Xi Jinping’s Problems Are ‘Monumental’

“This is a China where you can make at least as big a mistake exaggerating their strengths as you can in underestimating their potential.” On April 10, I spoke with Henry Paulson about his new book, Dealing With China: An Insider Unmasks the New Economic Superpower, released April 14. The former investment banker and U.S. treasury secretary told me that he wrote it because “I believe very strongly that this U.S.-China relationship is as important as any bilateral relationship we have in the world. And it’s becoming more difficult and more complex because we are dealing with a new China,” one that Paulson said “is much more assertive on the international stage.” But Americans continue to worry about a country that looks fearsome from the outside, yet is keenly aware of its challenges and limitations on the inside. “It’s important,” Paulson told me, “that we recalibrate this relationship.”

Paulson’s emergence as a major figure in U.S. China relations was not something he could have predicted. China was, Paulson writes in his new book, “as far from my mind as it was from my hometown of Barrington, Illinois” for much of his life. But the prime of Paulson’s career — first in high-level positions at powerful investment bank Goldman Sachs, which he headed from 1998 to 2006, then as U.S. Treasury Secretary from 2006 to 2009 — happened to coincide with arguably the greatest period of change in China’s long history. It’s one that would find Paulson at the center of the country’s pathbreaking reforms, despite — or perhaps because of — his status as an American outsider.

Paulson’s enjoyed a front-row seat to China’s rise from economic backwater to colossus. His first contact with China came in 1991 as co-head of investment banking at Goldman Sachs, a time when China was undertaking drastic steps to modernize its previously moribund economy. Paulson writes that in the early days, he and his team “might as well have been running a school” introducing Chinese authorities to the rules and norms of Western finance. Their first big deal, in 1997, was to shepherd China Telecom (now China Mobile) through the first-ever initial public offering, or IPO, for a Chinese state-owned enterprise. But first, the telecommunications firm had to be essentially created “from scratch” out of a sundry collection of state assets that had never been knit together into a marketable corporate structure that sophisticated buyers would recognize. Mega-deals like that — including subsequent Goldman-led IPOs of PetroChina and Bank of China, all of which required comporting with listing regulations stricter than Chinese laws at the time — were one way that Chinese leaders used pressure from foreign investors and foreign laws to force domestic change. He told me this afforded him an advantage when he took the helm at Treasury in 2006.

“I felt that the huge benefit that my experience in China brought with it was the working relations I had with China’s leaders,” Paulson said. (That includes a one-day stopover in June 2003, when anxiety about SARS was still at its peak; Chinese interpreted the visit as a vote of confidence that, Paulson writes, put him in good graces there for years afterwards.) Paulson told me he had “worked very closely” with Wang Qishan, now China’s top anti-corruption official, Zhou Xiaochuan, now governor of the country’s central bank, and others who worked to reform China’s economy. As a result, Paulson said, he came to the Bush administration “with a relationship of trust and credibility with the leaders” in China.

That, in turn, has allowed Paulson to amass some intriguing details about China’s top brass in his new book. Former president Jiang Zemin may have admitted that the Chinese women’s swim team doped (as suspected) during the 1992 Olympic Summer Games when he joked with Paulson shortly after the games that the team’s success owed to “foreign technology.” Erstwhile rising political star Bo Xilai, now in prison for corruption, was an impressive communicator but also “overbearing and aggressive” in person, Paulson writes. Zhou Yongkang, China’s former security and petroleum czar now charged with corruption (no relation to Zhou Xiaochuan), told former U.S. President George H.W. Bush during a 1998 visit to Bush’s office in Houston, “You can always trust an oilman.” (On that same U.S. trip, Zhou and his entourage took in a viewing of the box-office hit Titanic.) During a subsequent 2006 visit to Paulson’s office early in his term as Treasury secretary, Zhou showed a particular interest in an old pistol once belonging to Al Capone.

Paulson’s book also evinces admiration for several of China’s contemporary leaders. Wang, now spearheading China’s aggressive anti-corruption drive, was “driven by an almost kinetic sense of mission.” Central banker Zhou struck Paulson as “tall and graceful … a man of many talents.” Chinese President Xi Jinping, whom Paulson met after joining Treasury when Xi was party secretary of Zhejiang province, “was a big presence who lit up a room.”

But the 2008 financial crisis tested the relationships that Paulson had worked so hard to cultivate. Despite all the ink spilled over the causes and aftermath of the collapse in U.S. credit markets, Paulson writes, “Less well known to Americans is how profoundly the crisis would shape Chinese attitudes and policies.” There was a degree of triumphalism in response, Paulson writes. “’You were my teacher,’” Wang told Paulson at a meeting Annapolis in June 2008. “Look at your system, Hank. We aren’t sure we should be learning from you anymore.” 

