In April 2006, Henry M. Paulson, the chief executive officer (CEO) of Goldman Sachs, was invited for the lunch at the White House given in honour of the visiting Chinese President Hu Jintao. Paulson had already been approached by the White House to become Treasury Secretary and he had decided not to accept the offer. At the dinner, Paulson met Zhou Xiaochuan, China’s Central Bank chief, whom he had known from his years of dealing with China as the Goldman Sachs CEO. Zhou asked him if he was going to take up the job of Treasury Secretary. Paulson told him that he had declined the offer and was not sure how he could be effective in the last two years of an “unpopular administration”. “It’s a great honour to serve your country,” Zhou told him. “More important, you never know what opportunity you may have to make a difference.”
In his book Dealing With China: An Insider Unmasks the New Economic Superpower , Paulson writes that Zhou’s words struck him, and “I returned to them again and again over the next month or so as I began to second-guess my decision after some soul-searching and conversation with close friends.” It is amusing to know that a Treasury Secretary of the United States had taken the advice of a Chinese Central Bank Governor to take up a job at a time when there were serious disagreements between the two countries over trade practices. But Paulson’s relations with China cannot be seen through the prism of volatile Sino-U.S. bilateral ties. They run deeper.
As the CEO of Goldman Sachs, Paulson had played a key role in overhauling China’s state-run enterprises in the 1990s, including China Telecom. The Chinese government was so happy with the initial public offering (IPO) of China Telecom that Vice-Premier Zhu Rongji told Paulson that if he had 10 people like Mike Evans (Paulson’s colleague at Goldman who oversaw the China Telecom reform), “I would turn around all of the state enterprises”.
China many not have “turned around” all of its public enterprises, but Goldman Sachs, under the leadership of Paulson, continued to play a vital role in Beijing’s implementation of the “opening up” policy. It had helped the IPO of China’s National Petroleum Corporation, prepared the blueprint for the overhaul of Guangdong Enterprises Holdings and laid out the path for banking reforms. When Paulson became the Treasury Secretary, these business-to-business ties paved the way for government-to-government cooperation, but China never ceased to amuse him. In Dealing with China , Paulson reconstructs his years of association with China and its top leaders, including Jian Zemin, Hu Jintao and Xi Jinping.
Paulson divides the book into three sections: “Banking on Reform” (about working with China while at Goldman); “Breaking New Ground” (on his Treasury years); and “Building Bridges” (on his time running the Paulson Institute).
He says the book is the perspective of “a businessman who brings a first-hand financial knowledge of China and its corporate and political leaders. I have gleaned this over more than 100 visits to the country and nearly 25 years of dealing with Chinese officials on commercial matters while at Goldman Sachs, on affairs of state and macroeconomic policy as U.S. Secretary of the Treasury, and, nowadays as head of the Paulson Institute, which promotes sustainable economic growth and a cleaner environment through greater cooperation between the U.S. and China.”
What makes his approach different from other Western writers on China is that he is less preachy on “universal moral values” and his focus is on international cooperation and building business and economic links with Beijing. “I am not saying that China, which is such a different country, with such a different history and culture from ours, must have the same political system that we do. The U.S. after all has evolved in a great many ways since our founding. Just so, change will come for the Chinese,” he writes.
A middle path
Paulson is trying to tread a middle path between lauding the Chinese political system and demonising it. His focus is rather on the need to cooperate and compete with China in both economic and strategic spheres. Americans should root for China to succeed, he argues, because it is in the U.S.’ “self-interest” to do so. The U.S. needs Chinese support to deal with most of the world’s pressing issues, from environmental and economic issues to food security and nuclear proliferation.
How would this cooperation become possible? Paulson puts forward an eight-point agenda for the U.S.’ China policy, this includes the U.S.’ traditional policy of supporting movements within China for greater transparency, adhering to international standards, emphasising “speak with one voice” with official Chinese interlocutors, and finding China “a better seat at the table”. By “better seat at the table”, he means the U.S. should support China’s leadership roles in international groups such as the World Trade Organisation.
The book’s greatest strength is Paulson’s business engagements with China. Even as Treasury Secretary, the thrust of his engagement with Beijing was trade and economic cooperation. While the author gives extensive details about China’s economic reforms, the political process in the country is hardly discussed in the 430-page book. Paulson tries to balance this out in a chapter titled “The Party Line”.
But the chapter does not offer anything that is not in the public sphere. He says the Communist Party has “essentially made a deal with the people to provide prosperity in return for continued political power”. This is a sweeping statement, made without understanding the nuances of China’s political system that is deeply rooted both in the Communist Party’s revolutionary past and the Chinese nationalism it nurtures.
Sino-U.S. relations
Another problem is his overemphasis on cooperation between the two countries. Paulson sounds unrealistically optimistic about Sino-U.S. relations. He goes back several times to the rapprochement in Sino-U.S. ties brought about by President Richard Nixon’s China visit in 1972 to make the point that the once-acrimonious relations turned around for good. “President Nixon and his then National Security Adviser, Henry Kissinger, deftly took advantage of China’s even greater mistrust of a common foe, the Soviet Union, to build a strategic relationship.”
While his assessment on the rapprochement is precise, what it fails to take into account is the emerging complexities of the new world. The common foe called Soviet Union is no longer there. There is no Cold War antagonism between Russia and China. More important, there is increasing cooperation between the two countries in international fora against the U.S.’ foreign policy. Although the U.S. and China have, over the years, built economic and strategic mechanisms to strengthen their ties, there is a deep strategic mistrust between the two. One is a declining superpower and the other is a rising power. The Barack Obama administration has already said that it is shifting its focus from elsewhere to Asia.
Of late, there has been a heated war of words between the U.S. and China over the latter’s “encroachments” into international waters. Paulson, however, does not acknowledge this rift. While writing about the South China Sea dispute, he says: “I support U.S. policy, which is not to choose sides on the underlying merits of competing claims of sovereignty but to stand firm on such long-standing principles as freedom of navigation.”
Here, Paulson is using the U.S. establishment’s diplomatic language. In real terms, the coinage of “freedom of navigation in the South China Sea” is often used (it has appeared even in the latest Indo-U.S. joint statements) to refer to China’s claims on the sea, and the U.S., make no mistake, has taken a clear side against China in these disputes. But Paulson has a pragmatic sense of foreign policy. He writes about the threat an enhancing Sino-Russian cooperation at the global scale would pose to U.S. interests, something which many wonks in Capitol Hill will still not understand. “We certainly wouldn’t want to face a united China-Russia strategic front that could frustrate American interests.” Despite this, he does not think “four decades of goodwill and close cooperation between the U.S. and China are about to be tossed on the ash heap of history”.
The book is written in lucid prose and the style of writing is fascinating. Even a lay reader will enjoy reading Paulson’s experiences in China. The book is filled with anecdotes and stories that not many people may know about China. For example, he says Zhou Xiaochuan was sent to a farm in Heilongjiang, a northern province, for four years. In the brutal winters in Heilongjiang that last from October to May, Zhou kept up his spirits with a five-foot-tall stack of classical music records.
“During the Cultural Revolution, they tried to stop people from listening to classical music but in the countryside, no one cared!” Paulson quotes the Governor as telling him. Zhou is now steering the monetary policy of the world’s second largest economy. That says a lot about the rise of China.
