Henry Paulson, the former U.S. Treasury secretary and a relatively well-known China talking head, spoke at the Atlantic Council recently and despite an overflow audience said little that was fresh or new.
The occasion was the presentation of a four page paper by Paulson that counsels a “new framework” for US-China economic relations. The thesis is that the current consensus—where “China’s success” is necessarily also good for the United States—is fraying because of America’s attenuated economy, China’s aggressive industrial development that competes with the U.S. businesses, and its mercantilist trade policies and military build-up.
One solution, Paulson posits in the paper, is that the United States do more to open itself to Chinese investment. That will mean that there is even greater intertwining China and the United States. It will also mean that the $3 trillion of Chinese foreign reserves will be put to work in the United States, creating U.S. jobs.
The general principles he commends, however—five of them—contain a number of presuppositions about the nature of the Chinese political system that could make implementing them difficult or unfeasible.
For example, the first principle is “Unlock the Promise of Capital and Cross-Investment.” A key part of this is to “press [Beijing] hard” for a market-determined currency and a faster timeline for capital account liberalization. This will actually prevent a financial crisis in China, Paulson writes.
A market-based exchange rate seems a long way off.
The problem however is the extent to which a manipulated currency rate is connected with China’s domestic economy—it promotes exports—and the control over the economy exercised by the Chinese Communist Party (CCP). A market-based exchange rate seems a long way off.
Similarly for the second principle: it asks the United States to implement “sensible” regulatory practices, and demands that China correct “flawed practices that have led to massive producer debt and the misallocation of capital.” But again, the whole model of Chinese growth—fixed asset investment, including real estate in a big way—is a giant exercise in capital misallocation funded through debt. This isn’t a minor thing that can simply be “corrected.”
The third principle demands “transparency” from China.
The third principle demands “transparency” from China. Just recently, however, China’s response to short sellers using company filings to expose fraud in U.S.-listed Chinese companies was to deny access to the filings, harass the short researchers, and declare audit filings about these companies to be “state secrets.” And the incentives currently offered by the political system support such responses.
Principles four and five continue in the same vein: great ideas; anathema under the current political arrangements. And in fact it seems that none of these proposals are any different from what has been expected and wished from China for more than the last decade.
It’s unclear how all this constitutes a “new framework,” though it’s clear that the understanding of China that informs these proposals is the same one that informs the current consensus, and I’d characterize this “understanding” as primarily a failure to understand the primacy of the specific political institution of the CCP, and its cadre corps, in determining China’s growth trajectory and social, economic, and financial systems. Because of this failure of understanding, policymakers continue to seem to think thing may be changed just because changing them makes so much sense.
But when it comes to trying to find out why the CCP would reform along the lines we all hope, what does Paulson say? He was asked by moderator Steve Hadley about the role of state-owned enterprises and their connections with princelings—about how the system may be reformed.
Paulson did not tackle the matter directly, stating simply that China’s future needs to be in private enterprise—implicitly suggesting the dismantling of the SOE structure as it exists now (SOEs control 50 percent of industrial assets in the country). But he did not say how China would get there, nor how such changes would interact with the political system.
Unfortunately, it seemed that ignorance of the political nature of the Chinese economy, and the character of the political system, was endemic in Paulson’s speech.
He was asked about political reform twice in different ways. In one case it was the direct question of roughly “What do you think the prospects are for political reform in China.” Paulson said: “It’s a political system in the process of evolution.” The chosen example? The fact that not since Deng has a Chinese leader directly been able to appoint a successor. He also referred to “changes in the economic sphere leading to the government making concessions,” referring to environmental projects being stopped.
Then this: “My own view is that greater opening up and economic freedom and integration in the global system will inevitably lead to more political changes and freedom. What is the primary objective of the Chinese leadership? Stability. That’s why economic development and creating jobs is so important. But I think you’ll see the leaders over time come to understand that political reform and providing more liberties will be a tool that will be used to maintain stability rather than something that will be disruptive. But again this is a system that is evolving.”
This response is interesting for two reasons. 1) The internalization of the CCP’s refurbished legitimating principle expressed as “weiwen propaganda,” and 2) The idea that genuinely greater liberties will equal greater stability for the regime.
The first obviously conceals that “stability” in this context simply refers to continuing one-Party dictatorship.
The second is interesting for its failure to grasp that if China had genuine freedom of belief and freedom of expression—probably the simplest manifestations of actual liberty—the Party wouldn’t last five minutes. If by “more liberties” Paulson did not mean freedom of expression and belief, then the word has no genuine meaning in this context.
The other political reform question asked was whether Xi Jinping is a reformist. Paulson apparently does not subscribe to such labels. “My view is that everyone in the top leadership knows that this is beyond the point of saying … they all know that they’ve gone too far to stop now, they’ve got to continue reform, there’s no turning back. What’s happened in the U.S., the serious situation in Europe now, has pressed it upon them more. How fast reform will proceed is difficult to predict. I think they understand the issues and there is no turning back.”
The real nut of reform, however, is obviously this: CCP rule, or non-CCP rule.
The real nut of reform, however, is obviously this: CCP rule, or non-CCP rule. If the Party still has a monopoly on political power, and continues to repress the media and send those who think differently to reeducation through forced labor, what “reform” is there to speak of? It would simply be tinkering around the edges while concealing the real problem that besets China.
I had a question along these lines that I wrote down:
“A blog post that was widely spread recently characterized the Chinese Communist Party as a kleptocracy; I’d like to know whether you subscribe to this view. You referred to what could be understood as the kleptocratic elements in the regime—corruption, for example—and said they were mostly related to the municipal or local levels. But it’s true that the family members of central Party leaders also benefit immensely through systemic corruption; the whole SOE system for example, which is a huge part of the economy. So to the extent in which the Communist Party stands in an oppositional relationship with the people of China, extracting rents, coupled with the empowerment of the people you referred to, for example with Sina Weibo, more effective protests, greater interconnectedness through the world, and greater willingness to confront the Communist Party and so forth, do you think there may be a point where the Communist Party can no longer hold onto power? And how much do you think this contingency is thought about or prepared for by U.S. policy makers?”
Didn’t get to ask that one.
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