The simple truth is we will deal more effectively with China - and other nations - from strength, not weakness. For most of post WW2 period, our strength and resolve were never in question. This is no longer the case. While the US economy remains the biggest, most innovative on earth, we face two critical, defining challenges to our continued preeminence: our long-term fiscal situation is unsustainable, and our growth rate has been persistently anemic, exacerbating wealth and income disparities in our society. In the past decade we have seen just one year with a real GDP increase greater than 3 percent. We need to grow much faster to solve our fiscal problems and to create more and better-paying jobs.
Debt is our number one enemy. Our national debt now stands at just over $18T or $56K for every single American citizen. But when it comes to devising solutions, our government has proven to be dysfunctional, when it is not feckless. We need to make policy changes to restore our economic competitiveness or we will be far less able to lead from strength or by example. What nation will look to us as a model worth emulating? What nation will feel compelled to deal with us on our terms? I saw this up close when our economy was on the brink during the 2008 financial crisis: my views on reform didn’t carry the same weight with Beijing that they once had. It is difficult to argue for market liberalization when our financial system is in disarray and our economic house is out of order.
We must restore fiscal sanity to the way we manage our affairs - and soon. The longer we delay, the greater the reckoning will be. We need to do this while maintaining a strong military presence globally. This is a difficult, complex challenge, but we must meet it: there is no historical example of a nation that ignored its fiscal difficulties and was able to maintain its status as a global power for long. In the final analysis, our self-induced weakness is more of a problem for us than is China’s rise. We must take the long view and work to reinvigorate our economic prowess. We will advance our cause further and faster when we are once again comfortable projecting strength economically, militarily, and diplomatically. At the risk of sounding utterly simplistic, once we have dealt with our own problems, we will find it far easier to deal with China.
The Chinese are famous fo rigorous scholarship. True to that heritage, they do their homework. Mao once called Deng Xiaoping a walking encyclopedia. I can’t recall a single Chinese business executive or government leader right up to the top who didn’t come to meetings thoroughly prepared. They expect no less from us.
Corporate cybertheft is the most contentious and potentially destructive economic issue we face with the Chinese. It undermines our economic security, gives credence to the sense that China doesn’t play fair, and makes it difficult to find common ground. We should look for ways to apply behind-the-scenes pressure by using carrots and sticks to induce China to begin working toward solutions, but here there are no easy answers. The May 2014 indictments returned by a federal grand jury in Pennsylvania against five officials of China’s PLA for computer hacking and economic espionage was an attempt to do just that. But I have my doubts about the effort. The Chinese officials won’t be coming to the US to stand trial, and it is not clear that the Justice Department action will have succeeded in doing anything other than making things more difficult for some US companies operating in China.
It holds facilities for training cadres in, among other things, urban planning and dealing with the media. We stopped at the crisis management center, where a group of officials from Hebei Province sat before large-screen televisions, working on an exercise that simulated the aftermath of an earthquake, complete with sirens, dazed victims, and importuning reporters.
There was a media center where cadres could receive training on how to give interviews, how to make speeches, even how to dress. There was a prep room where officials participating in mock interviews could first be made up and have their hair touched up. In one room, the comfy furnishings were configured to resemble the set of a morning talk show; another room, complete with host’s desk, was ready for a late-night chat.
The Party was preparing the CEOs of its state companies to deal with the Western press as they went global. I couldn’t help but be impressed by the magnitude of the effort being made and expenses being incurred to invest in China’s upcoming leaders. But I was struck by the paradox the Party faces. For all its efforts, what the Party must do, if it truly wants SOEs to evolve into global leaders, is the hardest thing yet. It has to find a way to set them free.
If everyone in the world, including big countries like China, India, and Indonesia, wants to live like Americans, four earths won’t be enough.
Today China has 174 cities with over 1 million people; the US has nine.
The US has no dedicated high-speed rail line, and the first one likely to be built, in California, won’t be finished until 2028. China should have 11,000 miles by 2020. China surpassed the US’s iconic 47,000 mile interstate system in 2011.
