FIRST UK-CHINA FINANCIAL DIALOGUE MEETING

CHANCELLOR WELCOMES GREATER PARTNERSHIP IN DEVELOPING ECONOMIC LINKS WITH CHINA

Following the first UK-China Financial Dialogue meeting today, Chancellor Gordon Brown and Chinese Finance Minister Xiang Huaicheng welcomed agreement on the need for further strengthening of prudential regulation and financial systems in emerging markets. They also agreed on the scope for greater partnership between the two countries in financial sector development and commercialisation of state owned enterprises in China.

The full text of a communique issued following the meeting is attached.

Mr Brown said :

"I was very pleased to welcome Finance Minister Xiang and his colleagues to London for the first in a regular series of meetings between the Finance Ministries, Central Banks and Financial Regulators of our two countries.

"China's economic transformation over the past twenty years has been remarkable. It is now amongst the largest economies in the world, and is increasingly becoming integrated into the world economy. As such we clearly have a common interest in pursuing greater dialogue on financial and economic issues.

"Indeed, with one quarter of the world in recession, the ongoing world economic turmoil has highlighted more than ever before the very real interdependence of national economies and financial structures in today's globalised economy. Both the UK and China therefore have a clear mutual interest in seeing a positive resolution to both short-term problems facing the world economy today, as well as the challenges for the longer term.

"The meeting today with Minister Xiang sets the ground for increased cooperation and partnership on all then economic and financial challenges that both our countries face."

NOTES TO EDITORS

1. The UK-China Financial Dialogue represents a key element in new framework for enhanced partnership agreed during the visit of the Prime Minister Tony Blair to China in October 1998.

2. The programme for the first UK - China Financial Dialogue comprised a series of meetings between both Ministers, senior officials from the Treasury, Bank of England and Financial Services Authority, with counterparts from the Chinese Ministry of Finance and the People's Bank of China.

Joint Statement of the UK-China Financial Dialogue, 10th November 1998

1. At the invitation of the Chancellor of the Exchequer Gordon Brown, Finance Minister Xiang Huaicheng visited the United Kingdom and held talks with the Chancellor and Governor of the Bank of England Eddie George in London on 10th November 1998 on the occasion of the first UK-China Financial Dialogue. Minister Xiang also met with United Kingdom Prime Minister Tony Blair. Throughout the day, as part of the Dialogue, senior officials of Her Majesty's Treasury, the Bank of England and the Financial Services Authority also held extensive discussions with their counterparts from China's Ministry of Finance, the Ministry of Foreign Affairs and the People's Bank of China on a broad range of both economic and financial issues.

2. Both sides noted the deepening cooperative relations between the United Kingdom and China, and the comprehensive new framework for an enhanced partnership between the two countries agreed by Prime Minister Tony Blair and Premier Zhu Rongji in China in October 1998. The UK-China Financial Dialogue represented a key
element of that new framework to which both sides were committed, recognising the growing global interdependence of national economies and financial structures.

3. Discussions ranged widely over both domestic macroeconomic and microeconomic policies, and international economic and financial issues.

Domestic issues

4. The United Kingdom set out the action taken to build a stable economy capable of sustained and steady growth, including:

the new monetary policy framework which had removed politics from interest rate decision-making by giving operational independence to the Bank of England. Long-
term interest rates were now the lowest for 35 years and inflation was at its 2 1/2 target, compared to nearly 10 per cent in the early 1990s;
the new fiscal policy framework and the Code for Fiscal Stability. Borrowing had been cut by #20 billion in the Government's first year, and as a result of prudent spending plans, even with more moderate growth next year, the Government remained on track to meet its tough fiscal rules. It was set to repay #2 billion of debt this year and to achieve current surpluses totalling #33 billion over the next five years;
proper funding of public services to build a fairer society, including further investment of #40 billion extra in schools and hospitals;
provision of employment opportunities for all through greater employability, increasing skills and family friendly employment;
a new single regulator was proposed to remove the scope for duplication, gaps and inconsistency in financial regulation, together with new powers to tackle market abuse; and
with the Pre-Budget Report, a strategy to address the fundamental structural weaknesses that had held back the British economy in the past, with proposals to raise national productivity through a strategy for innovation, investment, competition and skills.

