time, Hank was already in Shanghai, so I followed him, and I must say we had a good discussion. Hank is very tough but very honest and very straightforward. That has impressed people like me and many of his Chinese friends. So in spite of what you have read recently in your newspaper, he is still one of the most respected people in China-the fact that a few weeks ago the Chinese government awarded him the Marco Polo Prize is proof that we respect him. That's why I am so honored that he personally traveled to Washington to present me.

Ladies and gentlemen, I am so happy to be invited to speak on China and the world economy. China's economic development over the past 25 years has been a miracle. China has maintained a GDP growth rate of 9 percent for 25 years, and this is a rare case in the history of economic development of the world. Many people ask me about China's economic development. What are the factors behind China's fast economic development? I think it is a very sophisticated process. It seems to me that two major forces are driving this development. First is the economic reform policy China pursued since 1979. For a long time, China was a planned economy and had ups and downs. And during the Cultural Revolution in the late 1960s and 1970s, China's economy was on the brink of bankruptcy. People like me, my generation experienced hardships and starvation. I still remember during my university years, we did not have sufficient food to eat. We were so hungry that we had to eat a lot of pumpkins. Because we ate so many pumpkins, the sheer smell of pumpkin upsets my stomach even today. I hope today's menu will not serve pumpkins. Ironically enough, pumpkin is considered a very healthy food, so I'm still reasonably healthy.

At that time, all the Chinese were equal, but they were equally poor. I would consider 1979 a historical turning point in modern China. That year Deng Xiaoping, the greatest man in contemporary China, decided to change this situation and launch a policy of reform and opening up to the world. Deng Xiaoping said, "Poverty is not socialism. We should make economic development the top priority of all priorities." And he advocated China's transformation from a planned to a market economy. With this transition, 1.3 billion people came to understand a very simple truth-that if they worked hard, they could have a better life. It is this simple truth that has made the spirit of entrepreneurship come alive in China again. And it's because of this truth that millions of Chinese entrepreneurs have come into being, thus changing the whole economic structure of China. Because of the millions of entrepreneurs in China, the private sector has grown rapidly. During the planned economy period, everything in China was state-owned-even a small restaurant and a small barber's shop at the corner of the street. Economic reform changed China completely. The private sector in China now contributes one-third of the Chinese GDP. People widely believe that in the next five years, the private sector will contribute half of the Chinese GDP and in 10 years, three-quarters of the Chinese GDP. This development of the private sector has changed China and has become the driving force behind China's economic development.

The second driving force is China's participation in economic globalization. It may have been a historic coincidence that when China started its economic reform process, economic globalization was getting stronger. Unlike their forefathers 200 years ago, the Chinese did not reject the idea of opening up to the world in 1979-maybe because China had suffered too much humiliation and poverty from its isolation during the past 200 years. As Deng Xiaoping said, in this contemporary world, it will be impossible to build a modern China and a Chinese economy by isolating itself from the world. Even though globalization is a very complicated process, the Chinese decided to embrace it and grab the opportunities that it has brought to the rest of the world. And globalization has really brought capital, technology, and human resources to China and has made it the largest destination for foreign direct investment in the past five years. In 2004 alone, China attracted $60 billion in foreign direct investment. We have overtaken the United States as the number one destination for foreign direct investment. China's foreign direct investment contributes 10 percent of China's total investment, 20 percent of China's industrial output, and 60 percent of China's exports. But what is more important is that globalization has changed the fate of millions of Chinese.

I will share with you a light-hearted story. It is the story of my first boss, the director general of the Ministry of Foreign Trade at that time, who'd had 35 years of service with the Chinese government. I still remember the first day when as a young university graduate I went to his office to report to him. He told me, "Young man, in order to do a good job you have to remember many principles. You have to follow many disciplines. One of the major disciplines is that you have to make a difference between the Chinese and the foreigners." In China we call it "nei wai you bie." This is a very important discipline to follow. Thirty years after that, a few years ago I went to see him, during the Chinese New Year. I went to his home, and he introduced a foreign young man to me. He said, "Yongtu, this American, Jong, is my son-in-law." I was a bit surprised because he was an old guerrilla fighter. In my mind he was very conservative. I was a little amused and remembered what he'd said to me when I reported to him on my first day. So I took him to the next room and asked him, "Mr. Director General, how do you make a difference between foreigners and the Chinese at your home?" He was somewhat embarrassed but still smiled and said, "Mr. Minister, the world has changed, so the discipline also has to be changed." This is what has happened in China. Globalization has changed the mind-set of millions of people in China and continues to change China everyday.

