Dealing with China

Summary

Podcast Summary: LSE Public Lectures and Events – "Dealing with China"

Date: May 11, 2015
Host: LSE Film and Audio Team
Guests: Hank Paulson (former U.S. Treasury Secretary, former CEO Goldman Sachs, Chairman of the Paulson Institute) and Lionel Barber (Editor, Financial Times)
Moderator: Professor Danny Quah

---

Episode Overview

This episode features a rich, candid conversation between Hank Paulson and Lionel Barber on Paulson’s experiences "Dealing with China"—the subject of Paulson’s then-recent book. The conversation covers China's economic reforms, political leadership, the West’s engagement with China, and the challenges and opportunities of working with such a complex and evolving country.

---

Key Discussion Points and Insights

1. The Dual Narrative of "Dealing with China"

• Lionel Barber introduces the conversation by noting the unique insights in Paulson's book:

  “There are direct quotations. There are inside anecdotes about the Chinese leadership, the people who are making the decisions behind the scenes that you won't read anywhere else.” (04:57)

• The book is described as having two main halves:
  • Paulson’s experience with China’s opening and economic liberalization as Goldman Sachs CEO
  • His later role managing U.S.–China relations as U.S. Treasury Secretary

---

2. Building Trust and Transparency with Chinese Leaders

• Paulson shares how he was able to quote Chinese leaders and build relationships:

  “Everything in this book has to be true. But absolutely everything that's true doesn't have to go in the book.” (08:25)

• Confidentiality and judgment have been key to sustaining advisory relationships.
• Paulson attributes candor and direct communication to earning trust:

  “I tend to be pretty direct...there’s nothing they are hearing from me that they haven’t heard before.” (09:13)

---

3. Goldman Sachs’ Early Bet on China

• Paulson recounts early visits (late 1990s), meeting then-Chinese leaders, and the skepticism around expanding in China (10:22).
• A key anecdote:

  “He looked me right in the eye and he said, we need to learn more about U.S. accounting. And he said, assets equals liabilities plus equity. Now I almost burst out laughing because I wasn't sure Bill Clinton could have said that.” (11:00)

• The significance: serious Chinese intent to modernize and learn from the West.

---

4. Transforming State-Owned Enterprises and IPOs

• Early privatization efforts, like China Mobile and PetroChina, required nuanced structuring and cultural understanding (13:49–15:39).
• Chinese leaders wanted to learn from UK privatization models, with Lord Brian Griffiths (“It’s like a medieval village, and you can't float that in the New York Stock Exchange.” – 15:23).

---

5. The Global Financial Crisis and U.S.–China Cooperation

• Critical importance of high-level relationships when explaining U.S. financial system uncertainty to Chinese officials during the crisis:

  “Here’s a vivid example...I would be going up and testifying during the day and getting my brains beaten out. And then I'd be...on the phone with the Chinese and say, oh, you don't understand our system. We all do this. It's all theater. We're going to do the right thing.” (19:07–20:10)

• Chinese held firm on U.S. securities, helping prevent further instability (22:34).

---

6. Xi Jinping: Consolidation of Power and Reform Mandate

• The “new emperor” approach: Xi consolidated power rapidly, reduced the Politburo Standing Committee, and asserted control over the military and national security (24:36):

  “Now, the way it works is Xi claps, Xi waves, and all the other members of the Standing Committee clap.” (25:09)

• Xi’s ambition: transform China’s economy and society, especially the municipal finance system and legal modernization (26:18–28:10).

---

7. Contradictions in Policy: Market Liberalization and Political Tightening

• Xi advocates for "decisive markets" in economic reforms but tightens political control:

  “At the same time, he's saying, I want the markets to be decisive, I want more flexibility and freedom. When he's looking at the economy, he's moving to tighten up the political system.” (31:21)

• Transparency remains a challenge; economic stats are not always reliable (33:47).

---

8. China’s Slowdown and Reform Challenges

• Slower economic growth is seen as inevitable and healthy if it yields “higher quality” growth less reliant on infrastructure debt (33:22–34:09).
• Reforms require consensus, but even Xi’s power has limitations when challenging entrenched interests, e.g., state-owned enterprises (35:27–36:20).

---

9. The Anti-Corruption Campaign

• Remarkable in scale:

  “So far, in excess of a quarter of a million people have been punished...minister level, what is it, 75 or something?” (37:04)

• Not simply about eliminating corruption but also consolidating political power and accelerating reform (38:42).

---

10. U.S.–China Engagement: Policy Recommendations

• Paulson’s core message: constructive, pragmatic engagement is vital for both countries and for solving global challenges (climate, growth, security):

  “There are going to be maybe more tensions. And it's very important that...the choices our leaders make will sort of help determine the mix we have of competition and cooperation.” (41:50)

• On the U.S. response to the Asian Infrastructure Investment Bank (AIIB):

  “I think...the Asian Infrastructure Investment Bank was a mistake in policy and a mistake in execution. But I don't look at it as some huge watershed event.” (45:09)

---

Notable Quotes & Memorable Moments

• On Xi Jinping:

  “Wherever Xi was, you saw the private sector playing a big role. I'd had conversations with him about the need to have the private sector lead innovation. So he believes in that.” (29:43)

• On U.S.–China Strategic Dialogue:

  “There's nothing wrong with competition as long as it's healthy competition...But if you don't turn [common interests] into tangible results...it's no point in having them.” (41:50)

• On the Global Financial Crisis:

  “I was in China, and the Chinese tell me that the Russians had approached them with the idea that maybe they see whether we'll take the bazooka out or not, and let's start selling some of these securities. And the Chinese held firm...” (21:15)

• On Doing Business in China:

  “I think there's clearly a right way to do business in China and a wrong way...it takes training, real training for the people there. And it takes just all kinds of vigilance...” (50:28)

• On Innovation Without Political Freedom:

  “It's amazing the amount of innovation which is coming out of China today still...I don't think that it's sustainable, but I need to acknowledge that we are seeing innovation in China.” (51:12)

---

Q&A Session Highlights (47:32–end)

• On Corruption and Ethics:
  Paulson emphasizes the importance of strict compliance and training for western firms operating in China (50:28).

