Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 14 - Evidence
OTTAWA, Wednesday, April 22, 1998
The Standing Senate Committee on Foreign Affairs met this day at 3:20 p.m. to examine and report on the growing importance of the Asia-Pacific region for Canada (China and Canada-China economic relations).
Senator John B. Stewart (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, this afternoon we resume our study with regard to the importance of the Asia-Pacific region for Canada. We are to be assisted by Ms Margaret Huber, the Director General for the North Asia and Pacific Bureau of the Department of Foreign Affairs and International Trade. I introduced Ms Huber more extensively at our meeting yesterday.
With her today is Dr. Karen Minden, the President of the Asia-Pacific Associates. Dr. Minden has had an extensive academic career, and I notice that she has a diploma in language proficiency from the Beijing Language Institute. That implies, and implies correctly, that she is proficient in Mandarin Chinese.
Our third witness is Dr. Paul Bowles. Dr. Bowles has a doctorate degree in economics from the London School of Economics. He has taught in the United Kingdom, United States, and Canada. Dr. Bowles is Professor of Economics and the Chair of the Economics Programme at the University of Northern British Columbia. He is a specialist in development economics and focuses chiefly on the East Asia region. We are most grateful to Dr. Bowles because he has come a long way to be with us this afternoon.
I am going to ask Ms Huber to lead off on the subject of Canada's relations with China.
Ms Margaret Huber, Director General, North Asia and Pacific Bureau, Department of Foreign Affairs and International Trade: Mr. Chairman, honourable senators, I am honoured to have been asked to come back today to talk about Canada and Canada-China economic relations, particularly in the presence of two such experts as Dr. Minden and Dr. Bowles.
I would like to begin by setting my remarks in the context of Canada's China strategy and, with that as a lead-off, move on to talk about the Asian financial crisis and the impact on Canada-China, talk about China's accession to the WTO and how that may affect Canadian exports, talk about some major Chinese government restructuring with impact on Sino-Canadian relations, touch on the results of Minister Marchi's recent trip to China and Hong Kong, particularly the announcement of a China-Canada parliamentary group, and, finally, the next steps in terms of further commercial and economic engagement between Canada and China.
First of all, to set it in context in terms of the importance of China for Canada, China is our fourth most important trading partner, and Hong Kong our eighth. When the two are added together, as indeed they should be since Hong Kong has now been restored to Mainland China, China becomes our third most important trading partner.
How do we stack up in their eyes? In strict trading relations, we are number 16 among China's import source countries and the 15th in terms of China's export destinations.
Our objective with China has been to encourage them to maintain or improve an open door policy and to become fully integrated in global and regional political and economic institutions. In fact, APEC has been a very useful tool in that regard.
Over the past two decades, China has been one of the most dynamic economies in the world and is now the world's 11th largest trading nation, with foreign trade accounting for fully 21 per cent of its GNP.
The recently concluded 15th Congress of the Chinese Communist Party confirmed some massive changes in China, particularly the reform and privatization of Chinese state-owned enterprises. This is the most important issue for them on their own agenda. Government reform in China envisages a reduction of 40 to 29 ministries. That, and related unemployment in China is, as you can imagine, a major challenge.
In that environment, we must continue to position ourselves to build an economic partnership with China that in both countries creates jobs and prosperity. Engagement should be at all levels. Building on the strong dialogue and the close rapport between Prime Minister Chrétien and Chinese President Jiang, the basis for the long-term relations between Canada and China rest on four elements: economic partnership; sustainable development and environmental protection; peace and security; human rights; and good governance and the rule of law.
In terms of the trade strategies vis-à-vis China-Hong Kong, an action plan has been, I understand, delivered to your offices. This was released not so long ago by our China division. Rather than going into details of the plan, I would invite you to have a look at that.
I would mention though that missions like the recent one led by Minister Marchi present an opportunity to raise Canadian interest in opportunities in China. The trade mission to China, which was the largest ministerial mission we have had, had very heavy representation by small- and medium-sized enterprises -- one quarter of the participants. We are also seeking to work more closely with the private sector, particularly groups such as the Canada-China Business Council, in innovative ideas about engaging China.
We work closely with CIDA, whose program for China is the largest of their bilateral programs and focuses on promoting economic linkages and partnerships, promoting environmentally sustained development, and increasing China's capacity to improve governance and human rights, a topic we focused on yesterday.
Since 1994, CIDA has undertaken 25 new bilateral projects with China and has allocated $195 million for disbursement until the year 2002. For this fiscal year, CIDA's budget for China is almost $40 million.
I would like to focus now on the impact of the Asian crisis, which has become not just a financial crisis but also a social and political crisis. China has had an average of 10 percent real growth since 1978, and in spite of substantial population growth, they have enjoyed a 400 per cent growth in real per capita GDP. During that period, there has also been a gradual reduction in the relative size of China's state sector, the state-owned enterprises that I referred to earlier. This state sector in China now accounts for about 34 per cent of total industrial output, compared to 82 per cent 20 years ago. For comparison purposes, that is less today than the size of the state sector in France.
However, China's economy is slowing down, with growth officially forecast at 8 per cent for 1998. To us, 8 per cent may sound extremely desirable, but that does represent a real reduction for China.
Inflation, nevertheless, is expected to be below 3 per cent, and the Chinese economy is in reasonably good shape. However, two major factors cloud the horizon. The financial storms that have hit Asian countries such as Indonesia, Thailand, Korea, and Malaysia have had, and could continue to have, an increasing effect on China. The growth of Chinese exports to these countries has already dropped conspicuously. The signing of some negotiated large capital projects with these countries has been postponed indefinitely.
China was recently further impacted by fall-out from the so-called "chicken flu" in Hong Kong, when some countries announced that they would not import frozen chickens from China and also questioned China's phyto-sanitary controls.
Moreover, the competitiveness of Chinese exports against exports by such countries who now will be exporting with reduced costs has been weakened both in the United States and Japanese markets due to the increased competition from the devalued currencies of these Asian competitors.
We anticipate that foreign direct investment in China will slump this year, declining from U.S. $45 billion in 1997 to perhaps U.S. $30 billion in 1998, due to retrenchment on the part of investors from East Asia. These East Asian investors account for fully 80 per cent of foreign direct investment in China.
Some observers of the Chinese economy are of the view that it is only a matter of time until China will devalue its currency, the Ren Min Bi, due to the competitive pressures from other Asian exporters and as a result of the general slow-down in the economy, aggravated by reforms to the state-owned enterprises. However, China's top leadership has stated emphatically that China will not devalue the currency, which would only further destabilize the region.
When I had the opportunity of meeting recently in Hong Kong with Chief Chinese Commissioner Ma, this was a point that he emphasized most strongly. Moreover, he pointed out that, due to China's trade surplus, which was U.S. $40 billion in 1997, and to the size of China's foreign exchange reserves, U.S. $140 billion, the second highest in the world, there is, in fact, currently pressure on the Ren Min Bi to appreciate.
China's leadership is keenly aware that a devaluation would cause economic and financial turmoil in Hong Kong and would lead to the collapse of the peg. China is intent on promoting stability in Hong Kong, particularly since it has been only a short time since the hand-over. Untimely devaluation of the Ren Min Bi would also wipe out the very positive recognition that China has received from Asian neighbours for assistance in recovering from the crisis. China, for example, came forward with $1 billion support in the second line of defence for countries such as Thailand and Indonesia.