I would like to emphasize that these two forces (economic reform and participation in globalization) are not working separately in China; they are interconnected. It is widely believed that without economic reform, China could never have opened up itself and joined the WTO. But on the other hand, China's participation in economic globalization greatly and decisively accelerated its domestic economic reform. Many people ask me about the impact of China's WTO accession-talking about China's decision to lower its tariffs, reduce import licenses and other trade barriers, and open up China's market. Of course, all those things are very important, but I think the most important thing is that after China's WTO accession, we have introduced so many important principles and concepts, and the mentality of our people has changed. Those changes form the foundation for further economic reform in China.

For instance, during and after China's WTO accession, we introduced a very important WTO principle called national treatment. Under this principle, one has to treat foreign and Chinese enterprises the same. So during the campaign to promote the WTO, we advocated the principle of national treatment. Yes, treating foreigners and the Chinese the same way is not a problem, but the principle of national treatment triggered a very fundamental debate in China. People questioned that if foreign enterprises were to be treated the same as Chinese enterprises, then in China, all Chinese enterprises-private or public or state-owned-would have to be treated the same way. In China, the private sector has been discriminated against in many areas, including access to markets, land, and financial support. So it is legitimate for people to say that if foreign and Chinese enterprises have to be treated the same way according to the WTO principle, then first and foremost the WTO principle should be applied to the Chinese private sector to enable them to compete with state-owned enterprises. That debate has greatly accelerated China's economic reform, and the private sector in China has grown very fast.

Another very important thing in China is that we have 90 million rural workers in the cities. In the past, these rural laborers faced a lot of discrimination in the cities. When we advocated national treatment, people said that the national treatment principle should also be applied to the rural workers working in the cities, which again is a fundamental issue in China. Now the rural laborers working in the cities are enjoying the same rights as their urban counterparts. So, the introduction of a very important WTO principle triggered a debate on such issues fundamental to domestic reform.

I can cite another example-that of transparency. Transparency was not a very acceptable principle in China. We had numerous so-called internal documents, which were accessible only to state-owned enterprises and not to private or foreign enterprises. So people raised this issue according to WTO's principle of transparency and demanded that we should have a transparent legal system. China does not have a tradition of transparency. In China there is an old saying that "if the water is too clean, there will be no fish." It means that it should not be too transparent in the business world. One has to fish in troubled waters. This has been a tradition in China for thousands of years. It's important to introduce this principle of transparency in China and make the business system transparent, stable, and predictable.

Now the principle of transparency has started to change the whole business environment in China and has even been extended to social and political fields. Everybody is talking about transparency. For instance, last year China suffered from a disease called SARS. People were talking about transparency daily and asking the government to share what was happening in the cities. People asked about the number of cases and about the measures to control the disease. Now the government officials are also talking about transparency. They are now advocating a kind of "sunshine policy," which means that all the administrative measures and actions must be transparent. So all these principles have fundamentally changed the mentality of the people as well. This change will accelerate Chinese economic reform. So the biggest impact of China's WTO accession is not lowering the tariffs and other trade barriers but the change in people's mind-sets. The Chinese leadership has very skillfully taken advantage of China's WTO accession, by using those fundamental principles and concepts to moving China toward a market economy.

