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Book Review: Henry M. Paulson, Dealing With CHINA (NY, Hachette Books, 2015)
Raymond Richman, 2/29/2016

The book shows that Henry Paulson, former Goldman Sachs president, is a fabulous salesman, a friend of the Chinese oligarchy and helped create China as an efficient economic power. As he writes in his preface: “Today’s China is a land of superlatives. It is home to the world’s fastest supercomputer, the biggest wind-power base, the longest sea bridge. It produces and uses nearly half of the world’s coal, cement, iron ores, and steel; it consumes 40 percent of the aluminum and copper. Forty years ago most  Americans wouldn’t have imagined owing China one red cent. Now it is the U.S.’s biggest creditor, owning just under $13 trillion of our government’s debt.” And “The  Chinese are formidable competitors. But we should not fear competition or shrink from it.”

The first part of his book is devoted to Goldman Sachs' successful attempt to give key Chinese industries access to international capital markets.  He describes his meetings with an important Chinese leader, Zhu Rongji, in charge of directing China’s economy, former Mayor of Shanghai and a protegé of Deng Xiaoping the leader of China whose reforms beginning in 1978 led to the spectacular double-digit growth of the Chinese economy during the succeeding decades. The meeting led to Goldman Sachs being appointed to take the nations’s telecom business private, and Goldman Sachs became well-known in China and the rest of Asia.

He deals with the efforts to privatize China’s state-owned oil company which was a conglomerate, including petro-chemicals, gas stations, and many other business activities, and had responsibilities for workers’ housing, health and other social services for several hundred thousand employees. It was an enormous task to create a company that met SEC requirements for an IPO. An optimist, he believed that China’s embrace of markets over central planning would inevitably lead to more economic and political freedom there.  He wrote in an op-ed article published in the New York Times, “The case for permanent normal trade relations with China is the story of PetroChina repeated a hundred-fold or a thousand fold.... The individual freedom, initiative, and responsibility inherent in free markets are, by their very nature, at odds with authoritarian rule.”  Time will tell. He does not mention that the U.S. and China seem to be on a collision course in the Spratlys. He writes in Ch. 6.  Cleaning the Stables in Guangdong, that China had embarked on reforms but the reforms required changes that led to “waste, mismanagement, fraud, and corruption on a massive scale.”

China needed top flight business schools and asked for Goldman Sachs help. A first class school of business management was created which partnered with the Harvard Business School, and they created an international board of outstanding executives. Essentially a do-gooder, Paulson helped create a Nature Conservancy in China to conserve natural resources. But he was always looking out for Goldman Sachs.  Paulson and Goldman Sachs brought out Bank of China’s IPO in Hong Kong  although he initially wanted to bring it out in New York at the same time. Ultimately, Goldman Sachs brought out Bank of China’s IPO in New York and invested heavily in ICBC. Chinese Banks boomed with Goldman making millions.

He made his first visit to China as Secretary of the Treasury to launch the Strategic Economic Dialogue between the U.S. and China, meeting with Xi Jinping who became the next Chinese leader. The first SED was held in Beijing at the end of 2006 with large delegations from both countries. On the agenda were China’s economic development strategy, making China’s growth sustainable, promoting trade and investment, and specific energy and environmental issues. They discussed problems with China’s currency, the renminbi, high-tech trade, pirated DVDs, increasing China’s consumption, China’s urban-rural imbalance, financing purchase of imports from the US, and airline traffic to and from the US. He makes no mention of China’s enormous trade surplus with the U.S., but it was discussed at the meetings, the U.S. expressing concern about the low value of the renminbi and its effect on trade balance. Paulson served on the Nature Conservancy Asia-Pacific Council with Wang Qisham, one of the negotiators, and signed a 10 year Framework for Cooperation on Energy and the Environment.

The 2008 stock Market collapse led to the failure of FNMA and Freddie Mac, which were bailed out by putting them under the Federal Housing Finance Agency. The decision was influenced by foreign government ownership, including Chinese, of their bonds. GM and Chrysler were on the verge of failure and were bailed out by loans from TARP funds. The US welcomed investment from China. Paulson falsely states that this  “led to 5 million U.S. jobs”. Buying existing enterprises does not create American jobs. China and the U.S. also signed an EcoPartnership agreement, “ensuring local institutions could work together to address environmental issues”. Utter nonsense! He writes, the SED led to hundreds of agreed upon programs. “I saw each one as a brick in a strong structure we were building.” This is simply wish-thinking. 

Most of the book deals with his life after retirement, and through his foundation advising China “to shift its $10 trillion economy from an over-reliance on exports and inefficient government investment in infrastructure, fueled by ominously rising debts at all levels of regional government, toward increased domestic consumption  and a greater emphasis on service industries and high-end manufacturing.” He argues that the U.S. and China need to work together “spurring global growth, combating climate change, maintaining peace and stability.” Climate Change? He has become an environmental fanatic, giving China bad advice on climate change! 

Upon retirement besides book-writing, he writes, Wendy and I intend to devote ourselves to the cause of conservation. He founded an institute at the University of Chicago which held a conference on urban sustainability in China and another a year later, on integrating rural migrants to the cities. He writes, “I believe that it will become increasingly obvious that climate change poses the biggest environmental and economic risk to the world.” We do not think it is a risk for the United States, Canada, and Russia. We consider this soft-mindedness to be evidence of approaching senility.

He writes that he favors agreements to protect foreign investors, so-called Bilateral Investment Treaties. Ch. 18. The $10 Trillion Reboot. Need to modernize its financial sector. Credit overgrowth. “The best course for China is to continue to free up its markets, eto promoted a vibrant domestic private sectors, and to all foreign firms to do business unhindered.,”

He writes that there is another darker side of China today lack of freedom of speech, freedom of the press, and expressions of dissent. “Undertaking political change will be risky, but postponing it too long will eventually pose even greater risks or China and the world.” Asked, “Why are you helping China?” We have a mutual interest, he writes. 

The book offers an inside look at a great investment officer. But he is less qualified to deal with world political problems than he believes himself to be. Mutual interest, indeed.