While minor adjustments, therefore, cannot be ruled out over the medium term, a significant devaluation of the Ren Min Bi anytime very soon is not in the cards, although I would not go as far as Chief Commissioner Ma to say that it would never happen.
The Chinese economy as a whole is far less leveraged than many other Asian economies. A much greater proportion of the production is aimed at domestic demand and a greater proportion of overall activity on infrastructure development.
While only about $3 billion of Canada's exports go to China, representing still less than 2 per cent of Canada's overall exports, our non-grain trade with China is growing year by year. For services which we still have not been able to fully measure, the Chinese market is now vitally important for Canadian engineers, consultants, bankers, and insurers.
Even if the Chinese economy does slow down due to reduced capital inflows and increased export competition by China's neighbours, we do not think that this will have a very significant impact on Canada's efforts to penetrate Chinese markets either on the goods or the services side.
Irrespective of the degree of consensus on the impact of the Asian crisis on China's economy, it is evident that the greatest concern is for the relatively flexible foreign capital and export-dependent sectors, such as toys, trinkets, textiles, household plastics and shoes. With a handful of exceptions, this, however, is not where Canada is strong in China or where Canadian companies have made significant investments.
Most of our strength in the Chinese market today is in the area of services and products that contribute to China's huge infrastructure needs. Given the size of these needs, investment in these areas will continue to grow for the foreseeable future.
I understand that Professor Bowles will be talking about the development in this area, as well as Professor Minden, so I will not go into further detail on that.
I would like to talk now very briefly about WTO accession and market access and what the impact will be on Canadian interests.
While China presents substantial opportunities for Canadian business, a number of Chinese practices still do impede Canadian access to the market. These include continuing high import tariffs, despite the reductions that they made in October of 1997. They also include domestic product standards that, in our view, unnecessarily limit trade. There is discriminatory treatment of foreign-owned firms, lack of transparency and consistency in the application of standards, laws and regulations, as well as non-tariff barriers such as import licences, quotas and unfair tendering.
In the ongoing WTO accession negotiations, Canada and other major trading partners are pressing China to commit to removing, or at least reducing, these trade barriers. While Chinese officials have indicated that China is very serious indeed about resolving these issues as part of the accession package, progress continues to be slow. The last negotiations in Geneva, which took place only on April 6, produced little progress. Ministers Marchi and Vanclief, who recently visited Beijing, raised Canada's concerns about high tariffs and impediments to market access when they met their Chinese counterparts. An important outstanding issue that they raised was the management of China's proposed tariff rate quota regime on grains and oilseeds, covering about 40 per cent of the value of our exports to China.
I would like to talk now very briefly about major Chinese government restructuring, which is unprecedented, and what the implications of that may be for Canada. The National People's Congress has announced an ambitious plan for restructuring that would be the most radical change in China's bureaucracy in the last 20 years. During the ninth session, outgoing Premier Li Peng was frank about the problems facing China and unequivocal about the solutions. He said that massive restructuring of the vast Chinese bureaucracy was necessary to prepare China for the future, realizing economic changes in China requires a more modern form of government, with clearer lines of responsibilities for ministries and avoiding duplication. It would force the civil service in China to catch up with the economic changes of the past decade and position China for the next millennium.
The actual plan, which is most ambitious and goes far beyond the EU's plan for unification, involves the number of ministries from 40 to 29 and the lay-offs of up to 4 million civil servants.
Though the impact of these changes on Canadian business would be limited in the short term, of particular interest are the changes that are planned in telecommunications and social security, and the consolidation of planning and regulatory functions for many sectors.
Successful restructuring can only be of benefit both to China and to Canada-China economic relations, and we certainly wish them well in these efforts.
I would now like to focus very briefly on the recent mission to China led by Minister Marchi and the announcement of the Canada-China Parliamentary Group.
The mission to China, which went not only to Beijing but also to Shanghai and Hong Kong at the beginning of April, included 84 companies and four parliamentarians. This includes 25 small- and medium-sized enterprises. Companies participated in all the sectoral meetings with Chinese leaders, and the mission received unprecedented large media coverage in China. Over $800 million in new business deals were signed, with over $48 million in investments. Five companies announced office openings in China, and there are now over 300 Canadian companies with offices in China.
Despite competing trade missions from France and South Africa, who were in China at exactly the same time, Canada was accorded very favourable amounts of time with senior Chinese leaders. Business participants were particularly pleased with access to senior decision-makers that the minister provided by including them in official meetings.
During Minister Marchi's meetings with the new Chairman of the National People's Congress, he announced the establishment of the Canada-China parliamentary group to provide a forum for dialogue between Canadian parliamentarians and members of the National People's Congress. This initiative had also been discussed during President Jiang Zemin's visit to this building in late November. We believe that the parliamentary contacts with China can be useful indeed to share Canadian expertise on a wide range of matters, such as parliamentary rules, separation of the role of legislator and executive branches, and parliamentary procedures that are essential to the development of a modern and representative legislature. China has indicated that they welcome the provision of Canadian expertise to their National People's Congress.
You have been very indulgent in your attention. I would now like to turn to the final area that I wish to address prior to turning the microphone over to Dr. Minden and to Dr. Bowles. That is, where do we go from here? Given that we had over 300 missions to China from Canada last year, where are we going now?
In addition to recent visits by Ministers Marchi, Vanclief and Marleau, the pace of missions by senior ministers and by business groups will not slacken. Minister Manley and Secretary of State Chan, for example, are expected to travel there in May. We will continue to have important commercial outreach into major cities other than where we have an established Canadian office, whether that be in Shanghai, Guangzhou or Chongqing.
WTO accessions clearly remain a priority for Canadian negotiators, and we have told the Chinese that they must come up with a more comprehensive offer that responds to Canadian industry concerns. I anticipate that after the visit by President Clinton to China in June, with movement on the U.S. WTO package, this may help to concentrate Chinese negotiators on the negotiations with Canada.
Sylvia Ostrey will be leading a private-sector WTO seminar in Beijing in July, focusing on regulatory change associated with WTO accession. We also anticipate that negotiations on an investment protection agreement that had been discussed during, and in the lead up to, the visit of President Jiang Zemin and during the visit to China recently by Minister Marchi will be completed later this year, providing greater protection for Canadian investors in China.
In September, the annual meeting of the Joint Economic Trade Committee between Canada and China will also be held. In November, the Canada-China Business Association, which is to be complimented on a role that far exceeds that of almost any other bilateral association that springs to mind, will be celebrating their 20-year anniversary in Beijing.
Honourable senators, thank you very much for your attention. I look forward to your questions towards the end of the session today.
The Chairman: Thank you very much. Now we turn to Dr. Minden.
Ms Karen Minden, Principal, Asia-Pacific Associates: Thank you very much, Mr. Chairman, honourable senators and colleagues. I am honoured to have been invited to speak to you today.
I will present a very brief snapshot of what I think are the key factors in China's economic and political profile in 1998 that would be of interest in this discussion. Following that, I will make some observations about Canada's competitive advantage vis-à-vis China's needs and, finally, suggest some policy implications for strengthening Canada-China trade.
China in 1998: The needs that are overwhelming as China completes almost two decades of rapid economic growth are three-fold: the need for skilled human resources, for infrastructure and for modern economic and political institutions, including the financial system, legal institutions, which can interface with the rest of the world. In spite of the stellar statistics and economic growth -- and Margaret Huber has outlined those in some detail -- the growth over the last 20 years has been quite remarkable, but recent assessments of Chinese economic sustainability highlight some of the weaknesses which really plague its economy.