Ladies and gentlemen, you are also probably very concerned about the future direction of China's economic development, whether China can maintain a relatively high speed of economic development. My reply is very simple: yes. The reason is also very simple: The two driving forces, which I mentioned, will continue to play an important role in the future. China's economic reform will continue because we know that if we do not continue, we cannot maintain this high speed of economic growth. Reform now is focusing on the enterprises, because we know that they are the basic unit of a market economy. If the enterprise is not healthy, the economy will not be healthy. So we're trying very hard to transform the state-owned enterprises and in the meantime accelerate the pace of the development of the private sector. All these are consistent policy decisions made by the Chinese government. Until now, the private sector was not supposed to get into some so-called sensitive sectors like telecommunications, power, petroleum, financing, railway, civil aviation, education, and so on, but from this year on, the private sector has been permitted to invest in these critical sectors. This will provide a great incentive for the private sector to develop in China and accelerate the reform process toward a market economy. March 2004 marked a historical turning point in China. Under the new leadership for the first time in Chinese history, protection of private property was clearly incorporated into China's Constitution. The protection of private property is something that you take for granted for years. But in China, it is a major breakthrough. It provides the legal foundation and framework of market economy.

China's participation in globalization will continue because we know that if China's interests are more interwoven with those of the United States and the European Union, China will be much safer. Along with the United States and Europe, China should also integrate itself with the rest of the world, including the neighboring developing countries. That's why China has played a very active part in recent years in regional economic integration in Asia. We took the initiative to negotiate a free trade agreement (FTA) with 10 Southeast Asian countries. We understand that if we do not share the benefits of China's economic development, there will be a lot of insecurity around China. China's decision to initiate FTA negotiations with Southeast Asian countries is more political than economic. We know that we have to alleviate the concerns and worries of our neighboring countries. The best way to do that is to let them share what we have achieved economically, which is why in recent years, China's imports from Southeast Asian countries have increased 20, 30, 40 percent every year. According to a World Bank report, from the mid-1990s until now, Thailand's exports to China have increased by 5.5 times, Malaysia by 6.8 times, and the Philippines by 30 times. Imports from Southeast Asian countries have increased enormously, and China now has a much better relationship with them. China is also trying to negotiate an FTA with Japan and Korea. I think this is again due more to political than economic considerations. We have learned from the experience of the European Union. In the last century, Germany and France fought two world wars. In the last 50 years, because of their efforts to have a united Europe, Germany and France have not only become economic partners but also very important political allies. If Germany and France can achieve that, then why can't Japan and China? That is why China is working vigorously to have much stronger ties with Japan through intensive economic integration. I also think that Australia and New Zealand should be integrated into the East Asian economic countries. Australia and New Zealand already consider that they are part of this region and are trying to integrate their economies into East Asia. We welcome this kind of initiative. I believe that this kind of an East Asian FTA or economic integration will benefit the United States because in this globalized world, so-called closed regionalism will be difficult to practise. Closed regionalism will do more harm than good-not only to the countries in the bloc but also to those outside it.

Finally, I would like to say a few words about the Sino-US relationship. It is understandable for the United States, as the biggest power in the world, to show great concern over the rise of a big country. But I'm somewhat puzzled as to why you are worried about the rise of China, because you yourselves have contributed a great deal to what's happened in China in the last 25 years. Business people like Hank Greenberg have brought human resources, capital, and expertise to China. Their contribution has made China what it is today. What is more important is the ideas you have given us to build a market economy, and we have followed your advice. I still remember the advice I got all these years from my American colleagues, including the senior colleagues from the US government. You told us that if you want to do a good job in creating a market economy, you have to advocate the spirit of entrepreneurship. You have to develop the private sector vigorously. You should give strong incentives to the people to make them work harder. You have to make painful decisions sometimes to restructure your economy, including phasing out those uncompetitive sectors of industry. You told us-especially the trade negotiators from the USTR-that you have to open up your markets and eliminate trade protectionism, because protecting industries will not make your economy competitive. We followed your advice, and as a result we are so successful. Ironically, now our "teachers" are getting worried because we, the "students," followed your advice so faithfully and became so successful. So as the students, we believe that our teachers should not be worried about that. First, China's rise is a historic event, which no one can stop. Secondly, even though China has made tremendous progress, its GDP is only about one-eighth of US GDP. Our per capita GDP is only $1,000, far from what you have. It may take hundreds of years for China to catch up with the United States, in per capita GDP terms. So do not believe the predictions of economists that China will catch up with the United States in the next 10, 20, or 30 years.