• On Innovation and Censorship:
  Paulson acknowledges China’s achievements in innovation but cautions that continued suppression of press and information could ultimately limit China’s potential (51:12).

• On Climate Cooperation:

  “There's no way we can really curb [climate risk] without China…So I just think it is essential that countries like the US and the UK work closely with the Chinese in this.” (54:49)

• On Domestic Consumption Model:
  Paulson argues that domestic-led growth is necessary for China due to the unsustainability of export- and investment-driven models (56:17–58:33).

---

Timestamps for Key Segments

• Introduction / Speaker bios: 00:00–04:52
• Why and how Paulson could quote Chinese leaders: 07:07–09:13
• Early Goldman-China stories: 09:41–17:34
• Financial crisis and U.S.–China relations: 17:55–22:41
• Xi Jinping’s rise and leadership style: 23:25–31:21
• Challenges of reform and transparency: 33:05–36:20
• Anti-corruption campaign: 36:20–41:01
• U.S.–China pragmatic engagement and global issues: 41:05–46:44
• Q&A with audience: 48:18–end

---

Original Tone & Language Retained

The dialogue throughout is candid, practical, and rich with first-hand anecdotes, reflecting Paulson’s straightforward style and Barber’s journalistic curiosity and occasional wit. Moments alternate between gravity (“How can you succeed in an information age...?” – 51:12) and well-placed humor (the “bazooka” metaphor for financial authorities – 21:02), keeping the session lively and highly informative.

---

This summary offers a comprehensive pathway through the episode, capturing its vital exchanges, policy insights, and personal recollections—especially valuable for anyone seeking an insider’s perspective on U.S.–China relations at a critical moment of global change.

Transcript

[Danny Kua]

Welcome everyone. Distinguished guests, ladies and gentlemen, colleagues, to this evening's conversation between Hank Paulson and Lionel Barber on dealing with China. As everyone must know, Hank Paulson is former CEO of Goldman Sachs, former U.S. treasury Secretary under President George W. Bush, and and currently chairman of the Paulson Institute that he founded to promote international engagement and cooperation between the United States and China, in particular on sustainable, environmentally sensitive economic growth around the world. At Goldman Sachs, Hank had played key roles in China's emergence and transformation. While serving as Treasury Secretary, Hank Paulson crafted the strategic economic dialogue between the US And China, allowing the two largest economies on this planet to address on a regular basis global issues of economic and strategic importance. Throughout that same time, Hank Paulson led US Government efforts on containing the worst of the aftermath from the 2008 global financial crisis. Lionel Barber, who will be in conversation with Hank this evening, has been editor of the financial times since 2005. He recently interviewed Chinese Premier Li Keqiang in the Hong Kong room of the Great hall of the People in Beijing, where, among many things, they discussed the recent economic slowdown in China. And even as China continues to say it is not trying to challenge the existing global order, Lionel and Li Keqiang discussed the recent global developments surrounding the Asian Infrastructure Investment bank, which in some people's eyes signals a possible watershed event on an eastwards drift in the world's geopolitical center of gravity. Lionel was previously the FT's US managing editor and editor of the FT's European edition. He has won numerous distinguished prizes, has been named One of the 101 most influential Europeans, and honored for his contributions to journalism in the transatlantic community. Many of you might have already might remember as well that a few years ago he delivered a public lecture here at LSE on whether the Eurozone should survive. Now, my name is Danny Kua. I'm professor of Economics and International development here at LSE and I'm director of LSE's sauce we hawk Southeast Asia Center. I will be the moderator for this evening's conversation and for the Q and A session afterwards. The Southeast Asia Centre is a regionally focused center within LSE's Institute of Global affairs, engaged in study of, among other things, a shifting global economy, transitions in global power, and the place of Southeast Asia between East and West. We are delighted to be able to host Hank Paulson and Lionel Barber this evening. Before the conversation begins, a few house rules that I'd like to set in place to keep the conversation flowing smoothly. Could I ask you to set your mobile phones to silent Please feel free, however, to leave them on and to tweet on this evening's events using the hashtag LSEpulsen. At LSE, we firmly believe that the conversation is one that happens not just here on stage and with you, but also out there more generally. You should also know that this evening is being recorded and simultaneously webcast. The running order for this evening is that Hank and Lionel will engage in conversation on Hank's latest book, Dealing with China, for about 45 minutes. Following that, the audience will get to direct questions at both of the panelists. Hank and Lionel. The evening will end at 7pm so without further ado, can I invite you to welcome Hank and Lionel to lse?

[Lionel Barber]

Well, thank you very much for that generous introduction. I must say, it's a little bit scary being here because I'm not used to the media being quoted out of context. Let me also say it's a real privilege to have the opportunity to have a conversation with Hank Paulson, who I've known for more than a decade, going back to when he was Treasury Secretary. And I remember receiving a disembodied voice from a plane crossing from Chicago, saying in rather hoarse language, I'm the new Treasury Secretary. And I stood to attention. I've been a journalist for 37 years, but I'm going to be a marketer and advertiser for just a minute because this is a remarkable book. There are direct quotations. There are inside anecdotes about the Chinese leadership, the people who are making the decisions behind the scenes that you won't read anywhere else. And the gentleman who's sitting opposite me has spent hours, hours with these leaders. So it offers an unprecedented insight into their way of thinking. It's a great book in that respect. It's also a book of two halves, in my view. One is about the story of China's opening after it joined the WTO and the decision to really move towards a more liberalized economy and the role that Hank Paulson played as the boss of Goldman Sachs, and Goldman Sachs own role, hence dealing with China, is about. But then, of course, there's the wider policy questions. When Hank Paulson was acting as Treasury Secretary, representing the Bush administration in dealing with China, managing the relationship. So I thought it might be useful, before we look at those two halves, to just ask a couple of intimate questions. So, Hank, I mean, how did you ever get these people to agree to be quoted?

