Thank you very much，Mr.Chairman. Let me start by saying what a pleasure it is to be here！This is my first visit to Lingnan University，but not my first visit with Professor Chen. So I want to say，first，what a pleasure it is to see him again-we have worked together for many years on APEC and other issues- and also to congratulate him and Lingnan for becoming a University and having this wonderful new campus and facility here in Hong Kong.

It’s also a great pleasure to see friends from the Chinese Academy of Social Sciences，who are among the co-sponsors. It was a great honor for me，during a visit to Beijing about two years ago，to be made an honorary fellow of the Chinese Academy for Social Sciences. I can tell you that the plaque they presented to me has a very prominent place in my office in Washington，as I am very proud of that. It is a pleasure to be back here meeting with all of you today.

As our Chairman said，I am pleased to lead off，and I will hope to leave substantial time for discussion，because I am very interested in getting your reactions to what I have to say and in discussing how we can move forward in Sino-American economic relations and，more broadly，China’s role in the world economy. I would echo what Professor Chen said-that this may turn out to be a historic moment in Sino-American economic relations and broader matters. I must congratulate the sponsors for their timing in setting the conference now. Obviously what happened was the following：you set this day for the conference，and then our two governments were terrified at the thought that we would come together and criticize their failures to reach an agreement on China’s membership in the World Trade Organization（WTO）.So they thought they’d better get together and try their best to work it out-which they are now attempting to do. So we should keep the pressure on them.

I would be the first to say that President Clinton clearly made an historic error back in April in not accepting Premier Zhu Rongji’s proposals at that time. I talked with President Clinton at length afterward and urged him to reverse that stance. Likewise I would have to say that China，I think，made a big mistake in delaying the talks for many months on the notion that somehow the United States had intentionally bombed its embassy in Belgrade. It was a stupid error on the part of the United States，a tragic error，but it was not intentional and was not aimed at China. That delay was also unfortunate

However，hopefully we are back on track，and I think this discussion between the United States and China over China’s entry to the WTO is a highly symbolic indicator of where the world economy will be going in the twenty-first century. The United States is now the great superpower.（I was just in Paris，meeting with President Chirac，where I learned that the French have begun to refer to the United States as the world’s first “hyperpower”-whatever that means.）But as we look toward the twenty-first century，China is clearly the next superpower，certainly in economic terms and more broadly as well. And so I think it is symbolic that these two countries are conducting this intense negotiation，looking to begin the twenty-first century on a new note of cooperation and，hopefully，Chinese engagement in the world economy.

I think back a hundred years，as the world entered the twentieth century，there was also great flux in the makeup of world economic activity and world economic power. At that time，there were two major rising economic powers，Germany and Japan. Neither was welcomed into the international economicorder by the leading powers of that day，Great Britain and the United States. The results of course were historically disastrous. Not only was there failure to integrate the rising powers of that time in the world economy，but also the failure to do so led to huge security and political conflicts that tragically destroyed much of the world as we knew it for the first half of the twentieth century.

Today we face a somewhat similar situation，where in China we have a major rising power，both in economic and in broader political and strategic terms. The challenge，both for China and for the rest of world，including the existing big powers，is to find the way to integrate the different systems，the different approaches，the different economies，in a way that will be stabilizing rather than destabilizing，with huge implications not just for the world economy but for world politics and world security as well. Sometimes some doubt is expressed as to how important China’s position is going to be.

Some of you may have seen the lead article in the recent issue of Foreign Affairs magazine by Gerald Segal of the International Institute for Strategic Studies in London. The title of his article was “Does China Matter？” -and his answer was，“Not too much.” He said that China should be treated as a normal middle power，such as Brazil or maybe India，and we that shouldn’t take China too seriously. Well，one has to look at the facts. Even ifyou take the most conservative possible economic facts，converting China’s economic performance at market exchange rates，you still find that China is already the sixth largest economy in the world-bigger than Canada，bigger than Spain，a little smaller than Italy or the United Kingdom，but clearly already in economic terms qualified for the G7，the big seven economies. And at anything like current growth rates，China will grow into the number-four position over the next ten to fifteen years.

When I make these calculations，however，I follow the practice of the World Bank and use purchasing power parity calculations. That exchange rate would rate China’s per capita income about twice as high as would be the case with market rates. Under that calculation，of course，China is already the world’s third largest economy，would probably pass Japan within the next ten years or so，and could actually catch up with the United States in terms of total GDP over the next twenty-five to thirty years.

Whatever calculation you make on exchange rates，China has the world’s second largest monetary reserves，and if you add Hong Kong，the largest monetary reserves. China is the second largest recipient of direct investments and，taking Europe as a group，the sixth largest trading country. So whatever statistics you use，China is clearly a global economic power that is destinedto play a leadership role in global as well as regional economic activities. That of course means that China must move as quickly as possible into the WTO. But even more important，in my view，is for China to move deliberately toward membership in the inner steering committees that really run the world economy：the G7 and the so-called Quad group of four within the WTO that does the real decision making. I think the question is not so much formal membership for China，though that’s extremely important to implement quickly in the WTO，but to move beyond that to China’s playing a central role along with the United States，the Europeans，and Japan，the countries that essentially work out the strategic focus and evolution of the world economic system.

