James Kynge, the Financial Times’ China expert, says that Hank Paulson’s latest book is a must-read for anyone who owns “an aircraft carrier or two”. That would seem to limit the readership at about nine people. But the book’s publisher will be cheered that Kynge says the tome is not just for world leaders, recommending it to anyone that “deals with China”. That means that it ought to have a large and growing audience.
WiC agrees that there is much to be gleaned from Dealing with China, Paulson’s memoir, not least because the author has met most of the country’s top politicians on his 100 or so trips to China.
The book is broken up into four sections. Perhaps the least interesting is the last, where the author gives policy prescriptions for how the Oval Office should interact with the Chinese. His most concrete suggestion is that a single senior figure be designated to manage relations between Beijing and the American president: “Without one go-to person for the US, the Chinese often wonder who speaks for our president. I can’t count the number of times I have been asked by Chinese officials who President Obama is relying on to manage the China relationship or who the right person to talk to about a given issue is.”
The other three sections are more lively, recounting Paulson’s personal dealings with China, first as an investment banker, then as US Treasury Secretary and finally as head of the Paulson Institute, the organisation he founded (and that he characterises as a “think and do tank”).
The first 177 pages need to be treated with the greatest circumspection. They deal with Paulson’s time at Goldman Sachs and at times read like a bit of an advert for his former firm. The narrative might even leave certain readers with the impression that Goldman Sachs was the main protagonist of China’s economic reform process. Of course, Paulson never explicitly makes this claim, but the way in which he recounts deal after ‘landmark’ deal makes it easy to imagine that nothing else was going on in China apart from Goldman-led IPOs for state-owned enterprises.
This obviously wasn’t the case. Much else was happening, not least an economic revolution in the private sector as huge numbers of tycoons built business empires (Paulson does refer to a handful of the tycoons, but much later on, spending about five pages on them towards the end of the book).
So is the Goldman section of the memoir worth skipping? It would be a mistake to do so, because it is stuffed with most of the best anecdotes about China’s leaders.
And, to be fair to the author, Paulson doesn’t portray every Goldman deal as an unalloyed success.
The best example of this is his narrative about the all-night argument over the pricing of PetroChina’s shares (the overseas listed entity that was spun out of oil major CNPC in 2000). Ma Fucai, who then ran CNPC, was not happy at the IPO price and embarked on a fiery negotiation to wear the underwriters down, telling Goldman and Chinese investment bank CICC to raise the price and get more cash for the government.
“There was a lot of arguing among the CNPC and CICC officials in Chinese; I am told the Chinese word for ‘traitor’ was tossed around liberally. Around 2am Ma fell asleep on the conference room table, and it was up to Jiang Jiemin, the executive whom the government had appointed to oversee the IPO, to carry on,” Paulson recounts. “ ‘Your chairman’s gone to sleep,’ Mike Evans [Goldman’s head of equity capital markets] told Jiang. ‘You and I have worked for two years on this transaction. This is the only price the deal works at. You have to trust me that this is what we have got to do.’
“At last Jiang Jiemin agreed. When Ma awoke, he reluctantly accepted the decision, but Goldman Sachs would remain in his doghouse for years to come,” Paulson reveals.
(For those curious how their careers evolved: Jiang Jiemin was arrested for corruption in 2013, while Ma later spent time working at the anti-graft agency and now looks to be safely retired.)
Paulson admits early in the book that he knew little about China before the 1990s: “For the first two thirds of my life, China was as far from my mind as it was from my hometown of Barrington, Illinois (population 5,102). My grasp of the country was shallow and ill-informed.”
But slowly he got to know more about the key personalities shaping China’s reform drive. He first met President Jiang Zemin in 1992, for instance. Paulson was part of a visiting group, but received a disproportionate amount of Jiang’s attention because the leader wanted to show off his language skills. “He began speaking in English to me, rattling off the names of US companies like GE, Boeing and IBM…” Paulson remembers. “He looked me in the eye and said ‘Assets equal liabilities plus equity’. I’m not sure our country’s leaders could have summed up a balance sheet as succinctly as this born-and-bred Communist.”
Paulson’s most important early relationship was with Zhu Rongji, initially China’s economic tsar and later its premier. All of the early privatisation mandates Paulson won for Goldman came via Zhu. The book begins with a recollection of a meeting to discuss how the telecoms sector might be restructured and sold to international investors in an IPO. It was a cold day in February 1997. “I noticed the edge of his long johns peeking out under his trouser cuff,” Paulson writes. “He was, as I’ve said, a very practical man, and the old offices in Beijing in those days could get awfully cold and drafty.”