[Hank Paulson]

Okay.

Well, Lionel, even before that.

Let me.

Say that I'm delighted to be here. Thank you all for being here. Today this is a great institution and.

I'm really honored to be interviewed by Lionel.

He knows as much about China as anyone I know. He's someone that I've enjoyed sharing views.

With over the years.

I think the fact that Li Ka Chung did this strategic interview with Lionel just says a lot in and of itself.

And yeah, so this is when you.

Write something like this. And I, what I did was I, first of all, I have a pretty good memory. I had people with me that took.

Some notes at Goldman Sachs and thereafter, as I say in the acknowledgments, I even was fortunate enough to have Xu Wang, who was the premier during the early days, to share his notes of meetings with us. And here what I really need to do was just use judgment. And the rule I used was everything.

In this book has to be true.

But absolutely everything that's true doesn't have.

To go in the book. And so there's certain conversations that are very confidential, very sensitive.

And I just, it was just really a matter of judgment that some things.

Would be totally inappropriate to write if.

I'm going to have a relationship of trust and an advisory, play an advisory role. But, but again, I've also said the other thing that helped me is I.

Have had a relationship with the Chinese.

Where they understand me and understand I'm Hank Paulson. And so I tend to be a little bit rough around the edges. I tend to be pretty direct and.

I say things very directly to them.

And so there's nothing they are hearing from me that they haven't heard before. And the kinds of things they've said to me of have been pretty direct back and forth conversations.

[Lionel Barber]

Now Hank, fair warning here. I'm going to obviously ask you for the most direct conversation you have. But before we get to that, let's just talk about Goldman and Goldman's role. I mean you, you made an early big bet on China.

[Hank Paulson]

Yeah.

[Lionel Barber]

How difficult was it to persuade your colleagues that you were right and their worries, concerns were not on the, on the money?

[Hank Paulson]

Well, well, it was a sale that took place not just by me, but by a China team.

I see, for instance, Richard Nada in the audience.

And Richard spent a lot of time in China, but.

A lot of it was just me going back and explaining.

What I was seeing.

[Lionel Barber]

And this would have been 1998, nine or a little bit earlier.

[Hank Paulson]

Give you an example because one thing I talk about in the book, there's.

In one of the early chapters, I talk about one of my first visits into what we called mainland China in those days to meet with Zhang Jiamin, who was the president, president, general party secretary, you know, the general party secretary.

Of the Communist Party. And.

That CH Tung Chi Hua, who at the time was a significant business leader in China but went on to become the first CEO of Hong Kong after the handover had taken me in. And at the time I was co head of the investment banking division of Goldman Sachs. And we had a half a dozen people maybe in Hong Kong and done very little business in the region and we were focusing on Hong Kong. And when I went in to see jiang Zemin and Ch said Mr. President, this young man runs investment banking for Goldman Sachs. They're trying to decide whether they should expand or not in China. And he immediately started to oppress me with his English, reciting English names for US companies, GE, IBM, Boeing, etc. And he could see I was smiling and enjoying it. And then he looked me right in the eye and he said, we need to learn more about U.S. accounting. And he said, assets equals liabilities plus equity. Now I almost burst out laughing because I wasn't sure Bill Clinton could have said that.

[Lionel Barber]

He would have taken a few more.

[Hank Paulson]

Weeks words, he would have taken a few more words.

And so I. But it was, it was anecdotes like.

That that convinced me they were serious.

And then we expanded as we, as the opportunities developed.

[Lionel Barber]

But set the context here. At the time the state owned enterprises were riddled with debt, totally inefficient, and the banking system was on, on its back, was defunct. So you had to see beyond that.

[Hank Paulson]

You had to see beyond it and you had to see, you had to have the faith that these leaders and the ones I was working with at the time were, you know, not just, you know, the Premier Zhuangji, but Wang.

[Lionel Barber]

Shishan, Wang Qishan, who's a figure throughout the book, the man now, I mean, the big trade representative, economic czar, but now obviously leading the anti corruption campaign in China, which we'll come to. But Wang Qishan, yeah.

[Hank Paulson]

Zhou Xiao Tran at the time, who now runs the central bank, the PBoC. A number of the people that have continued to move up and I could see how able they were and how pragmatic they were. They were going to look everywhere in the world for the very best practices and should and try to bring them back to China. As a matter of fact, they were looking often to the UK and to.

The privatization programs here. And for instance, I don't know, a.

Number of you may know Lord Brian Griffiths, okay, who was an advisor to Goldman Sachs, but he worked with the Thatcher government on these things. And so he played a key role in some of the early conversations. So again, but these were. It's hard to even imagine.

There's a chapter early on about our first.

The first big IPO in restructuring, which was China Mobile, and it was called China Telecom, but it was really the mobile business at that time. And this was a $4.2 billion deal. And right now that doesn't seem huge for China, but we priced that deal just the Black Friday before the age of the financial crisis. And that stock hung in there.

And the chapter is titled Real Gold and Silver, because when Wang Xisheng called.

His boss, the Premier, and say, the deal's closed, he said, what does that mean? Do we have the money? And he says, yes, real gold.

And then Shuangji says, I'll believe it.

When I actually have got the money right in our hands.

And so this was a story about bringing the capital they needed and the know how.

And then they used these transactions to drive reform and increase competition.

And it's just hard to get your mind around this. There's a story about the. The Petra China ipo. And this was the first big industrial company. And I remember Brian Griffiths referred to it as being equivalent to a medieval village. There was a million and a half employees, but it took care of their.

Families, which is 6 million people.

They had commissaries, dormitories, stores, you know, hospitals, schools.