The Global Competitiveness Report, for example, ranks China 29 out of 53, compared to Canada which ranks number 4, Singapore, Hong Kong and the U.S. at 1, 2, and 3 respectively. They assess countries based on infrastructure, openness in trade, financial markets development, regulatory environment, technology management, and political legal institutions. China is not a total basket case, but it is not up there in the top 15.
Another organization, Transparency International, ranks China 41 out of 52, compared to Canada who is in the number 5 position, based on perceived level of corruption. The kinds of things they look at are how tariff barriers are circumvented, for example, by bilateral concessions, the impact of non-tariff barriers which make trade difficult -- and Ms Huber has referred to some of those -- intellectual property rights, standards, and licensing procedures which may be unpredictable and not transparent. On the corruption scale, China again is in a precarious position.
Finally, the UNDP's human development index ranks 175 countries for literacy, education, life expectancy, and purchasing power, among other things. China ranked 108, compared to Canada in first place -- we did not know we had it so good -- and the U.S. in fourth place.
What are China's strengths? At the moment, it is currency. The Ren Min Bi is stable and is predicted to remain stable for at least a year. Export growth is quite strong. There is a very small short-term foreign debt, so it is not in the kind of vulnerable position of some of the other economies in the region.
China has huge reserves, estimated at U.S. $130 to $145 billion, depending on the source, and very strong leadership in place after the Fifteenth National Party Congress. Jiang Zemin is regarded as capable, with a relatively strong and broad power base. Zhu Rongji is regarded as a supporter of Jiang. In other words, the internecine fighting that has characterized other regimes may not characterize this one. He is regarded as being exceptionally capable and one of the more ethical Chinese leaders, and he has strong international support.
If you look at the succession, those leaders in their fifties and sixties, as they are coming down the pipeline, are being groomed for succession. Succession is becoming increasingly predictable in China, if things continue as they are.
We have already alluded to China's weaknesses, but let me just focus on a few. The reform of the state-owned enterprises with no social safety net in place is really a huge risk to social and political stability. Under the commune system, people were taken care of from birth to grave. When it was dismantled, there was nothing to replace it. Great-West Life and Manual Life have not been able to fill the void.
Apparently, about a third of the SOEs, the state-owned enterprises, mostly in the industrialized north and employing about 200 million people, are not viable. They are propped up by government loans.
The domestic banking sector is largely insolvent. The loans to companies are based on political criteria, as opposed to financial criteria. In fact, I have heard numerous comments from people who know much more about the WTO and finance than I -- and I am hoping that Paul Bowles may be able to expand on this -- that if there were immediate compliance with WTO, China's domestic financial sector would be bankrupt. There is a weak human resource base in law, finance and management which is a resource base that is required for global economic relations.
The key issues facing China are how to transform a centrally planned economy to a market economy and still balance the demands for social stability. The relations with the U.S. and dispute over WTO accession are a vulnerable area because of U.S. domestic politics, in large part. The challenge to build institutional capacity to receive a higher level of foreign investment so that infrastructure can be developed is probably going to be the key to sustained economic growth. That includes the legal and the business environment as well as the banking sector, which will have to be more transparent. That will have to take place in a culture which has no tradition of the rule of law. We are talking about thousands of years of very rich tradition, but rule of law is not one of them. If there is a change, it will be a real cultural revolution as opposed to the last one.
What is the match between Canada and China? The trade picture now, as we have heard, is not as impressive as it could be. It is dominated by cereals. The figure I have is 37 per cent, but I think Ms Huber's number is probably more reliable. This is followed by other natural resource sector products: wood, pulp and paper, ores. The share in China's trade is up 0.2 per cent from a few years ago but down from 1992 levels, and it is still relatively small, at about 1.5 per cent. Exports in 1996 were below 1995; imports are up.
What are Canada's strengths, because there are many, and what are some of the opportunities? Canada is regarded as an honest broker without any history of imperialism in China, and we are very close to the United States. In fact, a number of us who are involved in Canada-China relations non-officially get phone calls from Chinese organizations asking for advice on how to deal with the United States because we understand them best, apparently.
We are in an excellent position to follow our policy of encouraging China's entry to multilateral organizations. We have excellent capability in education and training to meet China's HRD needs. China is actively seeking to diversify its trading partners away from an over-dependence on U.S. markets, a lesson we should all heed, I think. We have world-class infrastructure capability in this country. We have geographic similarities: a large area with cold climate, vast distances, difficult natural barriers. We have excellent science and technology resources, engineering, environmental technology, R & D, and high-tech manufacturing. We know how to manage social services, certainly better than China, and we know how to manage health care services and delivery as well within that category.
What are some of the implications for the Canadian approach to strengthening economic preparations with China? First, I would suggest emphasizing and supporting an HRD component to trade and investment. For example, the Bank of Montreal is training Chinese bank executives, a number of whom obtained degrees in engineering from the Soviet Union in the 1950s. This is not an appropriate background for being the CEO of a bank. Their goal in doing this, of course, is to open more branches as opposed to just representative offices in China.
There have been some CIDA partnerships with business where there are HRD components. There would be, I think, marvellous opportunities for partnerships between educational institutions and industry, and perhaps some tax incentives which would encourage that. The HRD component in trade and investment is a very important opportunity.
Second is to invest in and exploit the high-tech component of our natural resource sector. There are two reasons for doing this: The first is that, although our labour costs are very high compared to many of our competitors, especially in Asia, the high-tech aspect of our goods and services make us more competitive, for example, bulk materials handling, transportation, information technology, and management of the natural resource sector.
The second reason for investing in this area is to promote the services trade which is clustered around each of those natural resource sectors, and in which we have tremendous expertise in this country.
The third area is to assist China in developing legal and financial institutions, and as you have heard, this is a conscious policy effort: management systems, environmental management. I would add that it is very useful to utilize Track II and Track III organizations to do this as opposed to just government-to-government in developing these institutions, Track II being non-official business government academic organizations and Track III being academic partnerships. Those levels do permeate to Chinese officialdom.
The fourth is to approach the China market as sub regions, looking at Beijing and Tianjin as one key region, Shanghai and the Yangtze River delta as a second, and Guangdong and the Pearl River delta as a third. Going back a hundred years in our history when all those areas were already populated by missionaries from Europe and the United States, Canadians looked to the far west of China, and I think could well do so again, looking to Chengdu, Chongquing, and the west China plain. Sub regions are more manageable and they make good business sense for Canadian companies.
The fifth is to encourage small Canadian firms, and even the big ones in this country are small by international standards, to leverage their entry into the market by partnering with more knowledgeable, experienced players, including Asian Canadians, third country partnerships, working through U.S. companies, Australian companies, New Zealand, Singapore, Malaysia in particular, and large companies like Siemens and Hopewell, which are in areas where there is Canadian competitive advantage.
Finally, it will be very important to respect China's sentiments that they are an ancient and rich civilization and they do not appreciate being lectured to by barbarians, as Henry Kissinger said. I do not think he was the first to say that.
I would say that it is important to design our bilateral and multilateral projects with mutuality as a key component. Whether ingenuous or not, it will be very much appreciated if there is some overture to the Chinese to teach us back on the areas where we presume to teach them. In that way, I think there would be a tremendous gain of knowledge, but even more important, a gain in goodwill.