Paulson recounts he met frequently with Zhu during the nineties, describing him fondly as “direct and no-nonsense and, at least with me, a good listener who took blunt advice when he thought it was in China’s best interest.”
But perhaps the American’s most enduring relationship would be forged with Zhu’s protégé, Wang Qishan. Arguably the second most powerful man in China today – as head of the anti-graft campaign – Wang got to know Paulson when he was running China Construction Bank, then the parent of CICC (the institution whose staff were angrily called ‘traitors’ by Ma Fucai).
“Wang was a warm, dynamic leader who exuded charisma and intellectual curiosity and had an uncanny ability to connect with people, Chinese or Western. I could see he was going places,” the author says.
It would be easy to be cynical about that last prediction, but the editor of WiC can personally attest from interviewing Wang in 1997 that the CCB head was unlike other Chinese bureaucrats in his style and willingness to answer questions (Wang even predicted that a Chinese bank might buy Morgan Stanley by 2007, which very nearly happened during the 2008 crisis).
Wang is the only one of China’s senior leaders that Paulson makes clear he’s on first name terms with. This is revealed in an anecdote about Wang’s time running Guangdong province, when he was tasked with cleaning up the debt-ridden mess at Guangdong International Trust and Investment Corp (GITIC).
Paulson wasn’t keen on getting mired in the same rescue process. “When Wang Qishan asked for help, I took a deep breath and said ‘Are you sure you can’t find someone better to do this job, Qishan?’
“‘This is for me, Hank, and it’s important,’ he replied. ‘I want you to handle this.’”
Such was the level of trust, it seems, that when Wang told Paulson it was safe to come to Beijing at the tail-end of the SARS epidemic of 2003, the American agreed.
“If Wang Qishan said it was okay, that was good enough for me.”
Paulson claims that decision to go to Beijing turned out to be pretty significant. “I’ve been told I was the first Western CEO to come to China post-SARS… I didn’t know it at the time, but this would in some ways become my most important trip to China while at Goldman. For years afterwards, Chinese friends referred fondly to my visit, while others I met for the first time often said I was well known to them thanks to the publicity it had generated.”
His relationship with Wang would continue to be important when Paulson joined the US government. During the 2008 financial crisis, Wang was Paulson’s counterpart in the SED (the China-US Strategic Economic Dialogue, a high-powered forum between Washington and Beijing). But by this point the financial meltdown was altering the complexion of Sino-US relations, with Wang speaking frankly to his longtime friend.
“ ‘You were my teacher, but now here I am in my teacher’s domain, and look at your system, Hank. We aren’t sure we should be learning from you anymore’. The crisis was a humbling experience, and this was one of its most humbling moments,” Paulson admits.
Another important long-term relationship was formed with Zhou Xiaochuan, China’s long-serving central banker. Of all the political bios in the book, the one on Zhou reveals one of the most interesting pieces of information. “A penetrating thinker, Zhou was also exceptionally well connected, always a huge plus in China. His father, a powerful official in the post-revolution First Ministry of Machine Building, had been an early mentor of Jiang Zemin’s, when the future Communist Party leader was a young official at the same ministry.”
In Paulson’s banking career he went to China an estimated 70 times – a record that only a handful of his international peers can equal. His next batch of visits would be as US Treasury Secretary. He had been reluctant to take on the role, but it was words of advice from Zhou Xiaochuan that swung him towards joining the final two years of the embattled Bush administration. When Paulson told Zhou that he had declined an initial offer, Zhou thought it was a mistake. “That’s too bad, he said, adding that he spoke as a friend. ‘It is a great honour to serve your country,’ Zhou said. ‘More important, you never know what opportunity you may have had to make a difference.’ Zhou’s words stuck with me, and I returned to them again and again over the next month or so as I began to second-guess my decision.”
Paulson first met Xi Jinping in China in 2006. At the time Xi was running Zhejiang province. “I had put a lot of thought into the person I would meet first [as Treasury Secretary]. Xi Jinping was the perfect choice. A rising political star, Xi had been an extraordinarily effective leader in promoting Zhejiang’s private sector, and I thought that a meeting with him would send another strong signal to Beijing.”
In fact, Paulson had met Xi a few months before in New York. “Xi was a big presence who lit up a room and I could see why he’d moved up the leadership ranks quickly,” he remembers. “He was incisive and forward-looking. He stressed that China should replicate the entrepreneurialism of Zhejiang’s thriving private sector before it lost its low-cost advantage in manufacturing as the price of labour rose because of growing prosperity. He was focused on the need to help industry in Zhejiang and other coastal regions move up the product value chain the way, say, Singapore had done in past decades.”
