The Pulse: Seeking cooperation, not conflict, with China

'Hank, you're a real patriot. Why are you helping China?"

The question was put to Henry "Hank" Paulson Jr., former CEO of Goldman Sachs and U.S. treasury secretary during the 2008 financial crisis, last year when he spoke to financial executives in Boston.

China has been a focus of Paulson's work for the last quarter-century, and he's traveled there more than 100 times. He bristles at questions of his motivation. Now, in writing Dealing With China: An Insider Unmasks the New Economic Superpower, he is very clear that his interest in promoting a better understanding of China is rooted in his desire to do what is best for America.

Appearing at the World Affairs Council of Philadelphia on Wednesday, Paulson explained the stakes while responding to a question from Craig Snyder, the council president, on whether the United States and China might be headed for physical confrontation.

"History shows that, more often than not, if you have an established power and you have a rising power, they come to conflict. And I don't think that's inevitable, and neither side wants this, and that would be a disaster for the world . . . so we now have a more complex relationship," Paulson replied. "China is now a formidable competitor, and there's also a large number of issues where we have very much of a shared interest. But they are much more assertive on the global scene and, the way I describe it is, we can't let that competition devolve into destructive, debilitating kinds of competition or conflict.

"It is in our best interest to have a constructive relationship with them, but it is really important now that we get difficult things done together where there is a shared interest. A shared interest makes no difference if you don't build trust and get difficult things done. The reason I set up the Strategic Economic Dialogue, which helped achieve a fair number of things, is because it is a good way to prioritize the important economic issues, which are so important to China. And if you get those right, a lot of other things are easier to get right."

Paulson hasn't always been so knowledgeable about the Far East. As he writes: "For the first two-thirds of my life, China was as far from my mind as it was from my hometown of Barrington, Illinois (population 5,012). My grasp of the country was shallow and ill-informed."

His early work at Goldman changed that. While based in Chicago, he was told he would be assuming responsibility for Asia because he was "closer" than his New York colleagues. It probably didn't hurt that, while in his 20s, he had worked for Richard Nixon just two months after the president's historic trip to China in February 1972.

Later, when running Goldman, Paulson oversaw the largest initial public offerings undertaken in the aftermath of Deng Xiaoping's 1978 institution of "socialism with Chinese characteristics." On his watch, Goldman made the biggest private equity placement ever ($2.6 billion) in China when the firm invested in the Industrial and Commercial Bank of China.

No wonder then that, as treasury secretary, he was instrumental in the initiation of the Strategic Economic Dialogue with China that enabled him to facilitate and oversee cabinet-level meetings with the Chinese leadership. That experience has given him unparalleled access to Chinese leaders, including Presidents Hu Jintao and Xi Jinping.

Paulson believes the Communist Party has reached a simple accord with the Chinese people: prosperity in return for continued state control. The question, of course, is whether China can have it both ways - economic freedom without cultural freedom, a subject I raised with Paulson at the World Affairs Council.

"In today's information economy, I don't know how economies can innovate and do the sorts of things they do to stay on top without having a free flow of ideas and information," Paulson replied. "I've run a global company, and, boy, you need to be connected. You can't have an Internet that's not connected. You need to know what's going on politically, regulatory systems, economically, in terms of ideas all over the world."

He added: "But understand what's going on right now. Xi Jinping . . . is focusing on the things that the people care about the most. So, corruption. He recognizes the party won't survive unless he curbs corruption. So he's focused on corruption, the environment, dirty air, and water.

"So . . . managing China, just think what it's like because they have to deal with the kinds of issues that afflict developed countries at the same time they have to deal with issues that developing countries are dealing with because a big part of the country is still poor. It would be like, . . . looking at Europe, Germany and Slovenia. They are both European, vastly different stages of development, they need different economic policies. So think about managing both of those in a single country under one party, and I mean that's sort of the challenge."

His message of needing to "get big things done" with the Chinese could be a tough sell in the run-up to 2016. One of the few things that seems to unite U.S. politicians is bashing China on currency manipulation, the widening trade deficits, and Stateside job losses, a point not lost on Paulson.

"During elections," he said, "the best we can hope for - for those of us that value U.S.-China relations - is the less said about China the better because what invariably happens is the candidates are very negative about China. Then they're elected and it's a bipartisan policy to figure out how to relate to China because it's very much in our interest to do so."

"I do prescriptions, not predictions," he told the audience. And Paulson's prescription for keeping the U.S.-China relationship productive and safe is to continue to foster cooperation.

THE PULSE