United States-China Commission
June 14, 2001 Hearing

Testimony of Mr. Gary Benanav
Chairman and Chief Executive Officer
New York Life International

Before the U.S.-China Commission
June 14, 2001
Washington, D.C.


Mr. Chairman, members of the Commission, I am Gary Benanav, the Chairman and CEO of New York Life International and Vice-Chairman of the New York Life Insurance Company. In addition to my corporate positions, I serve as the Chairman of the U.S. Committees of the Pacific Basin Economic Council (PBEC-US) and the Pacific Economic Cooperation Council (US-PECC). I appreciate this opportunity to appear before you during the first open hearing of the U.S.-China Security Review Commission.

Mr. Chairman, there is no need to outline for the Commission the fundamental importance of the issues Congress has asked you to consider. As our nation embarks on a new millennium, the rapid economic and political evolution of the People's Republic of China will remain among the most critical international variables for us to consider.

Any evaluation of issues affecting our immediate and long-term national security and economic prosperity must include China. It is my strong belief we must find a way to deal with China which advances our national interests while recognizing that both countries' political and economic security are inextricably linked.

In managing the international business of New York Life, I find myself regularly involved in debates on various public policy issues that have a significant bottom-line effect on our company and to our policyholders. Our country's current trade and investment policies toward China and China's entry into the WTO certainly fall into a high priority category for my company. My company and its policyholders and employees, like workers, farmers and businesses throughout our county have a great deal at stake in the way we as a nation deal with China and the Chinese people.

This morning, I would like to cover three areas in my testimony. First, I will address the challenge of compliance which China's WTO accession will present. Second, I will discuss the effects of economic engagement with China and China's entry into the global economic system. Finally, I would like to conclude with an assessment of China's domestic political evolution.

The Challenge of Compliance

Mr. Chairman, as Representative Sandy Levin noted in his March 6 speech at CSIS, (when China ultimately does accede to the WTO, our work will not have ended, it will just have begun.) The business community is under no illusions about China's WTO accession. WTO membership will represent a substantial and significant opening of China's domestic market and will have far-ranging domestic economic and political consequences for China. In many cases, China's implementation of its market opening commitments will trigger social and economic dislocations and associated adjustment costs.

WTO implementation will not be easy or automatic, just as the negotiations between the United States and China were neither easy nor automatic.

The transition to a market economy will not be easy because Chinese institutions in many manufacturing and services sectors are still in their formative stages and have not been exposed to competitive market forces. This is certainly true of the insurance industry, where the legal structures for regulation are less than a decade old, and the China Insurance Regulatory Commission is only three years old.

The transition to a market economy will not be automatic because China has not yet developed the full range of institutions needed to underpin the efficient operation of a competitive marketplace. China's trading partners will need to be vigilant and work with patient determination to ensure compliance with WTO agreements. Government, business, and NGOs must be prepared to monitor China's implementation of its WTO commitments and must be willing to work with our counterparts in China to help increase the institutional capacity of China to meet its WTO obligations.

The issue of institutional building is critical to China's ability to live up to its market opening commitments. In his recent book, The World Economy: A Millennial Perspective, Angus Maddison has identified the central factors in a county's growth. He concludes that societies achieving successful economic growth have tended to develop stronger legal protections for property rights and to build institutions that foster entrepreneurial activity.

China does not lack entrepreneurial spirit. If you have ever walked the Bund in Shanghai or visited a factory in Guangzhou or talked to students at Beijing University, you know the natural entrepreneurial spirit of the Chinese people. But China does lack the institutional foundations on which that entrepreneurial spirit can flourish.

In a recent AEI (American Enterprise Institute) paper, Professor Waldron writes eloquently on this point describing his concern that China's economic growth (rests on shaky foundations - and these grow more shaky, not less, as that growth continues in a political and institutional vacuum.) I share Professor Waldron's concern.

Mr. Chairman, if we can assist the development of durable rule of law intuitions in China, one can only imagine how more entrepreneurial the Chinese people could be. New York Life, like many other companies and trade and industry associations, has been active in training Chinese officials about international standards and providing information about the changes needed in Chinese law to meet WTO obligations. Building institutional capacity is essential if China is to meet successfully the challenge of implementing its WTO commitments.

Effect of Economic Engagement

Mr. Chairman, globalization presents the United States and China an opportunity to cooperate to achieve greater economic growth in both countries. Current conditions in the U.S. economy have tangible effects on the domestic economies of our trading partners. In the same vein, conditions in China's domestic economy influence growth in the Asia Pacific region and globally. It is in everyone's interest that China grows in a balanced manner, a manner that promotes its own internal stability and furnishes a market for other countries.