In conclusion, I think we understand that China is very likely to be the largest economy in the world and that the demands for transparency, predictability, and rules-based trade by international business will have an enormous influence on political reform and will work faster and more efficiently than political reform alone in that country.
The Chairman: Thank you very much.
I have been looking at Dr. Bowle's CV and I see various interesting items of experience. I do not know which one he is going to concentrate on, which ones he is going to draw upon in what he is likely to talk about this afternoon. Is it the macro-economic effects of foreign aid, or is it going to be the reform of China's financial system? Well, Dr. Bowles, reveal the answer.
Mr. Paul Bowles, Professor of Economics, University of Northern British Columbia: Mr. Chairman, my two colleagues have spoken on Canada-China relations, and I thought I would concentrate today just by outlining some current issues in the Chinese economy.
I would like to touch on three points: first, to provide the committee with some context within which to analyze Chinese economy; second, to look at the current context, current events; and third, to talk about the impact of the financial crisis, the Asian financial crisis on China, and Chinese analysis of that crisis.
I would like to start by talking briefly about the context for any analysis of the Chinese economy, which I think has to start with an acceptance of the fact that there are reform cycles, that the period since 1978, since the economic reforms have been introduced, has had a number of distinct cycles.
There are three components to these cycles. Those are what I call macro-economic, macro-political, and ideological, and I will explain what I mean by each of those terms.
There have been discernible macro-economic cycles in China. In fact, it is estimated that China doubled its per capita GNP in ten years -- which is the fastest time in human history apparently. It has been cyclical around that trend of high growth. However, there have been periods of hyper-growth and high levels of inflation -- and by high, I mean around 20 per cent per year -- which have then been followed by periods where the attempt has been to regain macro-economic control, lower inflation at the cost of lowering growth. That is the first point that we need to take into account.
The second component of the reform cycles has been what I have called a "macro-political effect," which is the relationship between central and local governments. Provincial, or local, governments are very powerful in China. They are not small entities; the population of some of the provinces is 60 million people. Their power has "ebbed and flowed." Efforts to recentralize power by the central government are in place.
The third dimension is an ideological one. By this I do not mean political reform, which is a different topic, but rather what is economically acceptable. What is the relative role of the market versus the plan? Should there be privately owned shares in China? Should there be stock exchanges in China? Should privatization take place? What should be the institutional design of the economy? These areas have all been contested, as China has changed its description of itself from a planned economy to a planned commodity economy and then to a socialist market economy. All these changes in names, which appear rather confusing, mean something about what is economically acceptable as China continues to develop.
Each of these three components are interrelated, so that when inflation has been the concern, the macro-economic agenda becomes one of lowering inflation. How is this achieved? It is done by recentralizing political power into the central ministries in Beijing and by reducing the role of the market and the need for planning. So they are inter-related but they are not identical.
There have been at least five main cycles in the reform period since 1978 <#0107> if memory serves me. One would expect these to continue, so when I talk now about the contemporary situation, what is happening now in 1998, it should be borne in mind that what happens today is not necessarily what will happen in five years' time. There are these cyclical effects.
What does the current cycle look like? Let us take the macro-economic dimension first. In 1992 to 1994, inflation reached, officially, 21 per cent in China. It was a period of hyper growth, characterized by 12 to 13 per cent growth per year. In the last few years, inflation has now been under control, brought down from about 20 per cent to 1 to 2 per cent; growth has been brought down from 12 to 13 per cent down to 8 per cent.
The past few years have been a period of recentralization of control. It has been achieved with the new Premier of China, Zhu Rongji, who fired the head of the People's Bank of China and replaced him with himself. He said, "I am going to take direct control of this." By doing this, he said to the provinces, "All that investment in real estate, cut it out. We only want productive investment." He fired bank managers on the spot if he thought they were giving too many loans.
This recentralization process did result in bringing down inflation, and the Chinese macro-economic performance over the past few years has actually been quite impressive. They have managed to reduce inflation with "soft landing" -- a term used by economists. What was emerging as a bubble economy with speculation in real estate and land assets was brought under control.
The problem is how to maintain levels of demand where inflation has fallen but where they do not want growth to fall below 8 per cent, because it would lead to problems in terms of providing sufficient employment for a growing labour force. There is still high foreign direct investment and China still has a large trade surplus. Externally, those things look good. The concern now is to maintain sufficient growth rates to absorb a growing workforce without rekindling inflation.
Where are we in the macro-political cycle? As my two colleagues have mentioned, there have been some very interesting institutional changes. The institutional change which has garnered a lot of attention is the one which has been mentioned, the reduction in the number of central ministries. This is important because these industrial ministries were seen as obstacles to the reform process.
Essentially, each ministry was protecting its own turf -- industries and enterprises -- and blocking attempts to reform those enterprises. This is an attempt to reduce the centralist nature of the Chinese economy and make firms less able to call upon superior government ministries to protect them from financial losses. That is a very significant and important change.
Along with a reduction in the role of central ministries there has been an attempt to strengthen some other central institutions, to insulate central institutions from provincial pressures. The most important example of that is the People's Bank of China, the central bank, which has had on its board provincial representatives and has operated both at the central and provincial level. The current plan is to have branch offices at the regional level, instead of provincial branch offices, thereby diluting the influence of provincial voices.
Hence, some very important institutional changes have taken place, some of which have resulted in reducing the role of the bureaucracy, others which have resulted in strengthening parts of the central institutions, too.
The third component, the ideological component, is that state-owned enterprises will be privatized. There has been a large debate in China about what to do with the state-owned enterprise sector. It has been less important in terms of its contribution to national output but it is still very important in terms of employment. Urban employment is based upon state-owned enterprises, which employs about 120 million workers. A huge debate has taken place where some have argued that the socialist system should have state-owned enterprises as the dominant component in the economy. This has now been revised. It has been let go.
At the last Party Congress, last November, the Chinese came up with the phrase "grasp the large and let go of the small"; in other words, keep the large state-owned enterprises but let go of all the rest, privatize them. The Chinese planners have two objectives this year: one is to have 8 per cent growth; the other is to lay off 10 million workers in state-owned enterprises.
If that happens, there will be a huge ripple effect, because even if this target is not met -- and I doubt that it will be -- even if they only achieve half of it, that is still a lot of people to be laid off. The local governments, provincial governments, will try to find jobs for those laid-off workers. Because these new jobs will not be as rewarding, the workers who have been laid off will be a potential social threat.
The new jobs to which they will be sent have historically been filled by migrant workers who have flooded into China's major cities. There is the prospect now that those migration flows will stop or, at least, be slowed down considerably as the pressure on urban jobs becomes more noticeable. Migrant workers will be prevented from leaving their home provinces, and so the problems of absorbing those workers will become real as well. There is potential for social unrest and labour problems in both the urban and the rural areas as a result of the fall-out of these policies.
Regional tensions will further intensify as workers from the inland provinces will find it more difficult to get jobs in the urban centres. Income inequality differences will intensify. Levels of income vary widely in China. While it is true that poverty has fallen dramatically in the past 20 years, there has nevertheless been an increase in income inequality, a situation that will become more severe.