That is what I mean by the integration of China into the global economic leadership. It goes well beyond formal membership in the WTO and in the International Monetary Fund（IMF）and the World Bank. That，I think，is the proper goal that I hope China would have. I certainly have urged that goal on my own government and on the other current industrial powers. But I think when we cite the objective of integrating China into the world economic leadership，we must quickly go on to recognize three problems that are unique in terms of a major economic power playing a global role of the type I described.

First，China is still a poor country，and despite a growth rate of 7 or 8 percent for the foreseeable future-we hope for manyyears-China will remain a poor country for some time to come. So we have an important paradox：on the one hand，China’s economy in total size will be massive-one of the top two or three in the world-but its per capita income will still be much lower than that of the United States or the other G7 countries. So as China enters this decision-making elite，we have to recognize that China will think about the issues differently than the current big powers，because it will remain for some time a much poorer country than the rich countries-the United States，Western Europe，Japan.

A second difference is that China does not yet have a full market economy despite the reforms of the past twenty years and the current plans of Premier Zhu and others. Despite the efforts to move the economy to a fully marketized basis，it will still be some time before China is a full market economy in the way that the current G7 or large industrial countries are. So a second difference is in the basic economic structure and system between China and the rest of the world.

One example of that is the fact that the Renminbi remains inconvertible on capital account. I happen to think that China was very wise to keep the Renminbi inconvertible on capital account；that has worked out quite nicely during the recent crisis and insulated China from the regional and global financial turmoil. But the lack of convertibility for capital movements does underline the structural difference between China and the current advanced industrial economies in terms of the reliance on market orientation for their economies.

Third，of course，is that China is not yet a democracy in political terms，and that raises another sharp distinction between it and the existing large economic powers. In fact，China is truly unique in human history. It is the first economic superpower which is at the same time a poor country，a nonmarket economy，and a nondemocratic society in political terms. So all these mean that，although it is critically important to move forward with the integration of China into the world economic system and leadership，it will be quite difficult to do so because China raises a number of unique and difficult problems which will have to be resolved in this integration process. And so，as we go forward，I think we should try to come to grips with these different approaches，the different structural conditions of the different countries. As we try to work through them together，we must be fully cognizant of the differences and the pitfalls they can generate.

In suggesting that China should become integrated into the inner leadership of the world economy，I of course assume that China would want to do so. And I could fully understand that there might be a debate within China itself，as there is now over WTO membership，on whether it is a good idea to contemplatethat kind of role at this point in China’s development. I would be very interested to hear the views of Professor Wang Jisi and others around the table as to whether China should at this point want to become a member of the G7，a member of the inner steering committees I am talking about.

I would think that it would be in China’s interest to pursue this course for several reasons. As with the WTO，G-7 membership and active participation in the global economic institutions would always be promoting internal reform of the Chinese economy and reinforcing the movement toward economic reform that was begun by Deng Xiaoping twenty years ago，which I believe is very much in the interest of China and its people in both economic and broader political terms. In addition，of course，as China plays a bigger role in the international institutions，it will inevitably adopt a larger world role. I think that’s not only proper but also necessary. It seems to me very much in the interest of China to play an increasingly active role in world affairs. As Professor Wang said，economics is now central to world affairs，and so China’s overall foreign policy and global posture would be advanced by the kind of integration I am talking about.

Another advantage is that an increasing focus on global and regional economic matters would tend to reduce the importance of bilateral economic conflicts. One of my great concerns is that the United States and China continue to spend most of their time haggling about bilateral trade and other economic disputes. This is simply a mistake for the world’s leading superpower and the next rising superpower；their interests and their scope should go far beyond bilateral commercial disputes to encompass the totality of regional and global economic and social affairs. Of course，there will always be bilateral problems. The United States and Canada have a number of bilateral problems，which are always being debated. The United States and Europe have had their recent trade disputes over bananas and beef，and have had other bilateral problems. But because of the broader relationships the United States has with those countries，and even with Japan，the bilateral problems are placed in a much broader strategic context. There is cooperation between the countries on much more profound，much more important global issues，which then provides a much greater，more constructive context within which the bilateral issues can be handled in a more satisfactory and more progressive way. So，for a number of reasons，China as well as the United States should want to raise the level of their relationship.

In addition，I would suggest to my friends in China that power begets responsibility. As China becomes a regional and global economic power，it also bears the requisite responsibility to behave accordingly. I believe that China has been doing that in a number of ways. The famous decision here not to devalue the Renminbi in the face of the Asian financial crisis was quite proper. It has been praised by U.S. officials and others around the world as making a major contribution to global as well as regional economic stability. China has taken a number of other constructive steps as we go forward with the current problems. I think that’s a reflection of China’s readiness to play the kind of global role I am talking about. I certainly hope that it does，and would urge it to do so.

All this is background. Perhaps we can agree at this point that China could and should play a bigger global role. Let me conclude my remarks by making a few suggestions on how that could be done-how，in institutional terms，in substantive terms，and in policy terms，China might be able to play a large and constructive role on the world economic scene as well as the narrower stage on which it has played so far.