China still faces tremendous challenges at home. Sixty-five percent of the Chinese population still lives in the rural areas. We have surplus labor force of 115 million. A great challenge for us is to relocate these people to the cities. To achieve that we have to create 10 million jobs every year in the cities. It is not an easy job. The transition of China from a basically agricultural country to an industrialized country may take several decades. So we still do not have the capacity to challenge the rest of the world. You should also understand that China is not only a producer but also a consumer. China is not only an exporter but also an importer. After 25 years of economic reform, people say that 10 percent of the Chinese population-130 million people-has already become an important consumer group. This number is increasing every day. China will basically depend on domestic demand and domestic consumption. China is also a major importer now, ranking third in the world. This year, China's imports will surpass $600 billion. China's GDP is only one-third of Japan's, but we import much more than Japan. Even though we have a large trade surplus with the United States, our imports from the United States increased very fast-32 percent-last year and even faster this year. That is why I believe that China's economic development and its rise provide a huge market for the rest of the world. Providing the biggest market for the whole world could be China's biggest contribution this century.

Last but not least, I believe China's rise is consistent with your basic value, the value of Americans. The basic value we believe is to create a better life for the people. China's economic rise in the last 25 years is to materialize this value. Because of China's rise, for the first time 1.3 billion Chinese have sufficient food to eat. For the first time 300 million Chinese have gone out of absolute poverty. For the first time 800 million Chinese have access to electricity. For the first time 650 million Chinese have become telephone users. Now 1.3 billion people enjoy a better life-not only themselves but also their families and children. I firmly believe that 1.3 billion Chinese are entitled to a better life. That is why I strongly believe China's economic rise is consistent with your basic value and do not believe you should be in any way worried about this process.

Ladies and gentlemen, the United States is a great country. American people are great people. We in China have great admiration for your country, your people as well as the great contribution you have made to mankind. With the rise of China, we can now share some of the responsibility of this world together with the United States. China and the United States are now considered the two most important locomotives in the world economy. So we have thousands of reasons to get closer and cooperate much better on a win-win basis. Let's join our hands, work together, and create a peaceful and prosperous world, for the people of the United States and China. Thank you very much.

Q&A Session

Question 1: Since you negotiated the WTO accession with the ending of the Multi-Fiber Arrangement, are you surprised by the reaction in the United States and Europe to the increase in exports of textiles from China?

Ambassador Long: The first question and a very sensitive one. Of course, it's an issue now, but I always emphasize back in China that we should not overemphasize and overplay this issue, because textile trade is only a tiny part of trade between the United States and China. Making it a major issue could create a big problem between the two countries. It should not be made a political issue. Of course, both countries should do something constructive to resolve this dispute. China has already taken some important measures to control textile exports. I hope that the United States also does something constructive, of course including the European Union, to get beyond these difficulties. We have much bigger interests in many other areas. We should not let such textile issues get in the way of a much better relationship between China and the United States.

Question 2 (Albert Bressand): I would like to ask you about what you said about how France and Germany have transformed their relationship in a way that Japan and China could now do. A key ingredient in the Franco-German transformation was-to use your word-transparency, the capacity to look at their past very sincerely, and this has been painful on both sides. The Germans, we know, had to admit that things had been done that should never have been done. On the French side, we had many French policemen and the French government taking the Jews to the trains, so it was also painful for us. Now, how hopeful are you that Japan and China can create that foundation? We have seen the turmoil in China regarding some of the new textbooks in Japan. Japan may not have incorporated very deeply its own reassessment, and in China itself not everybody talks about it as sincerely as you do. People still look at the great leap forward and the Cultural Revolution only with a partially open eye. How hopeful are you that Japan and China can transform their relationship?

