Brussels, 6 October 2010
Two years ago when the financial crisis just broke out, I underlined the importance of confidence at the Fifth China-EU Business Summit. Today, I want to emphasize the importance of calm, wisdom and courage. In the presence of so many business leaders from China and Europe, I want to focus on the issues that are high on the minds of EU business people and use this opportunity to set the record straight and clear the misunderstandings for better cooperation between China and the EU.
The basic fact is that China-EU trade and investment have been growing fast. EU statistics show that in 2009, EU exports declined under the impact of the financial crisis, yet its exports to China grew by 4%. In the first half of this year, they surged by as much as 42%. In my brief visit to Germany yesterday evening, I said to Chancellor Merkel that China-Germany trade now stands at about US$10 billion a month and may exceed US$120 billion this year. The entire China-EU trade approached US$400 billion last year and may top US$500 billion this year. This is what the reality is.
On the RMB exchange rate, in my meeting with the eurozone troika yesterday, I urged European political and business leaders not to join the efforts in pressing for RMB appreciation. Let's take a look at some basic facts: since the start of the reform of the RMB exchange rate regime in 1994, the real effective exchange rate of the RMB has appreciated by 55% whereas some major currencies have depreciated. In July 2005, a further step was taken to reform the RMB exchange rate regime. Since then, the RMB has appreciated by 22% against the US dollar and during the same period, China's trade surplus with the US has kept rising by a large margin. China runs a surplus in trade in goods but a deficit in trade in services, a surplus in processing trade but a deficit in general trade, and a surplus with the US and the EU but a deficit with the ROK, Japan and ASEAN. Aren't these facts enough to show that the imbalance is caused by the trade structure, not the exchange rate? The euro has experienced major fluctuations recently, yet this was caused by the US dollar, not the Chinese yuan. How can one put the blame on China? Trade imbalance is a structural issue in a globalized world and should not be politicized. Our goal is to pursue balanced and sustainable trade, not a surplus at all.
In the freezing winter of January 2009, I visited Europe and brought confidence in tiding over the crisis. Soon afterwards, China sent purchasing missions to Europe to buy European products. The EU is China's strategic partner. When some eurozone countries encountered difficulties, China did not stand idly by. We maintained our holdings of euro assets and bought more euro bonds, extending a helping hand to Iceland, Greece, Spain, Portugal and Italy in their most trying times. We will continue to support those countries, helping them pull through the hardships. The entrepreneurs here know it well that China has been a real friend.
Let me make the case that one should not pressure for RMB appreciation from another perspective. The profit margin of many Chinese exporters is only 2-3%, no more than 5%. Should the RMB appreciate by 20-40% as demanded by some people, many of these companies would have to close down, jobs would be lost, migrant workers would have to return to their home villages, and social stability would be undermined. A crisis in the Chinese economy is in no way good news to the world.
In 2009, China contributed 50% to the world economic growth. For many enterprises, China represents a huge market with great potential. Here, I want to once again ask our business friends not to press for RMB appreciation. We are firm in advancing the reform of the RMB exchange rate regime. Our goal is to put in place a managed, floating exchange rate regime based on market supply and demand and with reference to a basket of currencies. We will gradually increase the flexibility of the RMB exchange rate and keep the RMB basically stable at an adaptive and equilibrium level. An unstable RMB will lead to instability in enterprises, in employment and in the society. Should things go wrong in the Chinese economy and society, it would bring disaster to the world.
Second, on China's investment environment. I'd like to say that China will press ahead with reform and opening-up and this policy of ours will not change. Only by reform and opening-up can China achieve development. The basic policies that we have developed in the course of reform and opening-up will not change. The only thing that has changed is that foreign investment in China has been put under more standardized and orderly regulation.
The concern of entrepreneurs about the investment environment is three-fold: intellectual property, indigenous innovation and government procurement. I can tell you in a responsible way that all enterprises registered in China according to China's law enjoy national treatment and the products made by the foreign-invested enterprises in China are made-in-China products. We protect not only your intellectual property, but also all other lawful rights and interests.
Third, on the export of raw materials, rare earth, to be specific. Given my years of research on rare earth, I think I have a say on this issue. There are two types of rare earth, heavy rare earth and light rare earth. They exist in different parts of China. Heavy rare earth mainly exists in South China, Jiangxi province for example, and light rare earth mainly exists in North China, like Baotou of the Inner Mongolia Autonomous Region. In the 1980s and 1990s, rare earth was poorly regulated in China and we knew little about its extraction technology. It was then that some countries bought large quantities of rare earth from China at a very low cost, and they are fully aware that they still hold much rare earth in stock. China's output of rare earth takes up a lion's share of the world's total, much bigger than its share in the world's total rare earth deposit. We have not blocked rare earth exports, nor will we do so. If we are to achieve the sustainable development of rare earth, meeting both the domestic needs and the needs of the world, we should not only take into consideration the near-term interests, but more importantly, adopt a long-term perspective. It is necessary to exercise regulation over rare earth, but we will never block its exports. China will not use rare earth as a bargaining chip. We are for the sustainable development of the world.
China hopes to develop broader, deeper and closer business ties with EU countries. In terms of trade and investment, the EU has become China's biggest partner, far ahead of the United States and Japan. Honestly, the EU has done fairly well in relaxing high-tech exports to China. Our cooperation in the Galileo project, Airbus and nuclear energy is a good example. Just this morning, the King of Belgium talked with me about cooperation on the fourth-generation technology for mini-nuclear plants.
The development of China-EU business ties serves the fundamental interests of both sides. Standing here today, I feel the big responsibilities. I will do my best to promote China-EU economic cooperation and trade and work hard to overcome the temporary difficulties and problems in our cooperation.
Let us join hands to enhance China-EU business ties and build a better future of the China-EU comprehensive strategic partnership.