First，let’s talk about trade. I will assume for the moment that China and the United States come to agreement and work out membership in the WTO，although in fact China could still participate in the upcoming multilateral round of trade negotiations that could be launched in Seattle later this month even without membership. But it’s obviously much better if China is a member. I am going to assume that membership takes place. Let’s suppose，then，that China is eligible to participate inthese next global multilateral trade negotiations：What should be China’s posture？

It seems to me that China should play a very proactive，very positive role in trying to shape the agenda and the course of this new multilateral trade negotiation. Why do I say that？I think China has a number of major interests that could be promoted by a proactive role in the Seattle Round，or the Millennium Round，or whatever we eventually call it. First，there are still very high tariff barriers against Chinese exports. Even assuming that the current negotiations work out the problem of the Multi-Fiber Arrangement and China is eligible to participate in the elimination of textile quotas over the next few years，there will still be very high tariffs facing Chinese exports of clothing in the years ahead，particularly to the United States but also to Europe. So China，in addition to wishing to get rid of the textile quotas，should want to negotiate a substantial reduction in tariff barriers against its textile and apparel exports with the United States and other countries. In addition，China will still face high tariffs and some nontariff barriers on other light manufacturing products-not so much in the United States in this case but in Europe，in Japan，and elsewhere. And so，even in terms of some of the traditional issues of trade policy，China would have a big interest in moving forward.

But there are nontraditional issues as well. China and HongKong would have a big interest in altering the practices of the United States，Europe，and others in terms of antidumping duties，which are frequently employed in a way that makes it difficult to maintain market access for China and Hong Kong and other exporters of textiles or apparel products，shoes，and many other products. So in all those areas，I think China will have a big interest in trying to promote an ambitious outcome of this new trade round.

I believe that China will have lots of allies on those issues. Many other developing countries are also in the process of deciding whether to take an aggressive and proactive role in those new multilateral trade negotiations. I spent two weeks in India earlier this year，working with the Indian authorities，who are having a big internal debate，but，are pursuing some of the same interests that I have just mentioned and will probably take a very active role in trying to promote improved market access for their exports. The point is that if China，with its great significance to the world economy and its political importance，were to join this effort to reduce the barriers to trade that the industrial countries maintain against the developing countries，it could have a decisive effect in moving the world trading system to a more liberal regime and to a fairer regime that would be more accepting of the products of developing countries in world trade. In other words，China could make a big difference. I hope that China will try todo so.

A second area is international finance，where China will now have some major opportunities for leadership because of its membership in the new G20. We have talked in the past about the G7，the G10，the G22. My own view，as you may know，is that the G7，which has been the main steering group，should actually undergo a substantial change. The G7 should be collapsed into a G3，because the Europeans are increasingly speaking with a single voice on financial issues and have their own currency，the Euro. I believe that the G7 should be converted initially into a G3 consisting of the United States，the European Union，and Japan. But then it should look for early opportunities to expand its membership to bring in the new economic powers，of which the first obviously should be China. So the G7 should first become a G3，and then，as soon as it can be worked out，a G4 with China as number 4. I

In the meantime，the world’s economic leadership has created something called the GX；the X is used now because it is not yet quite clear how many members there will be，but the number should come to about twenty. It will be essentially a G20，and China is of course a member of that group. This new group is being established because the G7 does not have a very broad political legitimacy. The G7 includes only industrial countries-no developing countries，which is increasinglyanomalous in today’s world economy. So for reasons of both economic relevance and political legitimacy，it was decided that the GX or G20 should be created. My guess is that this new，larger group will increasingly replace the G7 as the major forum in which monetary system issues are debated and worked out as a steering committee for the IMF，the Bank for International Settlements（BIS），and the more formal world financial institutions. The great debate now about reform of the international financial architecture will probably take place increasingly in the GX.

This new forum provides a major opportunity for China to play a role in the key issues of the international monetary system- for example，the exchange rate system. China has，quite properly，maintained its fixed exchange rate through the crisis. But，as with many others as they look to the future，I would think that China might over time want to move to a different type of monetary regime. There is a substantial consensus around the world now that fixed exchange rates are not proper. Hong Kong is an exception because of its small open economy and its history. I think it’s fine for Hong Kong to maintain its currency board. But particularly for large economies not so dependent on trade，like the United States，Europe，and China，the increasing mode，I think，will be managed floating. I think China will at some point have to find an exit strategy for the current fixed exchangerate，whether it be widening the band or moving to some new system-Ⅰ won’t focus on that now. My point is that over time most of the world’s major economies will pursue some type of managed exchange rate flexibility. A very big issue will be the rules of that floating game and how the major countries interact with each other. Do they set up target zones？Some kind of crawling bands？Is there more informal coordination and cooperation？How do you do it？That will be a very big issue for the world economy，and will be a very important issue for China. The creation of this GX，and possibly within it a G4，will give China a great opportunity to help influence the development of thinking on those issues and to play an important role.

Another key question-and this one arises of course from the Asian crisis-is the treatment of international capital flow，particularly short-term hot money flow. Again there is a significant change under way in world thinking，including of the U. S. authorities，about capital. movements. There is an increasing sympathy for restrictions on capital movements. No longer is there a firm ideological conviction that we should let all capital move freely at all times. There is increasing support for the kind of restriction that Chile maintained for many years- taxes，special limits on capital inflows-to avoid excessive buildup of debt，bubble economy problems，that kind of thing. China has pursued a similar goal with different techniques. As I mentionedbefore，China has maintained the inconvertibility of the Renminbi on capital account partly to restrain capital flows in both the outward and inward directions. That is a different technique for pursuing what Chile did with taxes and what Malaysia has done in recent years with different methods. I think these different methods，including China’s method，will be increasingly considered and discussed by other emerging-market economies as well as by the IMF and others elements of the world financial system. China’s involvement in those discussions will be a very important issue for China itself as well as an opportunity to influence the evolution of the world system.