Ambassador Long: I am very hopeful because I believe that so long as both Japan and China make serious efforts, we can achieve the kind of relationship that exists between Germany and France. However, this process is much more complicated than what happened between Germany and France, because at the end of the Second World War, Hitler and his whole system was destroyed by the armed forces of the Allies. Those in power in Germany basically were anti-fascist people, who came back to power so emotionally; many others were also against fascist Germany. So it is much easier for Germany to face up to history. But for Japan it was a bit different because of US policy, which did not remove the emperor of Japan from power, and the emperor launched the war against China. The political structures of Japan were, therefore, not eliminated at that time. So it will take much more time and effort for Japan to really face up to history and recognize the criminal actions it had undertaken against China and other Asian countries. Japan has to work much harder to do that. But on the part of China we have to tell our people, especially the young people, that this was a tragedy 60 years ago and we have to look to the future now and that Japan and China have much more in common now than ever before. For instance, China is becoming a very important oil importer, like Japan has been for many years. In terms of the energy issues, China and Japan to some extent are in the same boat because both will be very concerned about exploration and production of oil, the political stability of the Middle East and other oil-producing countries, and the safety of oil transportation. So China and Japan will share much more than before because China has become a major importer of oil. We have to tell young people about the common interests we share with Japan and not to behave emotionally because of what happened 60 years ago. Of course, the politicians in Japan should also behave very cautiously and respect the feelings of the people of China and other victimized countries in Asia. But I still believe that China and Japan can get together and work together.

Question 3: It's just as much of a problem when a country has a huge current account or trade surplus as it is if they have too little-a deficit. How does the world trading system survive as we know it if just a few countries have huge surpluses and all the rest have negative results? Isn't that going to lead to a world of regionalism rather than globalization?

Ambassador Long: This issue is being discussed, and as you know China's banking system is in the process of fundamental transformation. So we have to be very cautious about all the policies in relation to the financial system. It is not that the Chinese government does not want to study all these issues seriously. It is just that we're short of the kind of expertise and knowledge needed to manage this very complicated foreign exchange system. Again, we will need your advice-constructive advice, not political pressure. Constructive advice is always welcome in the decision-making process of the Chinese government. But I am afraid that the more pressure you impose on China, the more difficult policymaking will be, because of pressure from foreign countries, especially from the United States, would be interpreted as "intervention" in China's internal affairs. That is not correct politically. So I think the best advice is to let the Chinese government make the right decision, because we have already understood what you are talking about and what the problems with our foreign exchange system are. We have to be more flexible, but we have to learn how to make it more flexible.

Question 4 (Alan Wolff): Mr. Ambassador, what is the appropriate relationship between economic liberalization and political liberalization at home?

Ambassador Long: We are hitting all the sensitive issues. Many people believe that while we are engaging in economic reform, nothing is being done about political reform. It is not true. We are engaging in political reform quite actively, but we're not pursuing political reform for the sake of political reform. Because, as Deng Xiaoping said, we have to make economic development the highest priority of all priorities, which is why when we pursue political reform, our major purpose is to improve the efficiency of the government and make it a clean government. We have made major efforts in recent years to reduce the size of our government. In China, government departments are called temples, to use the religious word, and civil servants are called monks. So we're launching a big campaign to reduce the number of temples and monks, because if you have too many monks, they are bound to interfere with the business operations of the private sector and other economic sectors. That is very harmful to China's economic reform. So reducing the size of the government is one of the important political reforms. Another reform is eliminating a lot of items subject to so-called administrative approval. In the last two years, we have reduced the number of items subject to administrative approval by 2,000 because we believe that every item subject to administrative approval could lead to corruption. It is important to phase out gradually those items subject to administrative approval and make the government as clean as possible. Our economic reform is for the sake of efficiency.

People asked me the same question at a conference last year: Why doesn't China follow India and become a democratic country? They are asking China to copy the electoral system in India as well as in the United States and some other countries. My answer is that we are working to become a more democratic country, but we are not trying to copy the models those countries have pursued. For instance, the general election campaign is just too expensive for China. We cannot afford to spend so much money for this kind of election. Second, we do not believe that this system is so democratic. Sometimes the election turnout is only 30 or 40 percent. What is the meaning of such an election? Also in China 65 percent of the population still live in rural areas and are very poorly educated. We do not believe that this kind of election will be so effective and really represent the will of the majority. What is more important is that any domestic system should aim at making the running the economy more efficient.