There appears to be a big change in the ideological front, where the government has gradually, in previous years, ended its commitment to provide jobs for all urban residents but nevertheless has protected those workers who have had jobs in state-owned enterprises. By and large, it now looks as if that is about to change.
I come to my third area, which is the impact of the Asian crisis on China. First, the Chinese themselves view the term "the Asian crisis" as a misnomer. They argue that there is not one Asian crisis, but two. There is the Southeast Asian crisis and the Northeast Asian crisis, each one of which has different causes. They view, and I think correctly, that the problems in Southeast Asia, in Thailand, Indonesia and Malaysia, were caused by overexposure to foreign direct investment and to short-term capital inflows, and over-reliance on short-term capital inflows.
The Chinese argue that they have managed to escape precisely because they have not tried to attract hot money into various financial assets in China, unlike the so-called emerging markets of Southeast Asia.
The South Korean financial crisis has different causes. It is not due to these short-term financial flows. Rather, it was because of the relationship between banks and enterprises. Banks were unable to stop lending money to enterprises because of various political pressures, and as a result became overextended, and the financial crisis has resulted from that.
The Chinese have learned from this to continue with their financial reforms, to try to add impetus to their desire to sort out the state-owned sector and to make their financial system more stable.
One of the reasons why China is reluctant to devalue the Ren Min Bi is not simply because of the external effects -- the effects it would have on other countries -- but the effect it would have internally. The Chinese government fears that its citizens will lose confidence in their own currency. If Chinese citizens, who have large sums stashed away in Chinese banks, decide that the currency is likely to be devalued and become worthless, they will try to stampede into other currencies, and that would lead to a domestic financial crisis.
In that way, the Chinese banking system is quite precarious. There are significant bad loans, and so any attempt by depositors to withdraw their money could lead to a potential crisis. Therefore, one of the reasons that the Chinese government wishes to maintain the value of the Ren Min Bi is to ensure domestic confidence in its own currency.
The third point that I will end on is China's view of the region and its role in the region. The Asian crisis has increased the importance which China attaches to itself in the region. There are many different analogies about how one views the Asian region or the Asia-Pacific region. In fact, there are competing ways of constructing the region. Should it just be East Asia or should it be Asia Pacific?
The analogy that the Japanese like best is the flying geese model, where Japan is the head goose, Taiwan and Singapore are the next geese, and all the other economies fall behind in a nice V-shape. In this model, Japan is the technological and economic leader of the region, with some technological gradation.
The Americans, of course, like to see themselves in the picture, too, and have the hub and spoke analogy, which I am sure you are all familiar with. It is no surprise that the U.S. is the hub and everyone else is at the end of the spoke.
The Chinese have viewed the region as a train with two engines, where China is the lead engine, Japan is the rear engine, and all the other economies are being pulled and pushed along by these two dynamic economies. The Japanese engine has now come off the rails and so China views itself as a much more important regional player, as the largest and most dynamic economy in the region, and it attaches more importance to itself as a result.
The Chairman: Thank you. We have had three very good presentations. We are most appreciative.
Senator Bolduc: In the past, grain distribution was one of the macro-political instruments that was used by the centre to keep control or to try to control the provinces. Now that the food problem has been solved in that country, do I understand that this mechanism is no longer useful in macro-political terms?
Mr. Bowles: Yes, your understanding is correct. It is still an issue. The central government is unable to use that as an effective tool for disciplining the provinces anymore. The government is now concerned because the rush for high-speed growth has meant that municipal, township and provincial governments, have been opening special industrial, technical and export zones everywhere and converting farm land into industrial land. The macro-planners in Beijing are quite concerned about the speed at which agricultural land has been converted to industrial uses. That is a contentious issue between the central government and the provinces now, but it has changed from the situation you described.
Senator Bolduc: I would like to come back to the problem of the state enterprise. We are talking here about 300,000 state businesses. What is the percentage of those businesses in the whole economy? Is it, for example, 80 per cent of the economy?
Mr. Bowles: In numerical terms, it is probably quite small because there are many thousands of small businesses, private businesses, township and village enterprises.
Senator Bolduc: A few years ago, I read statistics which indicated that, even though there was a lot of privatizing, the market economy comprises only about 15 per cent of the economy, in comparison to the state-owned enterprises, which accounts for something like 80 per cent. Is that possible? I do not think so.
Mr. Bowles: It depends on what it is a percentage of. If it is a percentage of industrial output, then what has happened in the reform period is that state-owned enterprises, as Ms Minden said, started off with around 80 per cent of all industrial production being produced by state-owned enterprises. It is now down to about 35 per cent. What is in between is not necessarily private. Although we do not call them state-owned enterprises, there are township and village enterprises which are owned and operated primarily by township governments and village governments.
"Township" and "village" are what used to be "communes" and "brigades." When they abolished the communes, they were abolished as political units but they stayed as administrative units and became townships. Those townships now run a large number of their own enterprises. SOEs account for about 35 per cent of industrial production; township and village enterprises account for about 40 per cent.
Some of those are private enterprises in disguise. Undoubtedly, some of them are. They call it "wearing the red hat" because you pretend to be a collective when you are not really. We do not have any firm evidence on how much of that sector is private and how much of it is really owned by local governments. My own guess is that most of it is local government-owned. Then on top of that you have the foreign sector, the joint ventures, and the private enterprises, which may make up 20 per cent of the economy now. Although we say that state ownership has decreased, that is really central state ownership. Local state ownership has increased.
Senator Bolduc: That is why the huge decrease statistically will not involve so many people, even though 5 or 10 million is a lot of people. What you said is that those workers will go back or will try to get jobs somewhere within their township. Do you not fear that there will be tremendous social stress if you couple that with the problem of the financial institutions? They have a huge real estate problem in many cities. I read an article recently by a British economist, and he was very pessimistic about China. He said, one way or another, pretty soon it will somehow boomerang.
Mr. Bowles: I am trained as an economist, too, so I am naturally pessimistic as well.
Senator Di Nino: I address my first couple of questions to Ms Huber. How reliable, in your opinion, is the data that we get from the Chinese?
Ms Huber: I have to say the cliché about "lies, damn lies, and statistics" is one that I actually believe to be very true, whether you are talking about China and statistics or not. Statistics can be manipulated. Hard data is hard to get. I think the discussion between the senator and Professor Bowles about state-owned enterprises and exactly how many there are illustrates that.
Much depends on your definition of terms. Depending on your definition, whether there are 200,000 state-owned enterprises or whether there are 80,000, as was mentioned by the deputy chairman of the agency responsible for state-owned enterprises who attended the Canada-China Business Council annual meeting in Toronto last November, in a way it is neither here nor there. Either way, it is a huge number.
The challenge facing Zhu Rongji, the entire leadership, and the Chinese people, is enormous by any scale. Certainly, getting more accurate statistics or more accurate data continues to be a challenge for all of us.
Senator Di Nino: Is there any way that you can verify some of this information when you are providing information to potential investors, or do you basically have to take it on blind faith?
Ms Huber: Blind faith in any enterprise, particularly a business enterprise, is not a policy that one would advocate. We certainly use all the tools at our disposal, such as information reports that are available here by participating in organizations like the Canada-China Business Council. We are not only able to tap into their data and their network as well, but we can also speak to other companies who have much lengthier experience in China, and we use our own network. There was talk of regionalization, for example. We have been increasing the number of our own offices in China and our missions, not only to the principal cities that easily spring to mind but also to some of the other centres.