And I remember Brian saying, it's like a medieval village, and you can't float that in the New York Stock Exchange.

[Lionel Barber]

There are lots of good stories. One of the big insights that I had was the moment that. And Hank's too modest to say this, but Goldman was so bloody good at its job that you were almost cornering the whole market in ipo. And there was a moment where one of the Chinese leaders said, well, actually, we're not sure whether you can have both of these. And you had to give up some to Morgan Stanley and finessing that because obviously you were part pioneers. But at the same time, for the Chinese, they didn't want to be too reliant on one bank.

[Hank Paulson]

Yeah, but it was fascinating the difference.

Here, because most places in the world, if you did one big privatization deal, they would rotate to someone else. But these were very, very demanding in terms of the quality of the team they insisted on. But for instance, after the China Mobile Global ipo, we had a meeting with Zhu Rongji, the premier, and this stock had held up during the Asian financial crisis. And so he said we have a proverb, that one beautiful flower in the garden, Confucius proverb.

And he said this is China Mobile.

A symbol of China's stability.

So he then looked at the, the.

Capital markets expert that worked with us, Mike Evans, looked at him and said.

Mr. Paulson, how many like him do you have?

I said only one, you know, he's.

The best in the world. He said, well if we had 10.

We'D turn around all of our state owned enterprises. We had 100, we'd turn around our country.

So when they had the next one to do, they didn't say how do we rotate it?

They instead were very demanding as to whom who was going to work on this.

You know, we had John Thornton who.

At the time was a key banker in London. We had experts from all over and they were very, very demanding in terms of what they wanted and how fast they wanted to move. But we, okay, we were fortunate to do a number of those transactions.

[Lionel Barber]

Now we're going to get into policy. I just would like to ask you, I'd love to have more time here, but just the global financial crisis, obviously you were front side center and that's written about vividly in your book on the Brink. The Chinese played a very important role here and you had to keep them on board. Right, so just tell us about a couple of or one of the most important conversations where they did waiver. They worried because obviously they borrowed, They've invested in U.S. treasuries. There was concern.

[Hank Paulson]

Well, yeah, concern. A number of cases. And I would say this, there's a chapter where I write about the financial crisis through the eyes of U S China relationship. And I'd say there more than any other issue I dealt with the work I'd done at Goldman Sachs and the relationships I'd had with again Wang Xisheng who by the luck of the draw we'd worked with on these, you know, the earlier transactions now was my counterpart during the sediment were critically important. Zhou Xiao Tran, who was at the PBoC, that's the central bank, the central bank.

So part of the problem was explaining how our political system worked.

And so here's a vivid example. Or didn't work or didn't work, but it was.

But so here's what I was trying to explain when Fannie and Freddie, Fannie Mae and Freddie Mac are two big, you know, government sponsored enterprises that, you.

Know, that were propping up our housing industry were starting to waver and go down and you have five, they had $5.4 trillion of securities, you know, outstanding globally, 1.7 outside the U.S. 3.7 inside the U.S. and so we need to go to Congress and get authority. And the Chinese were big holders of this paper. And so I would be going up and testifying during the day and getting.

My brains beaten out.

And then I'd be in the evening.

Get on the phone with the Chinese.

And say, oh, you don't understand our system. We all do this. It's all theater. We're going to do the right things.

We'Re going to do the right thing. So I'm crossing my fingers, my toes, taking a deep breath, you know, assuring them, and. And so they held firm. And so then as soon as we got it done, I was saying, okay, now why don't you start buying some securities? And they said, no way, we're not.

Going to sell, but you own a.

Lot more than we do. And so then, now I'm in China. This is after I've gone to Congress.

[Lionel Barber]

And asked for the almost on bended knee.

[Hank Paulson]

Oh, yeah, almost. Pelosi, I prefer later for her, but.

For Congress, I had made the mistake.

And it was an honest mistake of.

Saying I would like unlimited authority.

I couldn't ask for unlimited. So I looked, asked for unspecified. And I said, if we have unspecified.

It's like if you have a bazooka in your pocket and people know it's a bazooka, you probably won't have it taken out.

If you think it's a squirt gun, you'll take it out. So I'm, I'm not planning on taking the bazooka out.

So now I'm in China, and the.

Chinese tell me that the Russians had approached them with the idea that maybe they see whether we'll take the bazooka out or not, and let's start selling some of these securities. And the Chinese held firm, but they weren't also looking to buy more. They held firm. And I had another conversation with him, a very similar, very important conversation was in the week where Lehman went down, where we had to step in and make the $85 billion loan to the AIG, and where we were moving to guarantee the money markets that when we had one of our money market funds break the buck and a lot of Chinese, a number of Chinese institutions were selling, and we're.

[Lionel Barber]

That could easily have got out of control.

[Hank Paulson]

It could have really got out of control. We got on the phone with, again, the head of the central bank, and there wasn't any concerted effort. They were acting on their own. And we'd been telling them that's the way it's supposed to work, but we. He didn't want it to work that way this time.

And.

They move very quickly to shut that down.

[Lionel Barber]

Right, let's move effortlessly into more to today contemporary matters. You're pretty diplomatic in this book, but you do have a reference towards the end to a sense that there'd been a period of drift in China in terms of reform under the previous regime. Now it's a bit different now, isn't it? You have the man known as the new emperor in charge with a lot of concentration of power and driving the reform. Do you think that now the scope and sequencing of economic reform form in China is clear? And if so, can you tell us?

[Hank Paulson]

Well, I think I pretty clearly said that for 10 years, you know, we.

Had one administration that had done a lot like Xu Yongji, and then we.

Had 10 years where there was really divided leadership and very little done.

[Lionel Barber]

Yeah, biggest.

[Hank Paulson]

And so now you've got. Got a group with an extraordinarily strong leader who is, who has consolidated power very quickly. Xi Jinping. But he has inherited a situation where he needs to transform the country and he's working to do that. And I literally say that that's not an overstatement. When you look at what he's laid out, when you look at the scope of what he's laid out, because he's laid out.

