My readers know I follow the U.S. debate about China with great attention, so I have been watching Hank Paulson emerge with his new book, “Dealing With China: An Insider Unmasks the New Economic Superpower.” I attended an event last evening at the Asia Society at which Paulson, the former CEO of Goldman Sachs and former U.S. Treasury Secretary, engaged in a very stimulating conversation with Evan Osnos, of the New Yorker, who also has a book out called, “Age of Ambition: Chasing Fortune, Truth and Faith in The New China.”
Paulson’s knowledge of China is impressive. He described how the leadership is dealing with a serious over-extension of credit at the municipal level that could create a serious financial crisis. He knows that the environment is a major seemingly intractable issue and he’s trying to propose solutions. And he is aware that President Xi Jinping is cracking down on corruption in the Communist Party and on dissent and human rights across the country. I suspected something was wrong, however, when Paulson mentioned that there were “reformers” and “disrupters” in the Party leadership. If Xi is emerging as the strongest president since Mao Tse-tung, how can it be that reformers and disrupters are going to raise their heads and risk getting blown away?
In an op ed in today’s Wall Street Journal, Paulson finally and clearly revealed his flawed assumptions about the inevitability of Western-style reforms in China, specifically its economy. He argued that “reforming” (always a dangerous word when it comes to China) is the only course of action for China’s leadership. “That is why I remain cautiously optimistic about the prospects for reform, despite the gloom and doom that pervades so many analyses. China’s leaders understand what they need to do…The success of China’s reforms will be determined by how fast and to what extent the country rolls back subsidies and regulatory advantages for state-owned enterprises, opens key industries like energy and finance to the private sector, and fosters competition from foreign companies.” My analysis is that Xi’s brand of “socialism with Chinese characteristics” does NOT want to tilt the playing field dramatically against the state-owned enterprises or open sensitive sectors to foreign competition. His government appears to be in the act of curtailing the ability of Western companies to compete in China while it gears up its own “national champions” to compete with them–the complete opposite of what Paulson is suggesting.
A fair enough debate. But here is where Paulson loses it. “I believe the market can work magic,” he concludes. “And paradoxically, the Chinese Communist Party says it wants to rely on that magic too. In the most important economic policy statement in decades, the November 2013 Third Plenum, it declared that the market would henceforth play the ‘decisive role’ in the economy. So the Communist Party must face this paradox: For all its efforts and successes since launching economic reform in 1978, what the party must do, if it truly wants China to evolve into a global leader, is the hardest thing yet. It must commit itself to setting the economy free.”
Paulson is misinterpreting what the Party means by “the market.” When the Party talks about market mechanisms, it means it wants them to serve the state’s interest. It is not going to allow uncontrollable economic forces to be unleashed. The Chinese leadership no more believes in a “free” economy than they believe in relocating to Uranus. Despite his considerable experience with China, Paulson ultimately gets tripped up because he cannot accept the fact that the Chinese are charting their own unique path. He does everyone a disservice by suggesting that Western economic ideals can “work magic” in China and encourage its control-oriented leaders to launch a “free” economy.
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