At that conference I was telling my fellow participants about a discussion I had with our Indian colleagues. We were talking about the construction of highways. In the last 10 years, China has constructed 40,000 highways and now has the second largest number of highways in the world, only second to the United States. India has only a few thousands after 20 years; they started much earlier than us. We discussed the reason. Our Indian colleagues said that it took years for them to acquire a piece of land to build a highway. But in China, if the government makes the decision, we acquire the land and start constructing the next day. Hence it takes years for India to make many economic decisions, but we take a few weeks, sometimes only a few days. That's why I think China is a very practical country, one of the reasons why we are so successful. We do not believe that we should spend hours and weeks debating in parliament or in any other setting about whether a piece of land should be acquired for construction of a highway-it's just a waste of time. We cannot afford to waste time.

I'm not trying to elaborate or to tell you that your politics are no good. What I'm trying to say is that we have to pursue political reform according to the tradition in China and according to the priorities we have now. Our priority is to rapidly develop China and to make people better off. Then they will get a better education. They will then know what an election will mean for them. So it's a gradual process, and the answer is that we are aiming to build China into a democratic country, but we are not copying existing models in other countries.

Question 5 (Bill Cline): Mr. Ambassador, three economists at Deutsche Bank have elaborated the new Bretton Woods theory, and its premise is that China likes a fixed exchange rate because China needs a large trade surplus to employ the large reserve army of unemployed. Is this looking at it the wrong way? Is it your perception that a core element of China's growth strategy now is to maintain a sizable trade surplus? The current account was 4 percent last year, maybe 6 percent this year instead of maybe a 2 percent deficit, which we would normally think of for a developing country. Is there some truth to this concept that the growth strategy is dependent on trade surpluses, and therefore China is willing to buy up American treasury bonds and hold paper and give goods to Americans?

Ambassador Long: This theory is too sophisticated for China. I can tell you honestly that we seriously do not know what to do with the accumulating foreign exchange reserves. We're not manipulating the exchange rate for the competitiveness of China's exports. Even if we revalue China's renminbi by 100 percent, I can tell you China's exports will still be competitive, because the labor cost in the United States is 20 times higher than that in China; in Korea it is 10 times higher and in Mexico and Thailand, three times higher than in China. So we're not trying to manipulate the exchange rate to keep China's exports competitive. Even if China revalued its currency, it would not help the trade deficit issue of the United States-not at all, or only psychologically or politically, I don't know. But in real economic terms it doesn't help at all, because China's competitiveness is based on China's cheap and high-quality labor. China produces 3 million university graduates a year and 1 million engineers a year. Japan produces only 120,000 engineers and India only 80,000. We can maintain a very high-quality and relatively cheap labor force-that is the reason for China's competitiveness. Economic reform gives incentives to the Chinese to work hard. You cannot complain about the hardworking Chinese. They are working hard, so they are competitive-it is as simple as that. The spirit of entrepreneurship that was very much alive in your country for so many years made you the biggest country, the most powerful country in the world-maybe you have forgotten that. You were not manipulating your exchange rate to achieve that. The other thing is that we are not so sophisticated that we are buying your treasury bonds so we have some influence on the United States-not at all. Because we do not know what to do with these foreign exchange reserves, the safest thing to do is to buy your treasury bonds. The United States, being the most powerful country in the world, will not collapse, and so you are still the most reliable source for our foreign exchange reserves. It is as simple as that. So we hope that you will not complicate matters by a lot of wild imagination about this foreign exchange regime thing. We have to reform, we have to do something about that, but we have to do it cautiously, and we are listening to your advice.

Question 6 (Gary Hufbauer): Minister Long, you recall that when Ambassador Portman was quizzed by the Senate Finance Committee, he got quite a few questions about China, and many of them focused on intellectual property rights (IPR). There's considerable pressure coming from the Finance Committee and elsewhere for the United States, for Ambassador Portman, to self-initiate an IPR case on China focusing on enforcement issues across a broad range of industries. Would this be constructive or destructive?