The final issue is at the regional level but it also stems from the global crisis. One thing we learned from the latest financial crisis is that the early warning systems of the world economy-the systems that try to anticipate crises-have failed. And they have failed time and again：they failed in Mexico in 1994；they failed in Asia in 1997；they even failed in Russia in 1998. It seems to me that as we try to build better early warning systems in the future，a promising new approach will be to emphasize the regional level rather than the global level. It stands to reason that countries in a region will have a better sense than others of the development of potential problems in their neighboring countries. It also stands to reason that countries in the neighborhood would have more political legitimacy in suggesting that the neighbor hadbetter take some measures to put its house in order，because if it does not，the whole region could be in trouble.

For example，if there had been an effective regional surveillance mechanism in 1997，maybe Malaysia，Indonesia，and a few others could have approached Thai authorities and said，“We see a problem coming，and if you get into trouble，it will be trouble for us，too，so please take some action to head off the problem.” It’s interesting that the ASEAN countries are in fact now developing a regional surveillance mechanism. They are using some new analyses developed at my Institute for International Economics and other new techniques trying to anticipate problems in order to put in place better early warning systems to anticipate future crises，and also early action systems to try to get countries to take preventive policy measures to avoid the onset of new crises. It’s a good thing that the ASEAN is doing that.

But my point here is that we might want to contemplate more widespread regional devices，either in East Asia or perhaps in all of the APEC region. APEC is the regional grouping that brings together our economies already for a variety of types of economic cooperation. Maybe we should try to develop a serious APEC early warning system to avoid new crises in the region. Indeed，in 1997 APEC created the Manila Framework after the regional crisis struck，through which the finance ministers ofmost of the APEC member countries have been meeting since that time. That would provide a basis for the kind of regional surveillance mechanism I am talking about. Again，China could play a major role in launching that effort.

You may recall that in 1997 Japan proposed an Asian Monetary Fund. That idea was rejected by China，the United States，and others because it raised the risk of putting in place an institution that could compete with the International Monetary Fund，which would have raised a lot of uncertainty and doubts about the resolve of the world system to deal with the crises it then faced. What I am suggesting is not the Japanese idea of the Asian Monetary Fund，but rather an Asian or APEC regional forum for surveillance or monitoring each others’ economies to try to anticipate and avoid future crises and，indeed，to try to help the recovery from the current crisis. Maybe over time that could develop into some kind of monetary fund with financial capability. But I think the first step is to try to move on the adjustment process.

To conclude，these are some of the specific areas in which I think China could begin to play a central role in the management of both the regional and world economies. Speaking from the standpoint of the United States，I think it is essential that China do so both for it own interests and for the interest of the United States and the world economy more broadly. I suggested at thestart that history is very instructive，that history indicates how important and indeed imperative it is for rising economic powers to be brought as rapidly as possible into the leadership grouping，incorporated into the cooperative mechanisms that can steer the course of regional and international economic affairs. China is certainly the country that is moving most rapidly in that direction. I hope that the current talks between our governments on China’s WTO membership turn out to be successful. If they do，I think they will then usher in a new era in which we can move on to deal with some of these broader issues that we are discussing here. If we do it，then Sino-American economic relations could certainly move to a new plane and new dimension. I hope this conference will play a major role in getting the process going.

Thank you very much.

Question：I appreciate your idea that China should be integrated into the world economy and should join the steering committee like the G7 or GX. When Professor Zheng and I visited you last May in Washington，D.C.，in your office，you also mentioned this point. But I think it is well known that the obstacle to this is not on China’s side. Only a few days ago，I heard that the White House spokesman stated that the United States has no plan to bring China into the G7 meeting. So doyou think it is realistic to suppose that your idea could be implemented during this U.S. administration or in the next one？

Bergsten：One has to be careful in defining what coming into the G7 means，and I should have been more careful. I suspect the White House spokesman was talking about the G7 summit meetings where the heads of states get together once a year. One of the chief criteria for that group has been the political system of the country involved；they are viewed as the G7 of industrial democracies. The main objection to China’s participation has been China’s political system，not its economy. The G7 in fact has made Russia a kind of quasi member despite Russia’s terribly weak and irrelevant economy，mainly due to its effort to become a political democracy.

What I was talking about when I said the G7，as I should have made clear，is the economic G7-the G7 of finance ministers and central bank governors，which is the steering committee of the world economic and financial system. Historically，there has not always been a perfect match between the summits and the finance ministers group. In recent years there has been but historically，when the summit meetings started，they were a G5；then the summits added Italy and Canada in about 1977，and the summits became a G7，but for another five to ten years，the finance ministers remained the G5. There was a difference between the annual political summits and the frequent meetings of the economic leadership which was still，and when I was the U.S. member of that group in the late 1990s，G5. So what I am suggesting is that China increasingly come in to participation in the economic G7，the economic and financial G7. Over time I am sure that would lead to membership in the G7 summit meetings，but my precise proposal at this point is on the economic side.