[Lionel Barber]

Before you go into this, just let's tick off why it is, how he's. Because it's really rather fascinating how he's consolidated power. First of all, he reduced the size of the Standing Committee, of the Standing Committee from nine to seven. And also the military authority.

[Hank Paulson]

And the Standing Committee is the, you know, the group, you know, that's above.

The Politburo, that is the top leadership of the country.

And so he not only reduced the.

Size, but most of the members are term limited. And so they're looking to him.

The previous Standing Committee, when they address a big crowd, they'd all be waving and everybody would be clapping.

Now, the way it works is she claps, she waves and they.

All the other members of the Standing Committee clap.

And so he is, he is the leader and the military connections and the military.

So he's come head of the commission that controls the military. He set up a national security something like the US National Security Council, which he controls.

And so the power he's consolidated very quickly has been considerable. But when you look at what he's attempting to change, it is Increasing it goes to the not just economic system, but the good aspects of the social system, the political system in China. So he's got, and we could talk more about it, but he's got a $10 trillion economy where the economic model isn't going to work unless it's changed so structural changes. He's got an urbanization model.

[Lionel Barber]

Let's just take the economy, look at first $10 trillion economy. What's not working? One liberalization of interest rates, banking system. Still highly indebted.

[Hank Paulson]

Absolutely. But I want to just get to the most, I think, fundamental problem that he needs to deal with, which is he's been not only too dependent on exports, but heavily dependent, dependent on government investment at the municipal level into infrastructure. And so debt has been growing much faster than the economy has been growing. That's not sustainable. And so to change the system of municipal finance is quite a significant endeavor because in order to change that, you need a new national tax system, you need a new devolve certain responsibilities, budget authorities to mayors and governors who aren't quite ready for it yet. So he's looking toand there's a lot in the economy. He's saying with the economy, the overriding driver is that markets need to be. Markets need to be decisive when you look at the economy. And so we could talk a lot about what he's doing there, but just to tick off all of the things he's trying to do to just give you the scope of that, he needs a new urbanization model. He's trying to change the relationship between the central government and the provinces and municipal governments, and that's very, very difficult. He wants the central government to have more power in some areas and devolve more in others. He's got a legal system that he' sit's not the rule of law as we know it here, but he's trying to modernize and professionalize that.

[Lionel Barber]

And in other words, you do think that the words in the party congress on the rule of law that this is a step in the right direction. This is not just rhetoric.

[Hank Paulson]

I think it is clearly in terms of more consistency, professionalizing, you know, having head having federal courts, district courts, having courts where there's specialists in environmental law and property rights and so on. Now, at the end of the day, if the legal system, if there's 90 million members of the party that don't come under the legal system, you're never going to have the rule of law like we know it. But he's looking to make major changes there. You know, Huge reforms in the military, changing foreign policy. It isand doing this all through a party that is rife with corruption and with this massive anti corruption campaign. So it' sit all of these things. What's unique about him is he's saying, I take ownership of these. I'm heading every one of these efforts.

[Lionel Barber]

Now, you've had a number of long conversations, conversations with the President. Can you give us some sense of the man?

[Hank Paulson]

Well, I think a lot has been written about him, which is quite accurate because. Quite accurate, yeah, quite accurate. Okay. And so lots of relief.

Very accurate. Because I would say this, this is.

I first knew him as a man who believed in the role of the private sector and in competition to drive economic growth. Because when President Bush asked me to go to Beijing to set up the Strategic Economic Dialogue In September of 2006, I didn't go first to Beijing to see the President, Hu Jintao or the premier, but Wen Jiabao. I went first to Hang Zhou to see Xi Jinping. And it wasn't because I knew he was ultimately going to be the top guy. I knew he was on a pretty fast track. But I wanted to highlight the role that the private sector needed to play. And wherever Xi was, you saw the private sector playing a big role. I'd had conversations with him about the need to have the private sector lead innovation. So he believes in that. I clearly knew that. This is a guy who, very straightforward. You know, I've always sensed what you see, what you get. He's unusual, not as much for a Western politician, but for a Chinese politician too. He's got, he's a good retail politician. He has, he's very unscripted. And so that's, that's also very clear. But he's someone that, you really need to understand that. At the same time, he's saying, I want the markets to be decisive, I want more flexibility and freedom. When he's looking at the economy, he's moving to tighten up the political system. He's stating quite clearly he doesn't aspire to have Western style democracy, multiparty democracy.

[Lionel Barber]

So he's cracking down on media, social.

[Hank Paulson]

Media, social media, all of that, the Internet. So cracking down on all of those.

He's.

And so you say, how is this consistent? But he looks at the party as being the source of stability and the institution that's going to drive reform. And he is. And what he's doing is, I think the reason that he's doing this and it's being accepted is he's also inherited a Number of very serious social problems, political problems, very dirty air and huge pollution problem. If the party's going to survive, they're going to have to make progress there.

[Lionel Barber]

They'll choose growth.

[Hank Paulson]

Well, I've got to tell you, it's.

Going to be very interesting because right.

Now it's a big issue. And you go talk with mayors and governors, they're not just citing economic statistics. They're starting, they're citing their quality statistics. And I think that the public is going to demand that, that they take action here. They're concerned about corruption. He's hitting that huge, which we can talk about in a bit. They're concerned about property rights and because if mayors need money right now, they're taking someone's land and selling it to developers. So he's working on a whole series of.

[Lionel Barber]

We'll come to corruption in just one minute. Just say a word about the slowdown in China because there is definitely a slowdown and this is the consequence of moving away from the investment led export driven model that you described.

[Hank Paulson]

So.

Yes. How serious is it, the economy? There's no doubt that it is a. I don't even look at it as serious because I just look at it as inevitable. They said that, you know, the premier as you interviewed him, Lika Chung, he may have said it in, in your interview, the 7% is a new normal. Right. And so I think that's optimistic.