5. China outlined the measures implemented throughout the course of the year to stimulate its economy and to ensure sustainable growth, including more proactive monetary and fiscal policies. On monetary policy, money supply had been increased and credit control quotas abolished. On fiscal policy, an additional RMB 100 billion (equivalent to about #7.3 billion) of government bonds had been issued to the state commercial banks, earmarked for infrastructure with a view to re- igniting domestic demand. Despite these efforts to further stimulate economic growth, it restated its aim to pursue over the long run relatively tight monetary and fiscal policies.

6. China also reiterated its commitment to moving towards a socialist market economy, particularly to restructuring both its state-owned enterprises and its financial system. The next steps include:

restructuring of China's central banking system by abolishing the geographically-oriented branch network;
accelerating commercialisation of its state banks, strengthening of provisioning policy in line with international norms and practices, implementing of prudent and internationally accepted accounting standards, and initiatives to establish a financial asset management corporation and deposit insurance systems;
further reform, restructuring and innovation of state owned enterprises and improvement of their efficiency by strengthening accountability and better supervision;
and better provision of a social safety net to the laid off workers from state owned enterprises.

7. Both sides recognised the importance of China's contribution to international financial stability via its positive, commendable and responsible policy with regard to the Renminbi exchange rate, and agreed on the importance of an orderly and progressive approach to capital account liberalisation.

8. Both sides recognised how the two issues of enterprise and financial sector reform were inter-related, and how recent experience elsewhere in Asia highlighted the need
for sound financial and regulatory systems. Both sides agreed to pursue greater partnership in developing their enterprises and financial sector institutions. The UK
welcomed the grant of an insurance licence to Royal and Sun Alliance and a branch licence in Beijing to Standard Chartered earlier this year and looked forward to the
continued opening up of the financial services sector in China, with the economic benefits this will bring.

9. The two sides also noted the numerous bilateral schemes aimed at assisting with the development of the financial services infrastructure within China, including:

the Financial Sector Training Scheme (FIST) to promote the acquisition of skills and experience through work attachments at major UK financial organisations;
a seminar on financial sector supervision and regulation for representatives of the People's Bank of China at the invitation of the Bank of England and the Financial
Services Authority; and
a partnership between the People's Bank of China and the Department for International Development to study the implications for the banking system of state-owned enterprise reform.

International issues

10. The discussions between the Chancellor Gordon Brown and Minister Xiang Huaicheng also focussed on international issues.

11. The Chancellor set out the measures agreed by the G7, under the Presidency of the UK, to modernise the financial system and put in place new rules and procedures to promote international stability and growth, including:

the agreement to implement new arrangements for finance to deal with contagion, including an enhanced IMF financing mechanism;
the commitment to develop and implement international principles and codes of best practice on fiscal policy, financial and monetary policy, corporate governance and accounting and legal standards; and to work to ensure that private sector institutions comply with new standards of disclosure;
pursuing proposals to establish a new process for surveillance of supervisory regimes, bringing together the international institutions and national regulators to cooperate and coordinate their activities, and to exchange information more systematically on risks in the international financial system; and
the promotion of adoption of policies that better protect the most vulnerable, including the development of general principles of good practice in social policies.

12. Minister Xiang recognised the importance of addressing both immediate problems and longer term weaknesses and noted the G7 initiatives in this regard. In particular, he emphasised:

the need for further strengthening of prudential regulation of financial systems and of short of capital flows, especially the supervision of hedge funds, including via the enforcement of international standards and practices and better and more transparent information on such capital flows;
the need to design programmes to assist crisis-affected countries to achieve short-term stabilisation, and in the longer term, restructuring, recognising the distinct time frameworks needed for each objective. These should include a clear social dimension, minimising the possibility of social unrest and protecting the most vulnerable groups in society;
the need to fully incorporate emerging market economies, interests in the design and implementation of the reform of the global financial system, particularly their
specific local conditions and different stages of development; and
the need for industrialised countries to continue to create conditions for strong domestic demand-led growth and exchange rate stability, and further opening of
their markets. These policies are essential to improve the outlook for sustainable growth of the world economy.

Next steps

13. The two sides agreed to take forward the UK-China Financial Dialogue in China within the next 18 months.