It is related to the creation of the GX，because if I am right the GX will become the most active and politically legitimate steering committee. It is still true that a membership of twenty would be a little too large for a lot of the most important and confidential decision making，however，within the GX there will likely be a smaller group，which would be the true leadership group. That’s why I think the G7 will collapse to a G3 and then perhaps add China over the next few years. So what you would have is a G4 within a GX. That’s the vision that I have in mind. I don’t think it will happen in the last year of the Clinton administration and，anyway，this is a longer-term kind of evolution，although the GX will get going. But I think in the next U. S. administration，it is quite a realistic possibility. So I think that is the direction in which we should be working.

Question：On the early warning about the possible big drop of the U.S. dollar following the widening of the U.S. trade deficit. You predicted this year there would be a big drop in the U. S. dollar. But so far it seems to a certain extent it’s already realized，because the U.S. dollar dropped from 120 to 105 against the yen，roughly at that level. How do you predict the situation of the U.S. dollar in the forthcoming years？Would you please give us some comments on that？Thank you very much.

Bergsten：You are right. I have been suggesting since early this year that the exchange rate of the dollar would fall sharply. In fact it fell even more than what you said against the yen，because，of course，in the summer of 1998，the dollar was about 145 yen and has now dropped close to 100. So it’s been a big decline of about 30 percent.

I think the next big currency move will be a sharpdollar fall against the Euro. The Euro has been weak since it started early this year. That’s because of the cyclical weakness of the European economy. But as the European economy now recovers，as the U. S. economy slows down，which it probably will a bit，then I think that we will see a substantial rise of the Euro. It，s interesting that historically when the dollar goes through its big swings，both up and down，those swings always take place first against the yen，and subsequently against the European currencies. In addition，the dollar swing tends to be about twice as large against the yen as it does against the European currencies. So，if history repeats itself，we should expect the Euro to rise 20 to 25 percent against the dollar over the next six to twelve months. The U.S. trade deficit will hit about 350 billion dollars this year. That’s about 4 percent of our GDP. That’s a much higher ratio than the trade deficit reached before the previous large declines of the dollar. I think the only reason the dollar has not declined more generally so far is that the U.S. economy has been quite strong，capital is still moving into the market，and the Euro has been relatively weak. But as soon as Europe picks up and the U.S. economy slows down，I think we canassume a substantial further decline of the exchange rate of the dollar. That would be a great thing for Hong Kong’s competitiveness. So that’s my “early warning”.

Question：Before my participation in this conference，I attended another symposium in United Kingdom. Somebody from the European Union complained that China paid too much attention to the European Union and the Sino-European Union economic relations. The Japanese also complained about China’s rejection of the Asia monetary foundation suggestion. How do you think China should deal with trilateral economic relations with the European Union，the United States，and Japan？

Bergsten：I am glad you ask the question. I think one of the major reasons to create this G4 that I was talking about is to deal with that question. Because then you would have a basis for constant，very close，continuing conversations on all these economic and financial issues among China，the United States，the European Union，and Japan，which really will be the four economic superpowers of the twenty-first century. Maybe India at some point will come along，in which case that country should be added. But for now，asbest we can see，China would be the next participant at this level of activity. I think China would find that it would be very complicated to try to emphasize bilateral economic relations separately with Europe，the United States，and Japan. It would lead to contradictions and conflicts and inconsistencies，which is the reason that we need multilateral institutions，both formal institutions like the IMF and the WTO，and the smaller steering committees that I am talking about，which will bring together the key economies to be in constant conversation and constant dialogue with each other. It’s very important，from my experiences in the White House and the Treasury for many years，to develop close personal relationships with your counterparts in the other key countries on the major issues.

For example，when the Asian financial crisis broke out，I suspect China would have been more comfortable if its people could have picked up the phone and talked to their counterparts in Washington，New York，Frankfurt，Paris，Tokyo，in a more cooperative and more informed relationship than exists now. That’s the kind of thing that is developed through G7，G4，G3，types of ties that I mentioned.

I know that the People’s Bank of China，for example，a few years ago，joined the BIS in Basle and have been developing relationships with central bank counterparts around the world. That’s terribly important when you get speculative attacks on a currency，when you get into international financial disturbances that require cooperative responses. To have close cooperative ties with your counterparts in the other key countries is very important. In a very fundamental sense，that is the informal steering committees that I am talking about. That is what it，s all about-developing close ties so that when a crisis strikes，when major problems arise，you know your counterparts，you know their way of thinking，you have the relationships that enable you to respond quickly and cooperatively instead of having to go through big formal intergovernmental processes.

Today’s world economy and world financial system move very fast. The markets move fast，particularly for capital. But for trade and investment，too，the world economy is moves quickly. There is no time for formal extended negotiations，frankly，of the type that our governments have been having on China’s WTO membership；this is a kind of anachronism，becausethe world is just passing it by. The big players need to have the ability to respond quickly，flexibly，and cooperatively. The only way you have that is to develop these close-multilateral relationships that you can then mobilize when a problem occurs. I am glad you raised the question that way，because as China becomes a major player in the world economy，it must therefore deal with the Americans，with the Europeans，with the Japanese，and with others. There will always be bilateral discussions and negotiations，but it becomes increasingly important to have these small multilateral clubs in which the kind of relationships I am talking about can be developed and in which flexible responses can be fashioned on the basis of ongoing ties and relationships.