[Lionel Barber]

She said it would be hard to get to.

[Hank Paulson]

Yeah, okay. And I agree with them. I think it's going to be hard to get there.

And so my focus is we just.

[Lionel Barber]

To be clear, we do believe that statistics, we can, they're reliable, I think.

[Hank Paulson]

Well, I'm not saying that the statistics are, you know, transparency is not something.

That, that is easy to find in China. Okay.

But there is no doubt that, that the, this is economy that's been growing.

Very fast for a long period of time. It's an economy that has slowed down. And my focus is not on, you know, everyone says are you going to grow at 6.8 or 7.2 or whatever. I don't even look at that. I think what they need is high quality growth. And the kind of growth that's high quality growth is going to be growth that isn't overly reliant on this municipal government investment in infrastructure. Because if they do, these excesses are going to keep building up and the problems that they ultimately have will be much more severe than if they manage them up front. And I think the leaders understand this. They're really focused on the thing that gives me more confidence than anything else is when I talk with the Chinese leaders, there's no denial that they're dealing with these problems. They know what their problems are, they understand them. I think the issue is going to be, and I want to come back and qualify. Part of what I said about Xi Jinping, everything I said about him consolidating a great deal of power is right. But even with all the power he has, there isn't consensus on the most difficult issues. And it's going to take a while, it's going to take longer to consolidate more power, get more of his people.

[Lionel Barber]

So no consensus on which particular issues you have?

[Hank Paulson]

No, I would just take a couple of them.

I think.

Changing the relationship dramatically between.

The center and the provinces, I think that's one that's going to take longer. Let's take opening up the economy to competition. Competition. 70% of the growth comes from the private sector.

The way you're going to get additional.

Growth is to open up telecommunications, finance, energy to the private sector. There's no doubt that they've done a number of things to increase the access of the private sector, but I think reining in these state owned enterprises and taking away not only their regulatory privileges but their special subject subsidies they get and access to capital and so on, I think that's going to be a battle that's going to take longer to play out.

[Lionel Barber]

A word on the anti corruption campaign, which is quite extraordinary. At first when President Xi Jinping talked about a campaign to catch tigers and flies, a lot of people thought that this would last six months and then go away again and, and took a somewhat defeatist attitude. But in fact this hasn't stopped. It's going to go on and whole swathes of the top people that you did deals with in the early part of this decade have suddenly disappeared.

[Hank Paulson]

Oh.

There'S no doubt. And I want to put this in perspective so people.

So so far in excess of a quarter of a million people have been punished. Member party members. Lionel, I don't know what your latest count is, but minister level, what is it, 75 or something? It's a big number. The tigers and the flies.

And this is not just the business.

People you've been reading about. This has gone into the military where there's huge corruption selling.

Remember, you know, many, many years ago when you know, the British would sell.

You know, you know, commissions, officer commissions, this was rampant in Chinese military. You look, it's gone into the media and gone into academia. So this is, this is A really robust campaign. It's intensifying. And the. And so you look at it, I get asked all the time, is this just about curbing corruption or is this some kind of purge? What's going on here? And I look at it and say corruption was obviously way out of control. Xi Jinping knew that the party wasn't going to survive unless he dealt with it. So I think that's a primary, primary purpose, but it's also a tool in the toolkit to consolidate power. And when you start hitting some of the, some of the pillars of the state owned enterprises and so on, it's again, I think a way to help accelerate and drive reform.

[Lionel Barber]

And some people think it's depressing growth because not just the brandy industry or the liqueur industry has taken a very severe beating, but regional governors, people lower down are frightened of taking decisions.

[Hank Paulson]

Well, people, there's whole groups of people that are scared and they were first scared when they were writing their self criticisms, which was again part of what they.

[Lionel Barber]

That was an early market signal, wasn't it?

[Hank Paulson]

It sure was.

[Lionel Barber]

You went to Beijing, a mutual friend of ours said, you want to listen? Hank's just been to Beijing and he's been in and he was asking how things were and the guy was saying he'd had to write his personal self criticism.

[Hank Paulson]

Yeah, right.

So anyway, so these are, these, these are really, this is very significant.

But the other thing which the Chinese recognize is that this is not, it can't be the whole cure that this was a huge sickness and was costing, you know, I don't know how many percentage points it was taking off economic growth and it was threatening the survival of the party. But you know, I talk about, you.

Know, Wang Qishong who is now running.

This campaign, will talk in terms of metaphors. And one of the metaphors he uses is the medical metaphor. And so recognize as he said that the ultimate cure is sort of like Chinese holistic medicine. And there you're talking about it takes re education, a different set of values. I believe it will take a different legal system, but it will also take a big part of it is getting the government out of the economic sphere. And it's too involved.

[Lionel Barber]

It's certainly not selective surgery.

[Hank Paulson]

So that's right. So that's right.

And then he talks about the Western pharmaceutical, which would be some of the.

Things that Lionel was talking about. You know, you're not going to, you're.

Going to have less elaborate banquets, you're not going to have the military serve.

Hard liquor and so on, you're not going to go gambling in the casinos. And so, and then there's. The third approach is just go in and cut the cancer out. Which is of course what this is.

Which is.

But it sure is scaring a lot of people in curbing it.

[Lionel Barber]

I'm conscious we're going to open to questions. Let me just ask you one last question. It's obviously a huge question, but you've been at the heart of this problem, which is how we deal with China, how America as the superpower deals with this premature superpower, if you like China, how best to engage in it, how to. And you're very clear, you offer some policy, you offer some very practical advice, but you're very clear that in the end, America doesn't have any choice. It has to support reform in China and that this is indeed deeply in the mutual self interest of both countries.