There is no fast, one-stop solution for a company that is thinking of investing or entering into a business partnership in China, but there are many sources of very valuable information.
Senator Di Nino: Dr. Minden, I wonder if you could answer a question for me. After an incredible investment of funds, time, and energy over the last four years, it seems to me that the only thing we have achieved in dealing with China is to increase their exports to us tremendously, and actually reduce our exports to them. Am I correct?
Ms Minden: The market share is reduced.
Senator Di Nino: Yes, if you put it in those terms but, in effect, the trade deficit has increased tremendously. All of our effort, including our position on human rights with China, has only resulted, it seems to me, in a tremendous increase of China's exports to Canada, while our exports to China have actually decreased. Is that correct?
Ms Minden: The market share has gone down. In fact, the analysts' popular analysis of this is that while the government has led a number of trade missions and we have made the connections, Canadian business has not been very aggressive in following up. The perception of Canadian business in Asia generally, and in China in particular, is that other than a few companies who really do extremely well, many companies go over unprepared and it takes a very long time before they realize good returns.
Senator Di Nino: We are not going to get into that because the last time we did this, I think we also got some of the witnesses to agree that perhaps we in Canada are not doing a good job of preparing these companies anyway.
When we are dealing with China, with the kind of country it is and with the kind of regime that it has, are we able, to the degree that we can, to make sure that the imports that we have are not coming through child labour and prison labour and misuse and abuse of labour in parts of the country like Tibet, where China is an occupying force? Can we find a way to ensure that is not happening? Do you have any information on that?
Ms Minden: I have some general information. I will defer to my colleagues, but let me begin an answer, if I can.
It is impossible to be 100 per cent sure of the origin of your goods, and to know whether there has been any prison labour in particular. I think it is important to keep in mind that there is also a very different concept of penal reform. There is a philosophy of reform through labour. The Chinese feel that Canadian prison systems are very costly and that prisoners sit there and rot, whereas their prisoners are reformed through labour.
Senator Di Nino: One other quick question, and I am being a little facetious. When you talk about the HRD component, are you talking about human resources and not human rights?
Ms Minden: Yes, I am.
The Chairman: Ms Huber, do you want to add anything?
Ms Huber: If I could just add, as Dr. Minden indicated, yes, the trade balance overall may appear to be not as favourable as several years ago, if you figure that our position in terms the Chinese market share is perhaps smaller, but it is a smaller slice of a much larger pie. When you take away grain exports, which can be cyclical for a number of reasons, including the supply situation in Canada and current grain prices, then I think that the growth, particularly in value-added areas and in the service sectors, is a source of pride for Canadian exporters.
I agree that we can and should be doing a better job in preparing Canadian companies to ensure that they have, and are using, all the tools at their disposal. We are certainly working very vigorously in that regard. I do not mean just my own department, for we are working in cooperation with other partners, interdepartmentally, whether it be Industry Canada, Agriculture Canada, or CIDA, and particularly with private sector groups such as the Canada-China Business Council. We recognize that there is significant room for improvement.
Senator Di Nino: You do agree, though, that the Chinese have done a much better job of selling to us than we have of selling to them?
Ms Huber: That is hard for me to comment on since I do not really look closely at how they are selling to us. I would note, for example, that the Chinese are being much more assertive and self-confident. They not only weighed in with some of their Asian neighbours in their time of crisis, and I am thinking of Thailand and Indonesia, in terms of coming up with billion-dollar guarantees for their second line of defence, but China has also invested in Canada. For example, I understand that there are about nine investments in Alberta in the oil and gas sector which are quite significant. They are an indication of how the investment relationship between Canada and China need not be one way.
The Chairman: I have a question that is prompted by Senator Di Nino's question. Reference has been made to the decline in our grain exports to China and then another reference was made to the urbanization of agricultural land in China. That prompts me to think of another point: What is happening with regard to their population policy?
Let us go back over those points the other way. How successful is their population policy? Are they building houses and factories on their good agricultural land, and will the result be that they are going to need to import more foodstuffs from countries such as Canada? Dr. Bowles, is that in your area of expertise?
Mr. Bowles: Not really, but I will have a go at answering it. The population policy was very successful in restricting population growth, often coercively. I would say it is beginning to break down now. In the urban centres, the one-child policy is still pretty much in place but I am told that, in the rural areas, the measures of population control are weakening significantly because in order to effectively police that, it is necessary to have strict enforcement of the so-called Hukou system, the household registration system. Those household registrations still exist but, with increased mobility, they are more difficult to monitor.
Projections about China's coming agricultural crisis, as it is often referred to, vary widely because, again, it depends on how reliable you think the statistics are about how much arable land is actually being used in China and how much could be used. It depends upon your assumptions about what yields those could get, which depends upon better use of fertilizers, better use of irrigation, and the extent to which current yields fall below that.
There has been an incentive for many local governments to underestimate the amount of land which is actually in agricultural production. If one of those figures is wrong, you do not really know what the current yields are. We do not really know what an accurate figure for current yields are. We do not really know how much those yields could be raised by better farming techniques. That gives you a big scope for either saying that there is going to be a huge shortfall and China is going to be importing 50 per cent of the world's grain surplus, or for saying that it is looking not too bad. I am not an expert in these areas so I cannot say which of those projections I found most reliable, but that is why you get those differences, why you see some alarmist projections of huge shortfalls, and some which say the crisis is manageable.
The Chairman: That is very helpful. Dr. Minden.
Ms Minden: I think there are three issues which might be interesting to add to Dr. Bowles' comments. The first is that the one-child policy and the dismantling of the agricultural communes were instituted at about the same time, in the late 1970s, and they are contradictory policies. If you privatize the agricultural system and you take away the social safety net, then the more children you have, the better your social welfare in your old age and the more money your family will make in agricultural production. Therefore, that has been a very difficult policy to convince the peasants to follow.
The second issue is corruption. You have government officials who were seizing agricultural land, putting barricades around it and saying this is the future home of a joint venture between some fictitious company and our little regional government.
The third issue is a change in diet. With urbanization, more people are moving to a high protein, especially meat, diet. Professor Vaclav Smil at the University of Manitoba is actually a world authority on the food crisis in China.
The Chairman: Am I correct then in thinking, from what you have just now said, that because of urbanization, because they are eating higher up on the food chain, as it were, the pressure on the bottom of that chain is even greater.
Ms Minden: Yes.
The Chairman: The food is in a more concentrated form.
Ms Minden: It will be. I do not think it is so widespread at this point, but it certainly will be. There is much more meat in the diet than when I was a student in China 25 years ago.
Senator Milne: I am new to this committee, and I have just thoroughly enjoyed this afternoon. I have learned a great deal. I am a little concerned, and I am curious. Perhaps Ms Huber or Dr. Bowles could help me understand more of the mindset of the present government leadership in China. Do you see any move towards setting up social systems to deal with these 10 million people that you feel are going to be laid off as they gradually privatize some of the government industries or enterprises? If you foresee social unrest occurring because of these massive lay-offs and lack of a social structure to deal with them, how do you think the present government will react? I am asking you to foretell the future here because I think most people, in this part of the world at least, think with horror of Tiananmen Square.
Ms Huber: Like Professor Bowles, I would consider myself not to be of the optimist school. I usually prefer to reflect on worst-case scenarios, and then if I am pleasantly surprised, it is always a joy.
