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Interview: Hank Paulson on dealing with China and Xi Jinping (+video)

Is China going to beat the US at its own game of capitalism? And is China the enemy of the US and the West? The former US Treasury Secretary argues against over-estimating China and the idea that conflict with the US is inevitable. 

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    Former Secretary of the US Treasury and former CEO of Goldman Sacks Henry 'Hank' Paulson, sits in the conference room in his office with the backdrop of downtown, on August 20, 2013 in Chicago, Illinois. Paulson is now chairman of the Paulson Institute which he founded in 2011 to promote sustainable economic growth and a cleaner environment around the world, with an initial focus on the US and China. Paulson served in the treasury under former President George W. Bush during the economic collapse.
    Melanie Stetson Freeman/The Christian Science Monitor/File
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Henry Paulson’s ties to China date back 25 years and span more than 100 visits. As chairman of Goldman Sachs and as US Treasury Secretary during the George W. Bush administration, his contacts and relations with Chinese officials and leaders grew wide and deep. In 2006 he went out of his way to meet a relatively unknown provincial leader named Xi Jinping, now China’s president. Mr. Paulson's approach to the Middle Kingdom has been described as "engagement without illusions."

Paulson is engaged with both China's economy and its natural world and environment, one of his passions. “Dealing with China,” his new book, reflects on his experiences as well as ongoing efforts with China through the Paulson Institute in Chicago. Paulson hopes the book will be published in China but says he won’t accept any cuts or alterations. He spoke recently with The Christian Science Monitor. 

Q: You were early captivated by the energy around the opening of China's closed and ancient society. What has sustained your interest?

The people I worked with were the disrupters, the ones using capital markets transactions as levers to open up parts of the economy to competition. They were open to ideas, looked everywhere in the world for the best ideas and then looked to adapt them to China.

Growing up on a farm in the Midwest and never having visited China until 1991, it just seemed a foreign place, the culture, the history, the political system. But as you get to know the Chinese people, I have found it is very easy for Americans to relate to them. They are pragmatic, have a similar sense of humor and are very relationship-driven.

Over time, I got engaged and interested and watched all kinds of people being lifted out of poverty. What’s kept me going back is an effort to help my country and help humanity. The US-China relationship is very complicated and difficult right now. China has emerged and become a formidable competitor. We are partnering at the same time that we are competing, and this needs to be a healthy competition.

When people say, “Why are you helping China?” I say I’m helping the United States of America. The Chinese are going to do things that are in their interest.  And a good number of those things are also in our interest. The environment and the economy and the intersection of those two, for example, is the place where I strive to make a difference. The key is to turn many of our shared interest into tangible results so the populations of each of our nations can see the value of the relationship.

Q: Your chapter “Darkness at Noon” describes the abysmal air quality in Chinese urban areas.

I strive for better understanding of China in the United States and a strong US-China relationship because I want my grandchildren to grow up in a safe, prosperous and environmentally sound world. The odds of that happening are greater if the US and China are not in conflict but working in complementary ways. If I look at the global ecosystem and look at China’s global footprint, when I think about biodiversity, global ecological health, and clearly climate change, which is the biggest economic and environmental risk we face, we can’t avert the worst outcomes unless China is a big part of the solution.  

Q: How did you get involved?

In the late 1990s, I helped establish the Asia-Pacific Council of The Nature Conservancy and persuaded Lee Kuan Yew, Singapore’s senior minister, to co-chair it with me early on. We got a number of Chinese to participate, including Wang Qishan, now a member of the [Politburo] Standing Committee who runs the anti-corruption campaign. We focused on establishing parks in Yunnan. The place is spectacularly beautiful, the biodiversity. It is home to the peony, the azalea, the rhododendron – all sorts of interesting plants, four great rivers within 50 miles of each other, including the Mekong, Irrawaddy, and Yangtze. There is a spectacular Tiger-Leaping Gorge, a subtropical rain forest and peaks over 20,000 feet.

Q: If the air is clear in China in 20 years, why did that happen?

The main challenge in China is to burn less coal—and to develop and deploy clean energy technologies at scale. The Paulson Institute is working on financing models that will help attract private capital to do just that.  Also, China is very inefficient in its use of energy.  In fact, half of all new buildings in the world are going up in China, and buildings are the source of 40 percent of global emissions.  As I often stay, the cheapest and cleanest energy is energy you don’t use.  So we are also developing actionable ideas for more energy efficient buildings

Q: You are trying to strike a balance in your approach to China?