[Hank Paulson]

Yeah. The reason I wrote the book, the reason I spend all the time I'm spending in China right now, Lionel, is as I look at this, I say as China has emerged as a formidable competitor, flexing its muscles on the global scene, the consensus in America that, that China's rise is good is breaking down. You have a country that's facing enormous challenges. I think you can make as big a mistake overestimating China's strength as you can underestimating the challenges. It's underestimating its potential. So it's looking to transform itself and not in the Western model. But all of that leads me to think that, I think it's even more important that we have a pragmatic relationship with China and work very hard to have a constructive relationship with China. Because as I look at it, I can think of few major global issues that aren't going to be easier to resolve if we're working. Countries like the US and UK are working in a complementary way to China and they're going to be much more difficult if we're working across purposes. And here I'm talking about not only sustaining global economic growth, meeting the climate change risk. I mean, how can you possibly deal with that? And if we're not engaged with China and China isn't making progress, or if we're dealing with big issues like denuclearization or, you know, combating terrorism. So again, my view is this. There's going to be continue to be tensions, there are going to be maybe more tensions. And it's very important that we, the choices our leaders make will sort of help determine the mix we have of competition and cooperation. There's Nothing wrong with competition as long as it's healthy competition. But the, but the key is you can have all the common interests in the world, but if you don't turn those into tangible results and steps that populations of both countries can see the value in, it's no point in having them. And so I think now more than ever it's really important that we be strategic and we get difficult things done. Because.

[Lionel Barber]

And if that's the case, and I believe it is the case, then how can you explain to this distinguished audience the mistaken policy of Washington towards the Asia Infrastructure Bank?

[Hank Paulson]

Well, here's how I would explain this because I have.

[Lionel Barber]

You might need more than a couple of minutes.

[Hank Paulson]

I will try to be. You see, brevity isn't one of my.

Virtues, but I'm going to try to.

Be brief here because first of all.

I would say I happen to think the Obama administration has got a heck of a lot of things already.

And I think that this Sunnylands visit, the upcoming state visit by Xi Jinping.

The climate change deal was all very.

Good stuff and is good stuff.

I happen to think that the, you.

Know, the Asian Infrastructure Investment bank was.

A mistake in policy and a mistake in execution. But I don't look at it as some huge watershed event. Here's how I look at it.

[Lionel Barber]

Unlike George Osborne.

[Hank Paulson]

Yeah, okay, so that's right, George Osborne.

[Lionel Barber]

That's an inside joke.

[Hank Paulson]

Osborne got it right. But I would say this is a situation where China is a leader in infrastructure finance. The US doesn't do it. China does more in their China Development.

Bank and their Ex IM bank than any of the multilateral institutions.

China is not going to try to.

Throw out couldn't if they wanted to. The global financial infrastructure, they're going to want to participate in it.

We need to make room for them.

They're going to want to have some.

Initiatives themselves and we need to participate with them. I think they said with the Asian.

Infrastructure Investment bank we want to have high standards.

We should have done what the UK did.

So we want to work with you and work to have higher standards.

But the other thing, if you want.

To pick a fight, you want to pick a fight where you can win.

You know, and that was clearly be present at the creation, clearly a losing fight. But the other thing we should all be doing is the world needs better infrastructure funding. And I don't think the existing multilateral institutions do a great job there. People hold up the World bank. How can you tell me a governance.

Where you have all these live in.

Directors and you can't make decisions and.

You have all that expense is the right way to do it. That's got nothing to do with high standards in terms of infrastructure funding.

So I think we should be working to upgrade the existing infrastructure. And again, this is one. I think the UK government has got.

A number of things right which China.

This is one they got right. My government's got a lot of things right. But this is not some huge watershed event that marks some turning point for China and the downfall of the West.

I mean this is. This is. I'm sure you didn't get it right, but wrong. But many other members of the press.

Have cited this as some just cataclysmic event. I just don't think it's.

[Lionel Barber]

That might be better also to accommodate China somewhat better in terms of the international financial institutions which you come to. I think it's now time to open up the floor. There's loads of questions. Please, would you like to.

[Danny Kua]

Sorry, can we just have a round of applause? Excellent. Truly excellent. Now, as you know, let me just remind you that this event is being recorded and live webcast. When you ask your question, please identify yourself briefly and then ask your question. And please don't deliver a lecture. I will collect two or three questions before I turn over to Hang and Lionel for their responses. So if you could wait for the microphones when I call on you. Okay. The woman in the middle with the very fashionable happiest.

[Judy Wong]

Hi. Thank you Mr. Paulson for coming here. My name is Judy Wong and I am a student at the lse. My question for you is you mentioned this problem with dealing with a regime that you know has problems with corruption. How can you deal with them effectively without getting your own hands dirty? What's the logistics? Are you trailed around by an entourage of legal advisors every week where you went? And do you have multiple teams of translators to make sure that nothing gets lost in translation in your dealings?

[Danny Kua]

Okay, thank you. Can I have a second question? The gentleman in the middle here in the green.

[Hank Paulson]

Yes.

[Roland Tynan]

Roland Tynan. Thank you for a fascinating presentation and I definitely will buy your book on Lionel's recommendation. See, he is in some one tonight. But just one quick question. You've said the United States is a very dynamic and innovative economy, which I absolutely agree with. But surely since the existing model has run out of steam in China, which is very much as you've very eloquently identified as an investment driven one, it requires innovation and is it possible without the rule of law, without an end of censorship, without that free Flow of information. What hope is there really to achieve that? I mean, it inconceivable in the United States, we got a Facebook, Twitter, blah, blah, blah, and the whole stream of innovation that has come without those fundamental freedoms. And I would put it to you that if we're serious about economic reform, one of the most urgent things we should be doing is demanding the release of Gao Yu, the journalist at 71, who was given seven years in prison for allegedly leaking document number nine, which, as you again have eloquently identified, could have been written by she himself, but I presume it was signed by him in some way which clearly says we should not advance Western values. Freedom of the press, et cetera, all the things you need if you want an innovative economy. And the arrest and the imprisonment of Gauntly symbolizes that. Thank you very much.