In the case of some of the enormous problems that we have been discussing that are facing China, one of their strengths, I think, is that many of these problems have been brought out into the open. Unlike some regimes in the region that could be described as being in a state of denial, China is not, I believe. The Fifteenth Party Congress that was going on when I was in Beijing last October was really unprecedented in the frankness of some of the discussion on the problems of the upheaval that the privatization of the state-owned enterprises would cause in terms of unemployment, in terms of the corruption problems. This was discussed very frankly and openly, including in the media. Premier Zhu Rongji has been quoted as saying that he wants to have twelve bullets: eleven for corrupt party officials and the twelfth for himself in case of backlash.
China certainly has been looking at other models that they are trying to adapt to Chinese needs. There have been, for example, a number of missions that have come to Canada to look at our health care system, at our pension plan. The Deputy of the Treasury Board will be visiting China soon for further consultations on the approach taken by Canada for many of our public policies. Our ethics commissioner, in fact, will be accompanying him, continuing dialogue that began in 1995, with a mission by Howie Wilson to Beijing that was followed by a return visit from Beijing to Canada.
All this is to say that, yes, there are enormous problems. In some areas, the shape of some policies is now starting to emerge. For example, China has made statements about policy changes in the housing area. It plans to privatize housing, which is a major change, allowing people to purchase apartments and other units. In some cases where people have lived in an apartment for a number of years, there would be a commensurate reduction in the price reflecting their "grandfather tenancy," so to speak.
I think the cheering aspect is that nobody appears to be underestimating the scope of the problems.
Senator Bolduc: We talk about maybe ten million people being laid off. I vividly remember being in Romania in 1972 and also what happened in East Germany, where the level of productivity of the people working in state enterprises was about a third of what was happening in West Germany. When I see that there are about 170 million people working in state enterprises, I say to myself, maybe it is not 10 million we are talking about, maybe it is 20 million, and that is a huge problem. Do you think it is more realistic to speak about 20 million than 10 million?
Mr. Bowles: The Chinese government's plan is to turn around state-owned enterprises over the next three years. The 10 million is just the first step. Their own researchers estimate that about 30 per cent of workers in state-owned enterprises are superfluous. That figure could be 10 million this year, 10 million next year, 10 million the year after.
Senator Bolduc: I suppose there are also a few million in the civil service itself.
Mr. Bowles: Yes.
Senator Bolduc: I remember, in Romania, we visited a huge manufacturer. It was a factory producing tools and similar items. We met with the manager and he said, "We are very efficient" and all that stuff, and he had statistics on the wall. But I was walking in the shop for about half a mile and noted that one in three or four tool-making devices was not working. They were all from Italy and Switzerland and West Germany. I was completely scandalized.
When we got out of there, I told the manager, "Maybe your quota for the month is okay but when they work in Providence, Rhode Island, or in Rockford, Wisconsin, in the tool and die business, when they are on vacation, they are on vacation, and nobody works, but the rest of the time they are all working; all the machinery is working." If the situation in China is similar, they will have the horrendous problem they had in East Germany.
Senator Andreychuk: We have covered the problem of the displacement of people. As China moves to the changes it claims it will be making, the hope for its success lies in how well it addresses the social problems that arise along the way. I think we have talked about that. It also lies, as I understand, in the rule of law gaining some foothold in that country and in ethical leadership.
On the issue of ethical leadership, there have been cycles of change. The literature I have read suggests that more purchasing power, money, is being put into the hands of fewer people as these changes have occurred. The dynamic of corruption is raising its head in China in the sense that, as state-owned enterprises are being dismantled, private enterprise is being consolidated in a few. Am I correct that this is a cause of concern because, in this transition, you have civil unrest, but you also have the rich getting richer and the poor being more marginalized? Is there a significant middle class appearing to buffer that problem?
Ms Huber: One thing that I would note is that in any economy or society where you have heavy regulation, not only is this enormously inefficient from an economic point of view, but it does present opportunities for corruption. The moves toward de-regulation that China is trying to make and, quite frankly, is being pushed to make, as well through their interest in joining organizations like the WTO, will, in fact, moderate some of the tendencies towards corruption.
To answer your other question with regard to a middle class in China, I think it probably depends very much on place. I visited Shanghai five years ago, for example, and I was really struck by how different it was from my expectation. At the time, I was our Consul General in Osaka. The Osakans are very lively and have a strong fashion sense. The streets of Shanghai seemed remarkably similar in many ways. It was not the uniform regimented society that I had been expecting.
Since then, the economic growth that cities like Shanghai, particularly the coastal cities, have enjoyed, has permitted more of a middle class to grow. In fact, during the visit by President Jiang Zemin, I recall a discussion with the Ministry of Foreign Affairs Vice-Minister Li Zhaoxin, who was complaining of the difficulties that the foreign affairs ministry is having attracting talented young people to come and work for them because they would much rather go and work in the private sector, whether in foreign multinationals or in the domestic Chinese private sector, to make their way in the world.
Ten years ago, that would not have been a problem. On the one hand, you have a burgeoning private sector. On the other hand, yes, indeed, there are corruption problems, but both may to some extent be attributed to the economic growth that China has enjoyed.
Senator Andreychuk: Do you see the Chinese development as being close to that of the other Asian economies, or is it unique? When the leaders in some of the other countries could have been manoeuvred, they certainly consolidated power and formed these unique relationships between banks, state and enterprise. Is there a tendency to do that in China, or do you believe that they will studiously avoid the temptations of the Indonesian model, for example?
There has not been an opportunity in the past, but there may be now. You seem to say that there is hope that the new national leadership is ethical. If they are not, do you not see the same kind of temptations being set up in China? Perhaps in 20 years they will find themselves with consolidated power and performance.
Ms Huber: In the discussions last November that President Jiang Zemin had with the Speaker of the Senate, Senator Molgat, President Zemin mentioned that in the case of his two children, he had told them both to stay out of politics and to not follow in his footsteps. I am not sure that some other Asian leaders have been quite as self-restrained.
Ms Minden: I have three comments. First, what will happen to the Chinese economy with the release of all these people? Although I usually am a disaster scenario type of person, like my colleagues here, I am heartened by what I know about Chinese history. Over hundreds of years there has been a vibrant domestic economy with sophisticated exchange and distribution systems through a rural marketing system. It was effectively suppressed by the communists, but it has popped back up after years of really devastating conditions. Anyone who has seen a traditional market day in a Chinese village will have a visceral sense of the vibrancy of entrepreneurship and the sophisticated organization and distribution skills in China. There is some hope there. The bad news is that entrance to the huge domestic market which foreigners look to and salivate after will very likely be competitive because of domestic suppliers.
Second, what model are the Chinese considering? While the children of high-ranking officials may not go into government, they certainly use their government connections to improve their business. I do not think you will see the kind of dynasties that you see in Indonesia, for example. My understanding is that the Chinese were looking at the Keiretsu and the Chaibol models in Japan and Korea respectively and have decided, in light of the Asian crisis, that they must come up with something unique and different.
Third, I turn to the state of social welfare. I do not think the Singaporeans are exaggerating their worth, but they do have a substantial role in advising China on social welfare models that are based on a free-enterprise model. That is a significant factor to review. It is something Canadians could study as well in terms of managing pension plans.
Senator Andreychuk: As a country we have gone into China and taken a generalist approach, regarding it is a huge and open market, with opportunities for everyone. Would we not do better to really target education and human resource training services? Would that approach not be more successful for the businesses that we nurture, and in the long run would it not be a better investment for China?
