US Commerce Secretary Donald L. Evans is urging China to speed up its economic reforms if it is to maintain its gains.

Speaking to business students at Jiaotong University in Xian, China, October 26, Evans said, although China has made much progress, "the march toward a free market economy in China is incomplete." He noted that since 2001 China has been the fastest-growing market for U.S. exports, but expressed concern that that export growth "may be in jeopardy if the pace of reform slows or if there is backsliding."

There is a rising concern in the United States, he said, over China's failure to implement some of its obligations as a member of the World Trade Organization (WTO). "From the United States' perspective, free trade and open market access only works if both of our economies operate under the same rules and a good faith commitment to the spirit of all agreements and obligations."

There is also a rising concern about the pace of reform in China, he said. "An open trading system assumes that enterprises in one country will compete on equal terms with enterprises in another. ...

"When an economy like China's continues to, in part, support state-owned enterprises that continue to be funded by state-owned banks, regardless of their performance, the companies simply do not face the competitive pressures that enterprises in a market economy face," Evans said. "And therein lies the potential for problems in our trading relationship."

Protecting intellectual property rights (IPR) is another area where more progress is urgently needed, Evans said. "We know that China's government understands the importance of IPR protections. We should be open and honest about the fact that there is still a flood of counterfeit and pirated products being produced and consumed in China. These actions are inconsistent not only with China's international obligations, but with its goal of economic reforms and long-term economic growth."

Evans also observed that China's "present system of indentured capital, in which the savings of Chinese workers are appropriated by state banks and transferred through non-performing loans to unprofitable state-owned enterprises, is unsustainable."

Fully half of the portfolios currently held by China's banks are non-performing loans, he observed, adding that "these loans are, effectively, a form of government subsidy."

"These lending practices by China's state-run banks are fueling rapid growth," he acknowledged. "But to the extent that loans with no chance of repayment are going into the ledger, they are also building the Chinese economy on an unsound foundation. This is not a problem you can grow your way out of."

Evans said the U.S.-China trading relationship plays a vital role in the global economy today and the United States and China have a responsibility to make that relationship work.

"China's success," he said, "offers hope for people in developing economies around the world: by moving toward a market-based economy, a country can create the conditions to successfully lift hundreds of millions of people up from poverty."

The model China represents is critically important, he said, to China's future and to the three billion people in the world who live on less than two dollars a day.

"There is too much poverty and not enough hope," he said. "Expanding prosperity to the half of humanity that struggles under the burden of poverty is perhaps the great test for our generation."

Following is the text of Evans' remarks, as prepared for delivery >>>