MARKETS FOR CHINA
AT THE DAWN OF 21ST CENTURY
and East Asia
Prospects of Financial Cooperation
September 23, 2003
stand at the dawn of the Twenty First Century. Admittedly, the
geopolitical landscape is laden with controversy and danger.
Similarly, there exists the specter of economic difficulties
within many regions of the world. Nevertheless, there is abundant
reason to be optimistic. To state the obvious: The Twenty First
Century represents unlimited opportunities for humankind. That
sentiment is especially true for China and East Asia.
me to elaborate—but to do so, allow me first to make some comparisons
and review where the world stood exactly 100 years ago, at the
dawn of the Twentieth Century. What can we learn from the past
century? What insights can we glean? How can we apply the lessons
is perhaps instructive to remember that at the outset of the
last century, Sigmund Freud had just published his "Interpretation
of Dreams," and Albert Einstein had just unveiled his famous
three papers on relativity. Britannia was still the empire on
which the sun never sets; the railroads were in their Golden
Age, automobiles were considered a passing fashion, and in America
the phonograph was the most popular form of home entertainment.
right from the beginning, the Twentieth Century offered extensive
testimony of its message of hate and violence. In France, the
Dreyfus Affair had reared the ugly head of bigotry; in the U.S.,
the Supreme Court delayed civil rights by embracing the separate
but equal doctrine; the Spanish-American War had begun; American
President William McKinley was assassinated; the Russo-Japanese
War broke out; and there was a bloody rebellion in Russia at
other words, not too much different than at the dawn of the present
therefore cannot fault a historian if he characterized the last
century as one plagued by conflict and social upheaval. Indeed,
the Twentieth Century included a new low in the history of mankind—two
world wars and the Holocaust. Still, as my father optimistically
said to me: "Don’t forget, the world went from the horse and
buggy to the Moon."
other words, if there is a single lesson to be gained from the
momentous upheavals of the Twentieth Century, it will not be
found in the political or economic arena, but rather in the sciences.
In spite of the horrors that unfolded, science and technology
dominated the destiny of that century. I have no reason to believe
that the Twenty First Century will be different. In this respect,
it is instructive to underscore that the technological lynch-pin
of what occurred during the last century was devised precisely
on December 23, 1947—right in the middle of Twentieth Century.
For on that day, three Bell Laboratory scientists in the US who
ten years later received the Nobel Prize in physics—William Shockley,
John Bardeen, and Walter Brattain (who coincidentally was born
in Amoy, China)—had invented the first transistor. It was the
birth of a technology that would serve to dominate the balance
of the Twentieth Century and clearly much of the Twenty-first.
The Digital Age was born.
this measurement, our present century is still decades away from
its defining invention.
we forget, transistors and their offspring, the microchip, transformed
everything: The computer, the space program, the television,
the calculator, the automobile, the telephone, and, most important,
telecommunications. It enabled the world to migrate from the
gold standard to the "information standard." The new era fostered
instant mass informational flows in total disregard of internal
prohibitions or national boundaries. Simply stated, the technology
of the Twentieth Century moved mankind from separate and insulated
geographical regions toward an interdependent world economy.
Globalization was upon us.
a consequence, today, at the dawn of the Twenty First Century,
nearly every country on the planet has a market-oriented economic
system and is attempting to be a competitor in the global marketplace.
For the past 20 years when we spoke of a global economy, we were
talking about only 25% of mankind___mostly North America,
Western Europe, and Japan. Suddenly, there are three billion
more participants in the global economic system.
centuries China stood as a leading civilization in culture and
science. Then came the political upheavals and internal problems
of the 19th and early 20th centuries that
brought a virtual halt to its history of progress. However, in
1978, the new government under Deng Xiaoping introduced market
reforms with an eye toward a market economy. The result: China
again became the world’s growth leader with an output that quadrupled
in the last two decades.
China made the transformation from a communist centrally-planned
economy into what authors John Wong & Lu Ding of the National
University of Singapore, call a "socialist market economy," which
increasingly embraces free markets principles. As they point
out, within a few short years it became the workshop of the world.
The rapid growth has strengthened China’s economic power and
begun the process of raising the standard of living for its people.
Make it in China and export it back to the rest of the world
is now a predominant business strategy. Foreign-affiliated companies
now account for half of China’s exports of manufactured goods.
Indeed, direct foreign investment into China has become the world’s
major trend, putting America in second place for the first time.
That is a dramatic metamorphosis.
continued growth will not be without pain. China’s markets are
still a long way from embracing all the tenants of the free market.