Question：My question is about the economic relationships between Hong Kong and China. I think everybody knows that in the past twenty years Hong Kong has played a very important role in China’s economic development. Hong Kong is a gateway to China for international cooperation；Hong Kong is a re-export centre for China’s business；and Hong Kong is a funding centre or financial centre for the state-owned enterprises of China. But I think，after the Asianfinancial turmoil，the internal or external environment has been changed，especially if China can enter the WTO in this Seattle round，so I will think the traditional role of Hong Kong to China should be scrapped. So do you think how Hong Kong can reposition herself in the next century and then she can continue to play the important role in China’s economic development？Can she still benefit from China’s economic development？Thank you.

Bergsten：I think Professor Chen should probably answer the question. Let me offer a couple of thoughts on it，but then maybe have Professor Chen weigh in，too. In every big economic change，like China joining the WTO，there is an income effect and a substitution effect. The income effect of course means that China’s trade with the rest of the world will increase even faster. It seems to me that it’s a plus for Hong Kong because of Hong Kong’s increasingly intimate relationship with the economy of China：I think it will mean that it，too，will have increased international trade and investment opportunities as China itself extends even larger trade and investment and financial flows with the rest of the world. That is the income effect，and that should be positive for Hong Kong andincrease the relationship between the two.

At the same time，there may be a substitution effect. As China itself becomes a WTO member，particularly if it gets involved in all this steering committee stuff I am talking about，it may be that some of the advantages that Hong Kong brought in the past，some of Hong Kong’s particular expertise and ties to world markets，may become somewhat less important to China. That’s the substitution effect. But my guess is that the income effect will overshadow the substitution effect. That’s usually the case in economics. So in absolute terms，it seems to me that Chinese membership of WTO is good news for Hong Kong，though there may be some substitution and some erosion of some roles over time. I nevertheless think it would be good news.

I think the more interesting question，though，is on financial side：I assume that over time China will move to a convertible currency and，as I said before，to some managed floating of the exchange rate. Will Hong Kong then maintain the currency board and its fixed exchange rate？I think it’s quite possible. But it means that “one country，two systems” will take on an additional meaning. If in fact China maintains aflexible exchange rate while Hong Kong maintains its fixed exchange rate，I think some very sophisticated cooperation would be required between China and Hong Kong as well as the management of both those currencies. My guess is it’s in that area more than in the trade area that China’s increased emergence into the global economy and the kind of global institutional arrangements I talked about would have a big role.

Question：One of the disputes between the U. S. and China in the negotiations to enter WTO is that the U.S. wants China to enter as a developed country while China wants to enter as a developing country.（1）1 would like your comments on why the U. S. insists on this point.（2）Should China have a managed flow exchange rate before or after its entry to WTO？（3）You mentioned the regional neighborhood advice mechanism vis-à-vis the IMF. Which is better？As you know，the IMF went to Thailand and offered some advice，but they said，“No，no，no，you’re not making sense，so we won’t listen to you.” Is it possible that we’ll have too many bosses-or too many cooks，which，as you know，might spoil the broth？Which mechanism is better？How should the IMF coordinate，if possible，with the regional neighborhoodadvice mechanism？

Bergsten：All very good questions. Let me answer in reverse order. On the last question，you are absolutely right. The IMF and the regional surveillance institutions would have to work out a very close cooperation. You certainly would not want conflicting advice，but you may want competing advice. Sometimes the IMF and the World Bank do not give exactly the same advice to a country，and that may be healthy；it may present some alternative ideas to the country as to what would be the wisest course of action. You don’t want direct conflict. You don’t want the IMF telling a country to devalue its currency and the World Bank saying to revalue its currency. You don’t want to be so directly in conflict，but different approaches to different issues may sometimes be a healthy thing. One reason I think a regional mechanism would be good is that it provides neighborhood，more regional，local insights to problems of this type which the Washington institutions frankly just do not have. You mentioned the case of Thailand，which is now pretty well known. The IMF was not expert on Thailand-and they actually knew more about Thailand than they did about some other countries. They really knew almost nothingabout Indonesia，for example，so their original advice to Indonesia was not very good. I think the IMF quickly recovered and learned and made some reversals and got back on track. But in the first six months，the IMF made some serious mistakes in its advice and in its conditionalities. If there had been a regional mechanism that knew more about Indonesia and had been able to advise the IMF on what was better for Indonesia，the IMF’s advice might have been much better.

An analogy would be the relationships between the World Bank and the regional development banks. What I am suggesting in the monetary area is to set up a network on monetary and adjustment issues like what we have already had for thirty years in the development finance area. We always had the World Bank，and then in the 1960s a series of regional development banks was created-the Inter American Development Bank，the Asian Development Bank. I happened to have been involved in the creation of Asian Development Bank. I was at the inaugural meeting of the Asian Development Bank in Manila in 1966；I was very young then，but I was at that meeting as part of the U.S. delegation. I always thought that we have avery nice blend，beginning with the World Bank，which is bigger，but the regional development banks，which are significant and bring a more regional perspective and greater regional expertise and can actually help the World Bank in its programs and in different parts of the world. I am suggesting something like that might make good sense on the surveillance，early warning，adjustment issues and maybe even eventually in terms of some kind of monetary fund though I would put that at a later stage. You are right，they would have to work cooperatively，but they need not be identical. The regional outfit might help the global outfit to be more sensible and to avoid the kind of mistakes the IMF made，certainly in Indonesia and maybe a little bit in the other countries in the region too.