The level of understanding between China and the US is not where I think it should be, considering how important the relationship is. Some people tell me they think China has developed a better form of capitalism because they make decisions quicker, they are going to out-compete us, they are going to eat our lunch. But I feel there is as least as big a risk of exaggerating China’s strength as there is in underestimating its potential. This is a country that has huge challenges, an economic system that has run out of steam, which it needs to reboot. With a 10 trillion dollar economy, that is difficult.

Other people say they are becoming an enemy. It is hard to find examples where an established power and a rising power don’t come to conflict. But I don’t think that is inevitable. As a matter of fact, it is unthinkable… We do have a lot of shared interests with China. But those interests don’t make a lot of difference unless you turn them into tangible accomplishments. We need to do things that bring our countries closer together. I am a big believer in building linkages. For example, the Paulson Institute has a  program on cross-investment and its benefits.

Q: President Xi Jinping in the past year has instigated a serious new level of crackdown against civil society – intellectuals, artists, writers, NGOs.

Xi Jinping has been very direct. He doesn’t want Western style multiparty democracy and doesn’t want Western values. So he’s been clear, and I think he means every word of that. To Westerners and Americans this seems to be a paradox: how can you be willing to open up an economy and subject it to more competition at the same time you are tightening up the political system, tightening the controls over the media and internet. I think Xi looks at it and says the Communist Party is the source of stability, the only institution strong enough to drive these reforms. I look at it and say I don’t believe this paradox is sustainable in the longer term. We live in an information economy; how do you run a global company if you are not connected and don’t have the free flow of ideas. How does a country innovate?

What are the biggest issues for the Chinese people today? Talk to them and they are concerned about corruption. They are concerned about dirty air, property rights, food safety, the household registration system, freeing up the labor market, big income disparities and the lack of a social safety net. And Xi is dealing with those, focusing on them, and at the same time he’s eliminated the one-child policy and labor reeducation camps. But I believe that over time, as the country becomes more affluent, and the next several hundred million people go to the cities, this system is going to be difficult to sustain.

Q: In his "Age of Ambition” Evan Osnos points out that China’s weakness is local governments that borrow willy nilly for infrastructure projects. You note a staggering debt largely around real estate that has grown to 204 percent of GDP.

Everyone has picked up on this. They’ve been too reliant on exports and municipal investment in infrastructure. They have a broken municipal finance system because mayors and governors don’t really have budget authority and responsibility. Partly it is a real estate bubble. In the US, a mayor generally has responsibility for financing and overseeing municipal services such as police and fire departments, school systems and so on. In China the sub-national government has responsibility for funding all of these and many more things that we in the United States finance at the federal level.  In the midst of urbanization, the primary way the Chinese cities have funded themselves is to take someone’s land and sell it to a developer. So a lot of growth is driven by debt-financed real estate. That is not sustainable. They have to fix that.

I am not predicting a serious financial crisis, and every country has financial disruptions. The key is to manage them in a way that they don’t spill over and damage the global economy. When I look at China’s growth I’m not looking at, is it 6.8 or 7 or 7.1 percent. I want to see the drivers of that growth. If they use the same old tools to create jobs, the debt the government will ultimately be responsible for will be more costly.  And the problem is more likely to spill over and disrupt the real economy. They understand the problems and are working to fix them, which requires a new system of municipal finance and a new tax system.

This is a country that has $4.3 trillion in reserves, and has some very experienced people. So today, this problem is manageable.

But for Xi the issues are as much political as much as they are economic. There is a need to change the relationship between the central government and the provinces and the municipal government. And there is no consensus on that. They need to open up to private competition in finance, telecommunications and energy. And again there are divisions on this.

Q: In brief, how is the US dealing with China? 

We have to recognize we are dealing with a different China. The new normal is not just an economic new normal. Xi Jinping is not waiting for us or anyone else to declare them a great power. If they act like one, that shouldn’t shock us. That’s what every powerful nation including the US has done. China’s foreign, military, and economic policy are all evolving. We need to be strategic. There are all these crises and every administration tends to go from crisis to crisis. And yet if we can reset the US-China relationship, all these crises would be easier to deal with.

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