China's Domestic Economy

For balanced political and economic growth, China needs to encourage the expansion of its middle class. This group will stimulate the robust domestic demand needed for long term growth of the Chinese economy. China's long term economic development cannot be achieved simply through growing exports to the markets of its trading partners.

Experience points to the key requirements for balanced growth and a middle class. First and foremost is a system of contractual and intellectual property rights that allows people to accumulate capital. Developing countries that have advanced economically while maintaining social stability have this in common. China's high domestic savings rate, about 40 percent of GDP, allows for accumulation of significant amounts of capital.

The second requirement for balanced growth is a sophisticated financial system, which mobilizes savings and channels them efficiently by offering a range of investment products. In addition, a burgeoning middle class requires financial instruments that permit individuals to manage risk by pooling their resources.

Foreign insurance and other financial services firms provide a source of expertise, backed by capital resources, needed to meet these two requirements. By participating in the Chinese market, U.S. firms furnish the institutional prerequisites for balanced growth in China, while increasing value for their U.S. shareholders. This is an important contribution to the process of drawing China into the world economic community.

China and the World Economic System

Mr. Chairman, most nations of the world have realized that joining the global economic system brings political and economic stability and prosperity. Those that have not participated in the world economic system, either by choice, by chance or by mismanagement, find the cost of staying outside the system is accelerating every year.

The world community has devised institutions, some more formal and developed than others, to form a system of multilateral rules-based cooperation. The result, although a sometimes bewildering array of acronyms, is a set of building blocks for a global system which can secure and sustain political and economic stability. China needs to have a stake in this global system if it is to realize its full growth potential.

Moreover, the more China is rooted in the international rules-based trading system, the greater the cost to China's own economy of taking political or military steps that undermine the system. In short, China's stake in the smooth operation of the global economic system and the interdependence the global system creates, act as a constraint on China's ability to adopt political or military postures that will have the consequence of slowing down or damaging its domestic economic growth opportunities.

There is no doubt the deeper integration of China in the global economy serves U.S. national security and economic interests. China's membership in the WTO is one important element in the overall process of rooting China more firmly in the international rules-based system.

China's Domestic Political Evolution

Mr. Chairman, last year our country undertook a national debate on the merits of granting China permanent normal trading relations (PNTR) as part of the WTO accession process. During that debate, several commentators predicted opening China's domestic market would inevitably lead to the opening of China's domestic political system.

I do not believe this is an issue of simple cause and effect. Open economic systems do not, of and in themselves, inevitably lead to open political systems. But I do believe that without an open economic system there can be no hope of developing an open political system. As China moves towards a more open, less centrally controlled economy, the government will play a diminished role in the operation of the market. A more open economy will stimulate the growth of the private sector. Trade liberalization will allow foreign competition and challenge the efficiency of state owned enterprises. This is exactly what is happening in the insurance sector in China today.

But the effect goes beyond the economic arena. The energized private sector and expanded middle class in China already is demonstrating increased interest in democratic structures and understanding of international norms and values. For this reason, we all need to support wider interaction between civil society groups in both countries.

Many variables affect the evolution of political systems. We cannot control the evolution of any one political system. But we can influence the direction any particular country will take.

I mentioned earlier in my statement that opening China's market would not be automatic. It will take effort on China's part and vigilance on our part. I believe this is a safe prediction for me to make. I also believe increased private sector activity will put additional pressure on the Peoples Liberation Army to follow through on President Jiang's mandated reforms requiring the military to shed its business operations. That also is a safe prediction, and it will be a healthy result for both the United States and China.

The leaders of China face the monumental task of constructing a productive, stable future for the world's largest nation. China's future will determine in no small measure the future of the entire Asia Pacific region. To shape a stable and prosperous future for itself, China must engage in the rules-based institutions formed by the community of nations and must commit domestically to the formation of a robust middle class. U.S. business can contribute to both of those efforts, to the benefit of both nations.

In particular, American and other foreign businesses will bring to China their corporate values, which include among others, standards for treatment of workers, commitments to safety in the workplace, codes of conduct for business operations, support for rule of law and campaigns against fraud and corruption. The presence of foreign firms in China will increase and accelerate the pace at which international business standards, transparency and accountability permeate the Chinese economy. This infusion of international standards and values will influence the opening of China's political processes in a positive manner.

I want to emphasize three points in closing.

In the long term, we must devise a framework for US-China relations which advances our national interests while recognizing that both countries' political and economic security are inextricably linked.

In the near term, we must complete China's WTO accession, monitor China's implementation of its WTO commitments and work with China to build its capacity to comply with WTO obligations.

To be successful in the near and long term, we must establish a domestic political consensus that trade with China is a win-win proposition, economically and politically for the United States, China and the entire Asia Pacific region.

Thank you, Mr. Chairman.

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