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Taking on the Dragon

The Honorable Henry M. Paulson, Jr.

(Business Today) – Is there a template for ‘dealing’ with China? If yes, there are few better qualified to write it than the author who served as the CEO of Goldman Sachs (1996 to 2006) and thereafter as the US Treasury Secretary in the twilight years of the Bush administration. Henry M. Paulson, Jr has been engaged with the Chinese market for over two decades during which he came to know and work with leaders like Jiang Zemin, Xi Jinping, Zhu Rongji, Li Keqiang, among others, and also leading Chinese businessmen.

The Communist Party of China (CCP) controls Chinese businesses, functioning like a revolving door: access to one gives, and reinforces, access to the other. Paulson details the many deals that came Goldman’s way, making both sides richer. What comes through is that China perceptively exploited the competition among top US companies to be a part of the modern equivalent of the 19th century “cutting of the Chinese melon”. “US companies were falling over themselves to get a seat at the table,” writes Paulson. Even high flying CEOs like Paulson himself were not beyond pandering to the Chinese when required, including, in one instance, getting out of the car in a traffic jam and running, yes running, not to be late for a meeting with the leadership. Champions of free-market created wholly-owned business subsidiaries of the CCP. Time and again, allowances were made to win business which would not have been made in other countries.

The Chinese, in contrast, come through as more hard headed, demanding market value for state assets. They leveraged the US companies not just for business but also for skill development through education and training. Thus, Premier Zhu Rongji invited Paulson to help restructure Tsinghua University’s School of Economics and Management which he had founded. Not just that, he attended the meeting of the reconstituted Board with Paulson as the Chairman. If only the Delhi School of Economics had gained similarly with Dr Manmohan Singh as PM!

Will a severe economic downturn threaten the CCP’s hold on power? Paulson doesn’t think so. He reasons that China has a pragmatic, decisive leadership, deep pockets and hardly any domestic constraints. The greater long-term risk is the contradiction between seeking to change the growth model while tightening the screws on political activities; between advancing economic and social reform and modernising governmental functioning while clamping down on political freedoms. The Chinese leadership, he feels, will have to recalibrate the prosperity for stability mantra which provides legitimacy to the CCP’s claim to monopoly of political power once people take prosperity for granted.

As for the future, both sides agree that the US-China relationship is the most important one. Paulson notes there is no quick remedy to the gap in understanding: in China that the US wants to contain or thwart China’s rise; in the US that China may one day become an enemy. Xi Jinping’s approach is to have a “pioneering spirit” to take actions in “mutual interest even if they are unpopular in both countries.”

Paulson notes, in a straightforward and candid way, that doing business with China means taking China on faith. It is a country “ruled by men not laws.” His view is that the market “would inevitably lead to economic and political freedom”. How the rule of men, not laws, would lead to that has, indeed, to be taken on faith.

The bottom line from Paulson: Deal with China from a position of strength.

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