ON THE OCCASION OF THE CELEBRATION CEREMONY FOR MOU SIGNING BETWEEN CFETS AND CME

I am delighted to be in Chicago as China embarks on this important initiative with the Chicago Mercantile Exchange (CME). China has no better partner in this effort than the Chicago Mercantile Exchange. The CME is one of the preeminent futures exchanges in the world and a leader in financial product and technology innovation in the global financial markets.

China holds a significant and growing place in the international trading system and so it is appropriate that China acquire the financial and economic tools available commensurate with its size and presence in the markets. Today's announcement of a memorandum of understanding between the CFETS and the CME to further develop a currency derivatives market is certainly a step in the right direction.

The Bush Administration has always maintained that the international trading system works best with free trade, with the free flow of capital and with currency values set in open, competitive markets. It is best for the global system, for the United States, and for China itself, for China to move to a flexible exchange rate regime as soon as possible. Importantly, China acknowledges this and is making progress toward this goal. The Chinese are actively taking steps to modernize their financial infrastructure with the goal of achieving a flexible currency. In addition to today's announcement, Chinese authorities have also taken measures to liberalize certain capital flows.

This cooperative initiative is an outstanding example of the kinds of exchange-rate-related technical cooperation efforts Treasury has consistently advocated as part of our on-going technical cooperation program with China's financial sector and financial regulators.

This memorandum of understanding represents a significant milestone on China's path toward greater exchange rate flexibility. It is a demonstration of China's commitment to move forward along this path, but China must make continued progress toward achieving this goal. Risks of unexpected movements in exchange rates are inherent in foreign exchange markets. This initiative helps China develop the technology "backbone" and internationally standardized tools -- such as futures and forward contracts -- allowing companies and individuals to insure against such risks at a nominal cost.

This initiative illustrates the seriousness of China's effort to reform and strengthen its financial system as it moves towards a more flexible exchange rate system and greater integration in the world capital market. By drawing on the expertise of the private exchanges China will have access to the best technical expertise available.

China and the Treasury Department have this year initiated a technical cooperation program to help strengthen regulatory and financial sector infrastructure as China prepares its economy for more currency flexibility.

As China prepares to manage its economic and financial risks, technical cooperation is even more important, so that the move to exchange-rate flexibility happens in an orderly fashion. For a large economy like China's, an orderly transition to greater currency flexibility is important for China's own domestic economy, for the Asia region, and for global economic growth.