A post argues that in the U.S., Chinese language courses overly emphasize hanzi. I found someone linking to this post saying that he thought the anecdote rather proved the opposite, that maybe the problem was that rather than too much hanzi, there was too little. In any event, I have to say that after three years of college Japanese, I think I did know more than 500 characters, and that you probably need to know much more to reach an equivalent level in Chinese, but this was because I studied outside of the classroom. Also, for students in a third year course to be moderately fluent for speaking and functional for literacy, when dealing with a language like Chinese, seems to be normal.  It only appears strange in this instance because these students had experience in Chinese before beginning the university courses.

IMHO there just are limitations to how much speaking/listening improvement can occur in a classroom setting, because improvements in this area seem to be mostly dependent on time spent speaking and listening. Personally, I think if a student wants to live or study in a foreign country, literacy is important, because otherwise they’ll be unable to read signs or fill out forms. They’ll be unable to read newspapers or books. It will be difficult for them to build vocabulary, because they are cut off from this method of learning new words.