Paulson told me that Chinese reforms, which his book describes stalling substantially in 2003 after the retirement of reformist premier Zhu Rongji, nonetheless have a long way to go. President Xi is evidently trying to change that. “I can’t think of a leader in history that is attempting to change so much for so many people on such a massive scale as Xi,” Paulson said. “He’s got the economy to reboot, he’s got an urbanization model to reboot or change, in addition to the environment to clean up, the corruption problem,” as well as Beijing’s continuing tension with the outlying provinces and cities it governs. “You’re talking about really [deep] reforms.”

That includes reshaping China’s massive municipalities. “I’ve long believed the environmental issue is an economic issue and a political issue,” Paulson told me. “The three are entwined. You can’t build prosperity on any basis other than a long-term basis, and you can’t do that if you don’t have a healthy environment. And I think history shows that countries have to have some kind of a threshold level of economic success before they begin to have the means and the will to focus on the environment.” China may have reached that point, or be near it; to that end, Paulson’s eponymous institute, founded in 2011, is focused in particular on China’s cities, which plan to add over 200 million additional internal migrants by 2025. The Paulson Institute has helped create several initiatives aimed at China’s urban future, including a CEO Council for Sustainable Urbanization — which involve not just major American firms but also Chinese companies like e-commerce giant Alibaba and conglomerate Fosun – and an annual award for a city-level sustainability project in China that could be adopted as a model in other Chinese municipalities.

“Many of these [sprawl] problems in many countries stem from flawed policies, or policies that have run out of steam,” Paulson told me. “In China, you need to begin with a municipal finance system that is broken and needs to be fixed.” Currently, “the way mayors fund [their towns and cities] is to take land from farmers and sell to developers.”

Paulson comes across as a believer in international initiatives as a way to help China reform. Paulson thinks the controversial U.S.-China Bilateral Investment Treaty (BIT), a possible agreement to liberalize mutual investment which has been discussed for years but now appears to be inching closer to reality, could further open China’s economy to Western competition. “I’m very positive about the progress so far,” said Paulson, whose institute is helping to rally support for an agreement. “I think that the Chinese side has crossed a big threshold with their willingness to provide a negative list which essentially says, rather than having to go seek approval for every investment, these are the parts of our economy that are open and these are the parts that aren’t. Now this won’t be easy to get done. And it sure won’t be easy to get done this year. But if this is done properly and it’s a high standard BIT, it can be transformational and help open up more of the Chinese economy to competition and create more opportunities for U.S. businesses and U.S. workers.”

Paulson’s also less fazed than some observers by the China-led Asia Infrastructure Investment Bank (AIIB), which announced its charter membership this month. In words written prior to that announcement, Paulson had cautioned that U.S. authorities “should not reflexively oppose China’s efforts to lead a new multinational initiative such as the fledgling [AIIB].” I asked him if he had any friendly advice for the Obama administration, knowing now that it had tried, and largely failed, to talk potential charter members out of joining the bank, and has since pledged to welcome it. “The right policy,” Paulson told me, “would have been to say, when China moves to set up this AIIB, we will work with you. Even if we’re not joining, we’re an observer, we are advocating for the kind of standards and practices we think are best. It also doesn’t make a lot of sense given the new China we are dealing with to be opposing something unless you are pretty sure you can win.”

Paulson stressed he wasn’t piling on the current administration. “I don’t look at all of this as certain members of the press do, saying that this is some watershed event or some mega problem. The Obama administration has got many things right with China.” He added, “I think the climate change agreement” between the United States and China, announced in November 2014, “was really historically important.”

To Paulson, some are simply worrying about China too much. He said that some Americans are asking, “Gee, have they invented a better form of capitalism? Are they going to eat our lunch? Are they going to surpass us as the preeminent global power or something?” While Xi “doesn’t want our values or our form of government,” Paulson reminded me, it’s also true that the problems Xi is “dealing with are very significant; they’re monumental.” That means everyone should root for Xi to succeed in his reforms — “if he doesn’t, it’s going to hurt us all.” But ultimately, according to Paulson, “You should be less worried about whether China will overtake us than what we’re going to do [in the United States]. Because if we do the things we need to do to get our house in order and fix our economic problems and restore our economy, we’re going to be the preeminent power for a long time. And if we don’t, we won’t.”

Correction: It was Wang Qishan who told Paulson, “We aren’t sure we should be learning from you anymore” during a June 2008 meeting in Annapolis, not Zhou Xiaochuan as stated in an earlier version of this article.

AFP/Getty Images