Today, the largest difference between rich and poor countries—between
economic hope and economic despair for its people—is the freedom
and efficiency with which they can utilize their resources. Free
and efficient capital markets ensure that resources are allocated
wisely. The more efficient the system, the better the allocation
of these resources. Efficient markets lead to greater market
liquidity. A liquid market reflects truer price values and gives
investors confidence in the marketplace. As a consequence, capital
markets are strengthened, capital cost is reduced, and capital
is utilized more efficiently. Ultimately, the standard of living
is enhanced, and social order is greatly benefitted.
manage modern financial risks, the marketplace has turned to
derivatives. The economic function of these instruments is to
provide a safety-net based on benchmark groupings of inherent
business exposures or to unbundle the risks involved into their
basic components and transfer them to those most able and willing
to assume and manage each component. Consequently, financial
derivatives—both on centralized futures and options exchanges
or customized in the OTC market—can be likened to a gigantic
insurance company that allows financial market risks to be adjusted
quickly, more precisely, and at lower cost than is possible with
any other financial procedure. It’s a process that has strengthened
capital markets and improved national productively growth and
standards of living.
me to quote from the congratulatory message by Alan Greenspan,
Chairman of the Federal Reserve Board, to the Chicago Mercantile
Exchange on the Thirtieth Anniversary of its launch of financial
futures at the International Monetary Market division, the IMM:
financial derivatives markets, which the IMM has played a
critical role in developing, have significantly lowered the
costs and expanded the opportunities for hedging risks that
previously were not readily deflected. As a consequence,
the financial system is more flexible and efficient than
it was 30 years ago, and the economy itself may be more resilient
to the real and financial shocks.
note that financial futures were developed at the CME in the
wake of the breakdown of the Bretton Woods and its system of
pegged exchange rates. Our market was an important factor in
advancing the development of global markets. Which brings to
mind the current controversy over a possible revaluation of the
Chinese Renminbi. We are sympathetic to the fact that currency
controls, capital controls, and export subsidies often serve
a purpose during the formative stages in an emerging economy—but
at some point, the economy must throw off such shackles in order
to avoid impeding further development. That point is now. Accordingly,
we urge the development of a derivatives market that can assist
in managing the risks attendant to an emerging and blossoming
financial ecosystem. More to the point: The Chicago Mercantile
Exchange stands ready to assist the development of a Renminbi
applaud the National People’s Congress acknowledgment for the
need for additional futures instruments. Under the direction
of the China Securities Regulatory Commission there is now a
reformed market structure with three important futures markets:
The Shanghai Futures Exchange (SHFE), the Zhengzhou Commodity
Exchange (CZCE), and the Dalian Commodity Exchange (DCE). These
actions have given much needed encouragement to the growth of
a modern futures market in China. It propelled the Chicago Mercantile
Exchange, the largest futures market in the US, to recently execute
a historic Memorandum of Understanding with the Shanghai Futures
Exchange. Our agreement will provide expertise and education
to the SHFE toward the goal of making it a leader in China and
East Asia and ultimately provide a mechanism to distribute its
cannot be over-emphasized: Transformation in information technology
created a world economy. Current political confrontations notwithstanding,
it will continue to foster more globalization, greater interdependence,
instantaneous informational flows, immediate recognition of financial
risks and opportunities, continuous access to markets of choice,
more sophisticated techniques, new innovations, and intensified
competition. These are the unalterable trends of the Twenty First
Century. The markets of China must embrace this paradigm.
this I am certain: The Twenty First Century, no different than
its predecessor will be dominated by scientific and technological
change. While those changes cannot be foreseen with precision,
they will determine its destiny. However, the following truth
will not change: We will continue to live in a highly complex
and hazardous economic environment where information will continue
to travel at Internet speed. We will continue to live in a world
in which competition will remain intense and global, where interest
rates, exchange rates, and other asset prices will remain volatile,
and where dangers as well as opportunities will continue to rapidly
appear and disappear on a constantly changing financial horizon.
We will continue to live in a world where the possibility of
any economic dislocation, the prospect for any change in value
or price, the expectation of any alteration in national economic
policies, whether it be the result of international turmoil or
the consequence of domestic business disruptions, whether it
be in finance or agriculture will demand the means by which to
limit the attendant risks or an opportunity to capture the perceived
or real profit potential.
realities represent the opportunities and challenges in the Twenty
First Century for the markets in China and East Asia. I am confident
you will succeed.
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