Ambassador Long: Talking about protection of IPR, as a negotiator I still remember this was the hardest part of the negotiation. If you look into China's agreement with the WTO, you'll find that China has committed the most among all the WTO members on the issues of IPR. The Chinese government is serious about that, because we know that if China does not want to continue to be a cheap labor force at the lower end of the manufacturing chain, it will have to be innovative. It will have to have its own international property rights. The only way China can have its own international property rights is by protecting IPR, whether it's foreign or Chinese. So it's in our fundamental and long-term interests to protect IPR. We're not doing it because we have committed to the WTO or we have lots of pressure from the United States, we are doing it for our own sake. So the government is serious about that, there's no question about it. The question is about implementation, because it is not like implementing a tariff rate reduction or phasing out an import license. The government can make the decision, and it does it independently. We have honestly implemented all these obligations. But implementation of IPR is not simply a matter of a policy or law, it's a much more complicated issue and involves educating the people and enterprises. Enterprises and individuals can benefit tremendously from violating IPR, so there is a big interest behind IPR violation, which makes things complicated and difficult. So the Chinese government has to educate our people, but we recognize that we still have IPR violation cases. That's like in the United States and other countries: You have very strict laws against smuggling of drugs. But smuggling of drugs is very profitable, so it still happens from time to time. What I'm trying to say is that the government is serious, but we cannot assure you at this stage that violations will not happen. This is my honest comment. But what you have to observe is whether China is systematically developing a comprehensive legal system to protect IPR, whether the Chinese government is serious about it. After China's WTO accession, we set up a special criminal court for IPR violation cases. We did not have that before. We will take action against any violation of IPR and make it a criminal case and make punishment even more severe. This is the only way we can assure you that our government is serious because we know that if we are not, then Mr. Greenberg and especially those high-tech companies will never come to China, and we will lose the big transnational companies and the support of the world business community.

Question 7: During the past two decades, the outward economic development strategy, mainly featuring development of international trade and introduction of foreign capital, has made a great contribution to China's economic growth, but during the past few years there has been concern about the tremendous external imbalances, like the foreign trade surplus and a lot of capital inflows. Some economists believe that China needs to slightly adjust its economic development strategy, which means that it should pay more attention to domestic demand-investment and consumption in China-as the main source of economic growth. What's your comment on this subject?

Ambassador Long: You are quite correct. China should make more efforts to base its development more on domestic demand than on exports. If we depend too much on exports, then we are very vulnerable. So I believe that the Chinese government should base its national development strategy more on its domestic consumption. China is different from Japan, Korea, or Singapore. It has a huge population, something where no country can compare with us. The potential of the Chinese market has not yet been fully tapped. I was just talking about China's efforts to relocate 10 million rural people into the cities each year and make them city residents. If we successfully achieve that, we will create a very important consumer group of 10 million every year, because the lifestyle and spending of a rural self-contained population is very different from that of city residents, who need housing, transportation, and a lot of services. That potentially is a big domestic market for China. So China's domestic market is expanding very rapidly. I mention this effort of turning 10 million rural people into city residents not because China will make that a strategy but because it has always been the reality in China. I always tell Chinese entrepreneurs, don't try to go abroad but search for a market here, try to compete with the foreign investors, take the Chinese market first. We tend to forget the Chinese market by trying to grab the foreign market first. Then, as a Chinese saying goes, you pick up a sesame but lose a big melon. So I agree with this strategy, and China will depend more on the domestic market. We should treat the kind of trade frictions with the rest of the world very cautiously, but I can tell you we are not afraid of these kinds of trade frictions, because we have a huge domestic market. Coming back to textiles, the Chinese domestic market in textiles is expanding even faster than our exports. Look at all the statistics. People believe that we depend totally on the textile markets in the United States and other countries, which is not the case. So I hope that you can understand the big picture of China's economic development and understand that China is really a country that can contribute to the rest of the world. Because after all these years of WTO negotiations, we have come to a conclusion: For China to keep a good image in the world, we have to do two things-one, we have to follow the international rules and practices, as we have committed to WTO rules, and two, we have to open our market further because we believe that no matter how strong a country is, if it is firmly committed to international rules and practices, it will not be a threat to the rest of the world. No matter how strong a country is economically, if it is open, it will be a positive factor in the world economy. This is what we believe, and we hope that by doing these two things-committing to international rules and practices and to opening up further-China will be a responsible and respected country in this world. Thank you very much.

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