Book review: Dealing with China: An insider unmasks the new economic superpower
UNMASKS — the author’s promise in the title of this book,doesn’t quite hold true.
Henry ‘Hank’ Paulson is a consummate insider, who has dealt with Chinese business and government figures at the highest level. He was previously CEO of Goldman Sachs and secretary of the US treasury under George W Bush.
At times frank about issues facing China in general, the capacity for making friends which served him so well over decades as a financier and government official regrettably remain as rose-tinted glasses on the author.
The most serious criticism to be made of this book is that it is highly unlikely Paulson lost a single friend because of it. No unmasking is possible without ingratitude. Paulson may be a gentleman, but on the basis of Dealing with China there is no evidence he is an ingrate.
China’s rise is not only a seminal event of our time, it coincides with the author’s career. As a young man he worked in the Pentagon during Richard Nixon’s administration and then as an assistant to the president’s chief domestic policy adviser, John Ehrlichman. The latter’s involvement in Watergate saw him go to jail.
Nixon’s opening to China in 1972, however, was transformative and opened up the opportunities Paulson seized years later.
Paulson’s life as a young man was paralleled in China by the Cultural Revolution and the last years of Mao Zedong. The toll that took on China, its economic capacity, and leadership, both in business and politics, was enormous.
The great reopening led by Deng Xiaoping was the opportunity which the author, on behalf of Goldman Sachs benefited from. It was all the greater because of the country’s skills base had been so undermined by Mao.
Modernisation required foreign skills, and for those who got in and succeeded, the rewards were huge. One of the frustrating omissions in the book, a mask never removed, is that how among the billion dollar deals, he never confides in his reader how much he or his company made. Paulson had skin in the game.
The system being liberated, an “iron rice bowl” was hidebound and grossly underproductive. It had, however, enforced political authority.
If Chinese leaders wanted reform, they were also determined to remain in control. China’s Prime Minister, Li Keqiang, who visited Ireland in May, compared the task of modernising, reforming but simultaneously controlling China as “being like an acrobat with a bamboo stick for balance”.
The acrobat Li told Paulson in 2012 he “has to be careful. He takes one small step after another. He has to keep going forward, he can’t go backward. If he stops, he’ll fall off.”
The scale and scope of change has been enormous. Pre-reform the work unit was the central force in people’s lives. More than a job and salary, on leaving school Chinese were assigned a specific workplace for life; they were fed, housed, and given social and medical services there.
You required permission from work to travel, marry, and have children. By the 1990s competition from private companies had eroded the system, but it remained intact within the enormous state sector.
The state-owned oil company CNPC alone employed 1.5m workers, which, if you include their families, was effectively responsible for 6m people.
In the same period BP, a major international oil company, employed about 80,000 people. The scale of change unleashed was enormous.
The IMF, for one, estimated that between 1990 and 2001 the state-owned sector shed more than 40m jobs. This was the ‘wild-west’ into which Paulson led Goldman Sachs.
Business culture in Paulson’s telling was one where men, not laws, and consequently personal relationships were paramount. The networking skills, globally, of Goldman Sachs were prodigious.
Clearly masterful in delivering for the Chinese government, the range of people they could tap to reach into the Chinese system was astonishing. At the beginning, readying up a barely fit for purpose state telecoms and state oil apparatus for the
open market, were the fruits of those first contacts. As Paulson tells it, 15 years after the IPO which he led for PetroChina, it ranked as the biggest oil producer among listed companies globally. Its value, which raised $2.9bn when floated, swelled to $1 trillion. That’s real money!
Referring to China’s nascent banking system, Paulson called it the “the world’s biggest mattress”. There were also real people involved. The scale of change and growth led to an Irish-style banking crisis, and inflationary growth that was, Paulson says, a contributory factor to the unrest that cumulated in Tiananmen Square in 1989.
So too was the intensity of interconnection at the top of the system, and the scale of kleptocracy.
Spotting talent and making friends with key players as they moved up in a highly secretive system was clearly a talent Paulson enjoyed. It made him valuable to Goldman Sachs, and to the US while he was treasury secretary.
Some ‘friends’ did well; others did too well. One, Zhou Yongkang, the head of internal security, has since been arrested and charged with corruption.
Paulson quotes Reuters as reporting that he and his family controlled $14.5bn in assets. Not only is the scale staggering, it underlines the inherent instability of a system of government run essentially by men not laws, as the author put it.
When that system is the largest country with — likely soon — the largest economy in the world, such tensions could be globally pandemic. The rise of China is by any standards astonishing. What is underexplored is the inherent instability of the system.
This includes not only a vulnerable political system but what Paulson gingerly characterises as not just the “sheer amount of debt” but the opaque nature of both the debt and how the proceeds have been spent. State entities, regional governments, and municipalities have gorged on debt, to an effectively unknowable extent.
The underlying challenges facing an apparently unstoppable behemoth are myriad. Lacking the fissure of a functioning democracy any of them could become the spur to fundamental rupture. In Paulson’s telling, “China stands at a critical juncture”.
Its “nearly four-decades old growth model has run its course”.
Growth rates which peaked at 14.2% in 2007 nearly halved by 2014 when, for the first time since 1998, they failed to reach their target. The iron rice bowl has been broken. Like the acrobat, there is now no going back for the Chinese leadership. They must go forward or fall.
Paulson is passionate and knowledgeable about China. He is also a committed environmentalist who has worked to keep that issue politically alive.
His legacy is the US-China Strategic Economic Dialogue (SED), the inter-ministerial council — in Irish terms — that he founded as treasury secretary, and which is the nexus of the US-China relationship going forward.
He phlegmatically points out that, for all its growth, China’s economic system is in need of a “major overhaul and has few imitators. Its political system has none.”
The real threat to US hegemony is not China, it is its own long-term fiscal unsustainability. Anaemic economic growth is the new American normal. Its debt stands at $56,000 for every American, and no solutions are in sight.
The rise of China, in Paulson’s view, is over told in some reporting. The decline of the West into debt, low growth, and, I would add, demographic decline is the real existential crisis. The last chapter was the most interesting in the book. Paulson’s has insight to share. He could have done so better in a shorter, more focused, strategic, book.
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