As for your second question-“Should China float the Renminbi before or after the WTO membership？”-the simple answer is after，and I say this for two reasons. First，I hope the WTO membership will come quite quickly-like tomorrow，today，sometime soon. I see no need for China to float the Renminbi now. At my Institute for International Economics we have done a lot of studies of China’s competitiveness：is theRenminbi undervalued，overvalued，or about right？Our conclusion is-and I noticed that it was cited in one of your papers-that the current exchange rate is fairly close to equilibrium level. There is certainly no compelling case for devaluation or for a float at this point. As the Chinese economy is picking up again and export expansion is picking up again，I think it supports the views we and others have taken that there was no need for a Renminbi devaluation. Moreover，even though the Asian economy is recovering in general，it might be a little risky to float or devalue the Renminbi at this point；it might still ignite problems elsewhere in the region，revive the crisis，cause problems for the other countries’ recovery，so I think it would be better to avoid any early devaluation or float.

Having said that，I don’t think the real issue is a linkage between the exchange rate system and WTO membership. It is true-and is an important point-that as China liberalizes its trade as a result of membership in the WTO，that may create some natural deterioration of China’s trade balance and lead to a need for a weaker Renminbi over time. This was what happened when Mexico joined NAFTA. We knowfrom the work available over the past thirty years that when a developing country liberalizes its trade regime，either unilaterally or to join NAFTA or the WTO，there will tend to be a net increase in its imports，which will lead to a deterioration of its trade performance. With everything else equal，this will require depreciation of the exchange rate. So as China phases in its WTO obligations and can move forward its own internal reforms，there may be a one-shot secular deterioration in China’s external position and current account balance. With everything else equal，this might require a weaker Renminbi. I say “with everything else equal” because China has a very large current account surplus，and it has very large reserves. It may be able to accept a modest deterioration in its current account position without feeling the need to depreciate its currency. But it would not be a surprise to me or to most development economists if trade liberalization-liberalization of the trading regime as China is now undergoing，with or without the WTO but especially with the WTO-would at some point lead to a depreciation of the exchange rate.

To me，however，the more important linkage is between China’s exchange rate system and the ultimateadoption of capital account convertibility for the currency. As I said earlier，I think it was wise for China not to move prematurely to capital account convertibility. Other Asian countries did it. That was one of the sources of the crisis. So I think China’s decision to go slowly has turned out to be a good decision. Having said that，I nevertheless assume that over，say，the next five or ten years，China will want to complete the convertibility of the currency by moving to capital as well as current account convertibility.

At that time，the Chinese economy becomes more exposed to the international financial world. At that time，the risk of maintaining a fixed exchange rate would become greater. That may be the moment at which a decision needs to be taken on moving to a different exchange rate system-a broader band，and a managed float，as I mentioned before. Some very serious analysis will have to take place of what is the right kind of regime. But my sense is that the decision will be related more to the assumption of full convertibility of the currency，which in turn is related to the reform of the domestic banking system. That would be the key trigger for the decision to move to afloating exchange rate. That would be more important than the linkage to WTO membership.

The first question-“Why did the United States want China to be treated as developed country instead of developing country？”-is an easy one to answer：because the United States wants China to liberalize its trade regime，and to do so more rather than less. The way to do that is to treat it as an industrial country rather than a developing country.

That’s a flip negotiating answer. What is the intellectual answer？The intellectual answer goes back to what I said earlier in my remarks. China is a unique economy. On the one hand，it is one of the biggest economies in the world. It is certainly one of the most competitive economies in many sectors. It has a large current account surplus. It has the second largest monetary reserves in the world. In many respects，it is a developed economy. Having said that，I made the point that it is a poor country；per capita income is low and，in many respects，it is a developing economy. So there is no simple answer. For China to say，“Treat us totally as a developing economy” is not right，either，because it would understate China’s economic ability. At the same time，for the United States to say thatChina should be treated totally as a developed economy would also be incorrect and would oversimplify matters. So，the answer is somewhere in between. To oversimplify a little：that’s why they have spent thirteen years negotiating this issue. In some sectors China is quite a globally competitive developed economy，and in others it still has a long way to go and still is a developing economy. You simply have to work out which is which and how to treat the different sectors. To make it more complicated，it is not just a binary set-some are developed，some are developing-it is a spectrum，with China’s different sectors arrayed from one end to the other.

If we were talking about Bulgaria，no one would care-it is not big enough. But Cina is so big that people care how these different sectors are treated under the world trading rules. And honest people may differ. China may legitimately think that its telecom sector is：underdeveloped and the Americans may think it’s developed. Then they have to work out some compromise，which basically comes down to timing. The way this problem always gets resolved in the real world is timing. What is the phase-in period？Immediately if you’re really competitive，three years ifyou re fairly competitive，five years if you’re somewhere in between，and ten years if it’s a really backward sector that needs a long phase-in period. Frankly，that s the way it’s done in every negotiation. That’s the way the United States did it with Mexico in NAFTA. Some of Mexico’s liberalization was immediate；some sectors have fifteen years-that was in agriculture，（among）a very few sectors. Some sectors had two，three，five，or seven years. That’s the way it gets worked out in the real world. But it is complicated，and it is particularly complicated for China given its importance and its size and the unique intermediate nature of the Chinese economy. That，in a nutshell，is why they have a hard time with this negotiation，in addition to various political considerations. But given the best of will，it would still be difficult，because of this set of issues. I think the way they will work it out inevitably will be somewhere in between，somewhere along the middle of this spectrum，because of China’s unique intermediate position at the current place in its development history.