Ms Minden: I would not advocate exclusively targetting education.
Senator Andreychuk: How about human resource development?
Ms Minden: There is some consensus that we are not competitive in the manufacturing sector except perhaps in a few niche markets. It is too competitive in China for most Canadian companies. However, we are very competitive in services in some high-tech niche manufacturing areas and educational services.
The Chairman: Would you address the subject of infrastructure?
Ms Minden: I am thinking about infrastructure as being largely in the services area and a few high-tech niche manufacturers.
Senator Hays: Thank you for a fascinating presentation. I wanted to ask for further comment on the WTO's inability to gain access to some aspects of the Chinese economy. You were talking about financial institutions.
In any event, this is an interesting area for China. The U.S. goes through an annual ritual in their Congress of deciding what their trading relationship with China will be for that year. We have a more predictable relationship with them in that regard.
On the subject of the WTO gaining access, the comment was made that this would be a negative thing in terms of the way they currently operate. I would appreciate further elaboration on that.
Ms Huber: First of all, I must say how intimidating it is to be talking about China with Senator Hays, given the wealth of his direct experience with Asia. However, with regard to the question, I do not think I said that it would be negative, precisely. Certainly, a country or an economy joining the WTO is faced with the challenges of transition. The financial sector is an area of extreme importance to any country. Domestic Chinese banks could face particular challenges, especially in the short term. However, in terms of the long-term benefits, not only to a country such as China, but to a financial sector, it would clearly be in China's long-term interest.
Senator Hays: By way of pressing a bit further, any agreement on accession would undoubtedly provide for a long and ample opportunity for the Chinese economy to adjust, probably through establishing tariffs and various other phase-in mechanisms. In this context, are you optimistic about the WTO gaining early access, or what is your prediction?
Ms Huber: In relation to terms of accession, whether you look at past agreements whereby members have come into the WTO, or if you look at Canada's bilateral and trilateral experience with the FTA or with NAFTA, there have always been negotiated terms for defining the periods of accession, whether it is seven, 10 or 15 years, whatever both sides find to be mutually agreeable. This helps to minimize the difficulties. Clearly, in any major change like that, there will be difficulties for some sectors of the economy.
In terms of actual timing as to when China might formally join the WTO, I would not hazard a guess.
Certainly Canada has repeatedly gone on record that not only would we very warmly welcome China as a member of the WTO but that we hope for early accession by China. In terms of driving the timing of that, a lot of it also depends on China and the degree to which they can bring firm negotiating positions to the table.
The Chairman: I want to follow up on that one. It is a question that could have been asked at two or three different points. Let me put it this way. Perhaps the Chinese leadership is anxious to be able to say honestly that they believe that they can fulfil the conditions for access to the World Trade Organization, but have to say to themselves and, by implication, to us that they are not sure that they can deliver. Ought we not to make a distinction between the willingness of the leadership on the one hand and their capacity on the other hand?
What do you think about that? We say it depends on China. Those were your words just now, but who are we talking about when we say China?
Ms Huber: We are talking about their chief negotiator Long and key decision-makers such as Chinese Premier Zhu Rongji. Getting to your point that there may be a gap between what they will agree to and what they can deliver --
The Chairman: I am not referring to what they would like to offer but to what they can deliver.
Ms Huber: Joining the WTO will be a legal obligation. In instances where China or any other WTO member does not meet the terms of its obligations, then a panel can be called and restitution must then be made. So there are avenues of recourse for trading partners of any country found in breach of their obligations.
Mr. Bowles: I have just followed this peripherally. It is not an area about which I have read a great deal. WTO access does hold particular problems for state-owned enterprises in terms of what is classified as a subsidy. China, as we have said, is trying to reform those enterprises but already is finding significant problems. Once you get into defining a subsidy in China, who knows? I would not want to define a subsidy in the Chinese economy. I think that would be extraordinarily difficult.
The Chairman: What about in Canada?
Mr. Bowles: Nor would I want to define one in Canada.
The Chairman: We talked earlier about the size of the country and the diverse regions and then, of course, we talked about the kinds of products, whether they are tangible or intangible, that we would like to make available to purchasers in China. Can your department recruit adequate personnel to serve the genuine need of people who want to do business in areas where it is realistic to anticipate that we can do business in China?
Ms Huber: I have been working directly on managing our China program only for a relatively short period of time, although I have certainly served in Asia for many years. I have been impressed with the dedication of our staff there, not only in Beijing but in the other offices within the region, despite an extraordinary workload that cannot be compared to that of any other region.
I think I mentioned that there were over 300 missions to China last year, all of which received assistance from our offices there in some degree or other. This is in addition to the service to the travelling Canadian public and many other services offered by our missions. We enjoy a lot of dedication there.
Like the points made by Vice-Minister Li, there are also challenges in retaining good staff because of competition from the private sector, particularly for those with Chinese-language skills and given that more and more Canadian companies are setting up offices in China or wanting to operate there. I might add that, at a time when in my department resources are scarce, I have been able to address some of the human resource problems with our China program, not only through redeployment from other parts of the area for which I am responsible, but also by obtaining additional resources, something that, I can assure you, is extremely difficult in our environment.
It is a recognition that the China program is extremely important for Canadian interests, not only in the economic field but also across the board in other fields as well.
Senator Johnstone: Concern has been expressed today, more than once, about the numbers of Chinese who may lose their jobs and positions. My concern, and I hope it is not out of order, is how the financial crisis in Asia may affect our own Canadian workers and our own Canadian companies. It has been suggested that, by the middle of this summer, we will start to feel it. In fact, one of our national magazines has gone so far as to suggest that it will affect our labour greatly.
These countries can under-price and out-produce us. This question has been on my mind for a long time. Is it possible that these countries can put a car on the Canadian market for $3,000?
Ms Huber: Would you want to drive it?
Senator Johnstone: This is what I want to know. What would the quality be? Is this possible?
Ms Huber: I am not an expert in auto manufacturing, but I would note that the cost of labour in the unit cost of something like a car is actually relatively small. The cost is in the high technology, the design component. It is knowing customer needs and customer demands that is particularly important. That is one reason -- one of a number of reasons, granted -- that auto manufacturers like Toyota or Honda have moved to manufacture close to their customers here in North America.
Senator Johnstone: I could take comfort in the fact then that the financial crisis in Asia will not affect our labour to any extent?
The Chairman: I do not want to stop there because I come from eastern Nova Scotia where we catch bluefin tuna, and I can tell you that the boys on the wharf are very uneasy. Some of them catch queen crab and those fellows are very uneasy, too. It is not only the goods coming into the country that might be affected, but also the goods going into the Japanese market. I suspect that the producers of good cognac in France are somewhat uneasy, too. Correct? I think I see a head nodding. Dr. Bowles?
Mr. Bowles: Yes, you are correct. The economy in B.C., where I come from, has slowed down considerably this year,
The Chairman: I think we were told by Tim O'Neill, from the Bank of Montreal, that the result might be a downward pressure of 8 per cent in B.C. and 2 per cent in Ontario, but more in Atlantic Canada. That surprised some of us until we began to think about fish exports.
Thank you, senators. We have had a very good afternoon, almost entirely due to the quality of the presentations from the three witnesses to whom we are most grateful.
The committee adjourned.