In another example of the Chinese leadership’s policy of treating ‘old friends’ well, Xi has met Paulson twice since he became president. But the conversations might have got a bit more stilted. Paulson’s key takeaway from a 2013 sitdown was that Xi’s goal is for China to become a “moderately prosperous society” by 2020 and a fully modernised “affluent and prosperous” nation by 2049. Last year’s meeting saw Xi assure Paulson that “reform in China is not an empty slogan” and that his administration would complete 300 reform measures by 2017.
During his time in government Paulson also got a chance to compare Xi with Bo Xilai, since the latter took part in the Strategic Economic Dialogue. Bo sat across the table as minister of commerce, but Paulson claims not to have been a fan. “Bo’s confidence and communication skills were impressive, as was his memory for facts, but I found him overbearing and aggressive,” he writes. Paulson also claims to have detected an ideological gulf between Bo and Xi. “Bo contended that China’s cheap labour would always give it a competitive edge. I was struck by the difference in his approach to that of Xi Jinping in Zhejiang. Xi was already looking to the day China lost that cost advantage and thinking how the country could innovate.”
Paulson would meet Bo again, this time when Bo was running Chongqing. It was just two months before Bo was ousted in early 2012. Not that you would have known it at the time. “I can recall nothing in his manner that hinted at the trouble soon to come,” Paulson says. “Quite the opposite. He made a point of extolling the ‘magical strengths’ that had made Chongqing a ‘breeding ground for future leaders’.”
Paulson is honest enough to admit that he didn’t see Bo’s downfall coming: “I assumed Bo was powerful enough to prevail over whoever might be out to get him. I sure got that wrong… The scandal riveted the Chinese public much the way Watergate had preoccupied US citizens nearly 40 years before.”
The other disgraced figure who Paulson had contact with was Zhou Yongkang, the most senior figure yet to be purged for corruption. The two men seem to have got on well, and the former banker says little about Zhou’s downfall. Perhaps that’s also because Zhou played a critical role in getting the Strategic Economic Dialogue up and running, and this was an initiative close to Paulson’s heart.
In his Goldman days Paulson initially met Zhou during the early stages of the PetroChina IPO, when Zhou was running CNPC. In an early favour, Zhou asked Paulson if he could arrange a meeting with former American president George HW Bush, who had founded an oil drilling outfit in the 1950s and knew China well. The meeting happened when Zhou was travelling with an oil delegation to the US in 1998. “I’ve been an oilman all my life,” Paulson heard Zhou tell President Bush, “and you can always trust an oilman”.
(Somewhat more bizarrely Paulson also notes that on the New York leg of the trip Zhou took his colleagues to the “famed steakhouse Smith & Wollensky and then they went en masse to see the new movie Titanic.”)
Just ahead of the PetroChina IPO Zhou was shifted over to run the Ministry of Land and Resources. Paulson says Zhou wasn’t pleased about the move: “I’ll never forget visiting him once in early 1999 in his Beijing office, when he said to me, ‘Hank, you know important people in our government. Use your influence to get me out of here.’ ”
So when it came to persuading the Chinese that the Strategic Economic Dialogue was a worthwhile project, the American turned to his “old acquaintance”. During a visit to Washington in 2007, Zhou was invited to meet Paulson at the Treasury. “I knew that Zhou Yongkang, as a member of the Politburo, could help us to leapfrog the bureaucracy and bring our idea for the SED directly to Hu Jintao,” Paulson records. And sure enough,
Zhou agreed to relay the proposal back to Hu, which did the trick in formalising the new diplomatic channel.
“After the meeting’s formalities were over, I gave him a quick tour of my office, showing him some of the Treasury memorabilia. Zhou showed a particular interest in the pistol confiscated from Roaring Twenties gangster Al Capone,” Paulson writes. Considering that the wayward security tsar is now behind bars himself, there is a certain irony to the recollection.
Of course, one question most readers of Dealing with China will want answered is whether Paulson thinks that Xi can guide China safely through the ‘new normal’ era of lower growth. And the author remains a bull, it seems. “I wouldn’t fault a longtime China watcher for being sceptical – Beijing spent much of the last decade before Xi took power talking a good game about reform but not getting much done,” Paulson suggests.
“This leadership group is different, I believe. Xi Jinping and his team are not just thinkers – or talkers – but doers, pragmatists ready to use persuasion and power politics to achieve their goals.”
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