Question：Professor Bergsten，Gordon Cheung from Lingnan University. In your presentation，you mentioned thatChina should play a proactive role in the international economic relations，I suppose the facilitation of proactive role of China should be focused on the generation of its formal position or role of China to play actually in the internationally economic relations. To take the WTO as an example，after thirteen years，after 1986，she applied for that international organization and it seems that China has been you know moving very good in de-regulations and other policy regulations for that entry. But the fact is that before China can get a place in such kind of important international organization or regime，how can China to be able to play a proactive role before even she Gan be accepted by the international community. I also can take an example，for example in 1955，when Japan was formally to be accepted by the GATT，the former organization of WTO，she was actually not yet ready to be accepted in the international economy，but political things that activate at the moment.... My question is that，is there any political leeway that the U. S. can，you know，give China in that sense to secure her role in international economy？Do you think that can be reconciled？Thank you.

Bergsten：That is a very good question. If this negotiation worksout，China will be absorbed for the next year or so in assuming membership in the WTO，applying the requirements of membership，the terms of the accession agreement，all that. So certainly the immediate focus will be on implementing the accession agreements and coming into compliance for participation in the WTO-which means not just the rules but also the dispute settlement mechanism，the WTO Council，all the institutional mechanisms that China will have to start participating in，and familiarize itself with，and learn how to operate，since these issues sometimes involve complicated arrangements，and it takes time to learn how to deal with them.

But I think China can also play a proactive role in the new multilateral negotiation simply for reasons of timing. I do not think the new multilateral negotiation will get going very quickly. I am going from here to Tokyo，then to Beijing next week，and from there to Seattle，where I am running a large conference during the WTO ministerial and participating actively in some of the events there. I hope that they will launch a new multilateral trading round in Seattle. My guess is that they will do it. But my guess is also that they will notget the actual negotiations going very quickly. Part of the reason，frankly，is the United States. The U.S. administration has received no negotiating authority from the Congress. The so-called fast track legislation has not been passed. Until it is，which，at the earliest，would probably be two years from now，the United States will not be in a position to negotiate very much. Likewise，the Europeans are absorbed by agriculture. Japan is still in a weak economic position，and they too are absorbed by agriculture.

There is a big debate among the current WTO members about the agenda for this new round. They might even fail in Seattle. China indeed might become a member of the institution just as the institution fails！It will be only a temporary failure，I hasten to say，but it could happen that there is a big announcement today，tomorrow，sometime soon，that China is admitted to the WTO，and then in three weeks we get to Seattle and the membership fails to launch a new round. You might ask yourself，“What have we got into？Is this thing worth it？” Yes，it would be worth it. But the point is that they may agree to launch a new negotiation，but it would be some time before it really gets going. So I think there is time for China toassimilate into membership of the organization and still be thinking about and developing the positions it may want to take in the new round.

There is a shortcut that China can take. I mentioned before that，on a number of these issues，there is a natural alliance between China and some of the other developing countries in the WTO. A number of those developing countries have already been working quite hard to develop their positions and to develop some cooperation among them，trying to reduce the barriers I mentioned-the antidumping duties，a number of things at that time. I am sure that those other developing countries would welcome China as an ally. And they would be happy to provide technical assistance or briefing or information or analysis to the new member of the organization，to help it come quickly up to speed. Again，the other developing countries would surely welcome China as an ally in trying to advance their agenda，and I would think it would be good for China as well to work with them，to develop alliances. That would constitute a kind of shortcut through which China could certainly pick up from the interests of other developing countries in the new round.

China will of course have its own specific interests，which will not be identical to those of Korea or India or any of the other individual developing countries，so it would need to do its own work and develop its own positions. But in broad terms，as I mentioned，I think there will be considerable overlap. I actually spent a fair amount of time on these issues with India earlier this year. It might be interesting to see whether China and India become allies in the World Trade Organization.

It will also be interesting to see how issues in finance shape up. I mentioned the GX，in which China and India are both members. Keep in mind that China and India have very similar exchange rate systems. China and India are the two big countries that have maintained inconvertibility of their currencies on capital account. Both have been successful in avoiding the ravages of the Asian crisis. It would be quite interesting to see whether，in the international economic area，China and India turn out to have common or at least similar interests on a number of issues and find themselves wanting to work together. Now，I don’t know whether that will help resolve some of the long-standing and deep-seated political andsecurity problems between China and India，but it might help. In any event，it may turn out that there is some good sense in economic cooperation between the two countries for exactly the reason I mentioned. Again，time is part of the answer and the rather slow place that’s likely in these new negotiation will give China a chance to get involved，certainly before the going gets serious. The United States and other countries have talked about completing this new trade round in three years. There is no chance of that；we，d be lucky if it could be done in five years. It’s very complicated this time around；there are lots more issues than in the past，and there are lots more countries than in the past. There may be some “way stations” on the way；we may see some early results on some topics，but if this negotiation does get going，it will surely last much more than three years，and there will be plenty of time for China to get involved.