Introduction
In "Dealing with China," Henry M. Paulson provides a comprehensive look at China's rapid economic transformation and its implications for the global economy. Drawing from his extensive experience as a former U.S. Treasury Secretary and Goldman Sachs executive, Paulson offers unique insights into China's rise as an economic superpower and the challenges it faces moving forward.
The book takes readers on a journey through China's economic reforms, from the late 1970s to the present day, highlighting key milestones and policy changes that have shaped the country's remarkable growth. Paulson also explores the complex relationship between the United States and China, offering valuable perspectives on how these two global powers can work together to address shared challenges.
China's Economic Transformation
The Birth of Economic Reforms
China's economic transformation began in the late 1970s, following the death of Chairman Mao Zedong. Under the leadership of Deng Xiaoping, China embarked on a series of bold economic initiatives aimed at opening the country to the global marketplace. These reforms marked a significant departure from the communist economic model and set the stage for China's unprecedented growth.
One of the most crucial aspects of these reforms was granting more authority to state-owned enterprises (SOEs). While still required to meet centrally planned quotas, SOEs were now allowed to sell their goods and services on the open market with flexible pricing. This change introduced a degree of market competition and efficiency that had been absent under the previous system.
Another key element of Xiaoping's economic plan was the creation of special economic zones (SEZs). These zones served as economic laboratories where China could experiment with western economic practices, such as competition for construction contracts and incentive pay for workers. SEZs also offered lower tax rates, looser import and export restrictions, and easier access to foreign investment, which helped to kindle the dormant Chinese entrepreneurial spirit.
The results of these initiatives were nothing short of extraordinary. Within a few years, hundreds of millions of Chinese had been lifted out of poverty, and China's GDP was growing at an average rate of 10% per year. This rapid growth created new opportunities for bright and business-minded individuals who had previously been unable to put their abilities to good use in the jobs they were assigned under the old system.
Privatization and Restructuring
As China's economic reforms progressed, the country looked to successful examples of privatization and deregulation in other parts of the world. The massive privatization efforts led by Margaret Thatcher in the United Kingdom between 1985 and 1990 served as an inspiration for Chinese policymakers.
By the mid-1990s, many state-owned companies in China were struggling with debt and inefficient management. Privatization offered a solution to these problems by selling shares of these companies to the public and international investors. This process not only raised capital but also forced SOEs to adopt global accounting standards and improve their operations.
The telecom sector was the first to undergo privatization, led by the state-owned China Telecom. Between 1992 and 1996, China invested more than $35 billion in telecom infrastructure, dramatically increasing the number of fixed telephone lines from 11.5 million to 55 million. However, this rapid expansion was not economically sustainable, as infrastructure spending was depleting more capital than the national telecom company could generate on its own.
Using the 1996 privatization of Deutsche Telekom as a blueprint, China Telecom aimed to raise $2 billion through its initial public offering (IPO). The process was complex, requiring over 350 full-time accountants to accurately assess the company's financial situation. Despite these challenges, when China Telecom finally offered stocks to the public in October 1997, it exceeded expectations by raising over $4.2 billion.
The successful privatization of China Telecom paved the way for competition in the Chinese telecom sector. By 2008, China had three large, competitive national carriers, demonstrating the transformative power of privatization and market competition.
Reforming the Oil Sector
Following the success of the telecom privatization, China turned its attention to the oil sector, which was also in desperate need of reform. The China National Petroleum Company (CNPC) was highly inefficient and struggled to compete with its Western counterparts.
One of the biggest challenges facing CNPC was the high cost of its workforce. Under the old system, Chinese workers were assigned to a workplace for life, with companies providing housing and healthcare. This resulted in CNCP employing a staggering 1.5 million active workers by 1999, compared to the 80,000 employed by oil giant BP at the time.
The restructuring process for CNPC was even more complex and costly than the telecom privatization. The macroeconomic situation was particularly challenging, with the recent Asian financial crisis stifling oil demand and global oil prices at their lowest levels since 1973.
When CNPC was finally introduced to the global market as PetroChina, about two-thirds of its workers were laid off in an effort to make the company profitable and attractive to international investors. This massive reduction in workforce led to protests both in China and the United States, highlighting the social costs of China's rapid economic transformation.
The layoffs at PetroChina were part of a broader trend in China's economic modernization. The International Monetary Fund estimated that the state-owned sector in China had shed over 40 million jobs between 1990 and 2001, underscoring the significant social and economic changes that accompanied China's rise as a global economic power.
Reforming Education and Banking
As China's economy continued to evolve, it became clear that the country's educational and banking systems were not equipped to support a modern, globally competitive economy. Addressing these shortcomings became a priority for Chinese leaders.
In the 1990s, Chinese universities excelled at producing engineers but struggled to educate capable managers. Recognizing this deficiency, Chinese Premier Zhu Rongji sought to reform business education at Tsinghua University, often referred to as the "MIT of China." The goal was to shift away from rote learning and theory-based education towards a more practical, case study-based approach that would foster critical thinking and problem-solving skills.
In 2001, Tsinghua University launched its first executive program, "Managing in the Internet Age," based on this new educational model. Since then, over 50,000 students have gone through Tsinghua's executive training programs, helping to create a new generation of Chinese business leaders equipped to compete in the global marketplace.
The banking sector also required significant restructuring to adapt to global standards. Initially, four state-owned banks were created to compete with one another and improve efficiency. However, this approach led to unintended consequences, as these banks began financing state-owned enterprises through unsound loans that spiraled out of control, leading to inflation and threatening the entire economy.
To address this crisis, the Chinese government implemented a series of reforms and restructurings. For example, the Industrial and Commercial Bank of China (ICBC), the country's largest bank, managed to dispose of $135 billion worth of bad loans in just six years. These efforts helped to stabilize the banking sector and make Chinese banks more competitive on the global stage.