[Danny Kua]

Thank you. Can we have a round of answers? Then I'll come back to you. So the two questions, one, on how to deal with the regime without oneself getting corrupted, and second, the culture.

[Hank Paulson]

So first of all, I think there's clearly a right way to do business in China and a wrong way. And I think in terms of corruption, I think companies from both the UK and the US are protected, I think to a large extent by our practices.

We in the us, US by the Foreign Crop Practice Act.

So I think the Chinese understand the rules on which we need to operate, but I think it takes great vigilance and I think it takes training, real training for the people there. And it takes just all kinds of vigilance and care to make sure you've.

Got the right rules.

And I agree with what, what you've. The second question, because if, when I was talking about what Xi Jinping is doing, when you look at the dichotomy between, you know, freeing up the economy and tightening up the censorship, you know, the party control and so on, I look at it and I say, how can you succeed in an information age? How will you be as innovative as you need to be? How can you run a global company? I used to run a global company. You need to be connected to what's happening everywhere in the world, the political system, the regulatory system, etc. The one thing I will say, okay, which is, I don't mean to contradict this, because I really believe this. I think ultimately this is self defeating. But the thing I will say is it's a major amazing the amount of innovation which is coming out of China today still. So if you talk to, when I talk to people at our national labs in the US and companies that I admire and they look at the quality of the patents and what's coming. With a country that size, with 1.4 billion people, many of whom are trained in the UK or the educated or the US, with the amount of money they're investing in basic research, there is a surprising amount of innovation coming out of it. I don't think that this. I agree with you. I don't think that it's sustainable, but I need to acknowledge that there is, we are seeing innovation in China.

[Danny Kua]

Excellent. Now the woman with the glasses, third in from. Yep. And then the gentleman right in front of her.

[Judy Wong]

Hi, my name is Tess Sunderland. I'm part of the Goldman alumni and now running a solar PV developer here in the uk. I wanted to link this, which is a fascinating talk, with another issue that I know is close to your heart and the Risky Business project and climate change. Could you speak a little bit about how do we most effectively deal with China if we all as a world wouldn't get somewhere fairly swiftly on that pressing issue?

[Danny Kua]

Thank you. You could just pass the microphone to the gentleman in front of you. Yeah.

[Robin Wang]

Hello, my name is Robin Wang. I'm a current student in the Master of Public administration program at LSE. Thank you very much, Ms. Paulson, for your speech. I think you should agree that people have a clear idea about what doesn't work in China and they are debates based on what should be done to fix them. One thing is about China's macroeconomic development. People know that the current model of investment and export driven development is not working. But as you might agree, consumption is needed, but people don't necessarily agree with you. For example, last month Yukong Huang, who is currently cancelling the State Council in China and the World bank, said publicly that consumption is not the way to go about it. And personally, for the short run, I would think as a Chinese, the current inadequate system of social safety net and health care is not going to make me change my mind to put my money out of my bank account and make them into a form of consumption. I'll be very grateful if you can share your views on that.

[Danny Kua]

Thank you. It's a question about consumption. Question about risky business. Can I.

[Hank Paulson]

Okay, well, just on Risky Business, I would say that my passion, I've always been involved of conservation from my early days and I have a number of chapters in the book. There's a chapter on Saving Shangri La, which is more focused on parks in China. When I left government, I basically said, which all of us need to do. Where do we think we have the best chance of making a difference. And I looked at what was happening in China and the next 300 million people going to the cities or Chinese companies looking to become global companies and doing more and more business outside of China and, and their ecological footprint or the decisions that are made in China are going to do more to impact global warming than just about any place else. There's no way, I look at that as being the biggest economic risk we as a nation face. And so there's no way we can really curb that issue without China, which is by far the, the largest and the fastest growing emitter of carbon. There's no way we can curb that without working with China. So I just think it is essential that countries like the US and the UK work closely with the Chinese in this.

And so I agree with you.

I think that's, that's a huge issue. Now I know Yukon Wong, I've talked with him. The. In terms of consumption, you need to say this. Chinese consumption is actually growing pretty fast. It's just, it just is.

It is.

When you look at consumption growing in China relative to anyplace else, it's just as a percentage of the overall economy. They need more domestic led growth. And I look at this and it's pretty clear to me that this is going to take a while and it's going to come from a number of sources. It's going to come from opening up certain sectors of the economy to competition from the private sector and developing a services industry. And there's real room for a services industry. And it's going to come with changes in the financial system which give Chinese savers and investors a chance to get a better return. So again, it's pretty clear to me that China is not going to be able to rely on exports to the extent they have. Just look what's happened around the world. And they were selling, you know, during the bubble that preceded the financial crisis, we in the US were, you know, were you spending more than we could afford? Americans were doubling their borrowing to buy products that they couldn't really, couldn't really afford to buy. The same could be said for the Europeans. Chinese can't rely on the exports to the same extent. It's going to need to be domestic led growth. And my judgment is the numbers just don't work for them to continue to be doing it so heavily with investment because, you know, debt can't keep growing faster than the economy is growing. That just is not sustainable. So they've got no choice but to open up to greater competition from the private sector and get more domestic LED growth.

[Danny Kua]

Thank you. Now, okay, there are obviously a lot more questions, but we have reached the end of our time, and I promised our speakers that they could get away at exactly 7. Now, you might also know that if you do have burning questions, it hasn't been answered yet. Let me also do the same thing that Lionel did, which is be a salesperson for this book. There are signed copies of the book in the back of the room, so on your way out, you're welcome to stop by there and read more of Hank's thoughts. Before I close the session, can I just ask the audience to remain seated because the speakers need to exit in a certain way? And then if I could just ask you to remain seated while the panel leaves to close out the session. I want to thank all of you for your attention and for your enthusiasm and for all your questions, but also, if I could get you to join me in thanking our two speakers this evening.