Challenges and Future Prospects
Addressing Debt and Environmental Issues
Despite China's remarkable economic growth, the country faces significant challenges that threaten its long-term stability and sustainability. One of the most pressing issues is the rapid accumulation of debt in the Chinese economy. Between 2008 and 2014, China's debt-to-GDP ratio rose from 130 percent to 206 percent, with debt growing much faster than GDP. This trend has raised concerns among international financial institutions, including the International Monetary Fund, which has urged China to take control of its ballooning credit levels.
To address this issue, China needs to implement further reforms, particularly in the management of state-owned enterprises. Currently, the hiring and firing of executives in SOEs is still controlled by the Communist Party, which can lead to politically motivated decisions rather than commercially sound ones. Allowing SOEs to operate more independently and compete freely in the market could help improve their efficiency and reduce the risk of excessive debt accumulation.
Another critical challenge facing China is environmental degradation. The country's rapid economic growth has come at a severe cost to its natural resources and the health of its citizens. Air pollution in major cities like Beijing has reached hazardous levels, while water scarcity and pollution threaten both urban and rural areas. Groundwater reserves in northern China are nearly depleted, and many rivers and lakes are too polluted for human use.
Addressing these environmental challenges requires significant investment in energy-efficient technologies and sustainable development practices. The Paulson Institute, founded by the author, is working to support China's transition to a more sustainable economy through initiatives such as courses on urban sustainability for Chinese mayors and biodiversity mapping of Chinese wetland areas.
Strengthening US-China Relations
As China has risen to become a global economic powerhouse, its relationship with the United States has become increasingly complex and important. Recognizing the need for more effective communication between the two countries, President George W. Bush and Chinese President Hu Jintao launched the Strategic Economic Dialogue (SED) in 2006.
The SED was designed to improve dialogue between China and the US on economic issues by creating a more coordinated approach to high-level discussions. Prior to the SED, Chinese officials would meet with different US cabinet members, often receiving conflicting messages about US priorities and goals. To address this issue, a new position was created to coordinate cabinet members' communication with China, ensuring that the US government spoke with one voice in its dealings with Chinese officials.
The first Strategic Economic Dialogue, held in Beijing in December 2006, made important strides in the US-China relationship. Some of the key outcomes included:
- Allowing the Nasdaq Stock Market and the New York Stock Exchange to open business offices in China
- Resuming stalled negotiations on expanding US carrier flights to and from China
- Facilitating financing to support US exports to China
These achievements marked a crucial fresh start in addressing long-standing trade issues between the two countries and set the stage for more productive cooperation in the future.
The Importance of US-China Cooperation
As China has grown to become one of the world's largest economies, some Americans have questioned the wisdom of helping a potential competitor. However, the reality is that Chinese issues are increasingly global issues that affect the United States and the rest of the world.
For example, a 2014 National Academy of Sciences study found that up to a quarter of the sulfate pollution on the US West Coast is caused by Chinese manufacturers and carried by winds across the Pacific Ocean. This demonstrates that supporting China in its efforts to become more sustainable is not just altruistic but also an investment in the future of the United States and the global environment.
Furthermore, the economic relationship between the US and China has become increasingly intertwined, with mutual investment benefiting both countries. Chinese investment in the US doubled from 2012 to 2013, reaching $14 billion across various sectors, including agribusiness and real estate. While some Americans may be wary of foreign ownership of US companies, it's important to consider the positive impacts on growth and employment that such investments can create.
For instance, the Wanxiang Group, China's largest auto parts manufacturer, employs about 6,000 Americans in 14 states. During the financial crisis, Wanxiang invested heavily in struggling auto parts manufacturers, saving over 3,500 jobs in the process. This example illustrates how Chinese investment can contribute to economic stability and job creation in the United States.
Looking to the future, it's clear that there is much to be gained by working with China rather than against it. Developing a solid relationship with China and promoting a better understanding of Chinese objectives is vital for navigating the global challenges of the 21st century. By working together, the United States and China can address shared concerns such as climate change, economic stability, and global security more effectively than they could individually.
Conclusion
Henry M. Paulson's "Dealing with China" provides a comprehensive and insightful look at China's remarkable economic transformation and its implications for the global economy. From the initial reforms of the late 1970s to the complex challenges facing China today, the book offers a nuanced understanding of the country's journey to become a global economic superpower.
Key takeaways from the book include:
China's economic reforms, including the empowerment of state-owned enterprises and the creation of special economic zones, laid the foundation for its rapid growth.
Privatization and restructuring of key industries, such as telecom and oil, were crucial steps in modernizing China's economy and making it more competitive on the global stage.
Reforms in education and banking were necessary to produce capable managers and create a stable financial system that could support China's growing economy.
Despite its impressive growth, China faces significant challenges, including rising debt levels and severe environmental degradation, which require further reforms and international cooperation to address.
The relationship between the United States and China is of critical importance, and improved communication and cooperation between the two countries is essential for addressing global challenges.
Chinese investment in the US and US investment in China can be mutually beneficial, creating jobs and driving economic growth in both countries.
As China continues to evolve and assert its influence on the world stage, understanding its economic journey and the challenges it faces is crucial for policymakers, business leaders, and citizens alike. Paulson's book serves as an invaluable guide to navigating the complex relationship between China and the rest of the world, offering insights that will remain relevant for years to come.
Ultimately, "Dealing with China" argues that the future of the global economy depends on the ability of China and the United States to work together in addressing shared challenges. By fostering mutual understanding, promoting sustainable development, and leveraging each other's strengths, these two economic superpowers have the potential to shape a more prosperous and stable world for generations to come.