Rural areas, the west and the country’s interior, lag badly. China’s cities teem with hundreds of millions of people who - thanks to an outmoded system of residential permits - live all but illegally as second-class citizens in a land whose newfound prosperity they have labored to create.
A a young investment banker, I learned that the key to success was building relationships, between you and your client, between your firm and his or hers. As Treasury secretary, I had worked to build lasting relationships, this time between countries. Personalities came and went - I wouldn’t be Treasury secretary much longer, and the Chinese leadership would also change. But with the SED we had created a forum for relations between our countries that would carry on after us.
I learned something else as a young investment banker: never take no for an answer. You almost never got what you asked for the first time around, especially with new clients. You had to work hard to understand their needs and frame your proposals to appeal to their best interests. Then you had to push and push, and keep asking for the same thing. With enough time and effort, the answer might just change to yes. I certainly employed that approach in China. How many times did I hear “no” or “not yet” or “not so fast” in response to my requests for the Chinese to open their markets or move their currency? Even when we didn’t get the answer we wanted, we managed to wedge the door open a little further, and the next time we’d push a little more. In a country where so many people weighed in on so many issues, we were, at a minimum, helping them build a consensus for change.
He noted some in the US were criticizing China for wasting resources, damaging the environment, and contributing to global warming. On the other hand, many claimed the Chinese were hurting the US by exporting too cheaply, and they were pushing China to rebalance its economy by encourage even more domestic consumption. How was China to pursue both increased consumption and sustainability?
“Here we are,” he said. “It’s a hot summer day, but it’s cold in your offices because you’ve got the air-conditioning on. In the winter you’ve got the heat blasting out. For exercise you work out in air-conditioning gyms, then take hot showers, then get into air-conditioned cars. This is America! In China, we don’t live that way. We can’t afford to. I tell my colleagues: conservation with personal conduct! For exercise, ride your bikes to and from work.”
The world simply does not have enough resources to support another billion Chinese living the Western lifestyle. We have to find a new model.
The G20 was a relatively new organization, established in 1999 after the Asian financial crisis to coordinate policy responses. Like the G7, which represented the world’s biggest economies, the G20 was made up of finance ministers, but it included major emerging markets countries, which had grown rapidly but had previously lacked a voice in international decision-making bodies. The G20 included the BRIC members - Brazil, Russia, India and China - and countries like Saudi Arabia and Mexico as well as big Western economies like Germany and France.
Although I knew much of the legislation was for show, and not intended to become law, I worried about one of the bills reaching the floor. If it went to a vote, Congress was sure to pass it, because that was what their aggrieved constituents back hom would demand, and no one wanted to appear to be “soft” on China. I believed that the congressional leaders were looking for good reasons not to move the legislation, but I was also concerned that some unforeseen economic or political incident, or some Chinese action, might cause the leaders’ judgment to change.
“I know you didn’t want me. I know you don’t think I’m strong enough. But I’m going to show you I’m as strong of stronger than you are.”
That was my introduction to China’s Iron Lady, and the beginning of a soft spot in my heart for her. I appreciated her directness, not to mention the strength of her grip. She was a force of nature. I would find her, in time, to be a tough negotiator and and efficient communicator who didn’t twist words and was never discourteous or disrespectful. That day, looking around the vast high-ceilinged reception room thronged with dark-suited men, I instantly understood the struggle it must have been for her to make her way to the top ranks of the Party and state. China is in theory and egalitarian society, and I’ve met many dynamic and powerful women in business throughout the country, but Wu Yi was the only woman in the top government ranks - there was no other woman in the 25-member Politburo and just four among the 205 members of the Central Committee. I felt an admiration for her that would shift over time into professional affection.
This meeting proved Bo to be a shrewd, exceedingly well-prepared advocate for China. For every point I brought up with him, he had a swift and dismissive response.
Bo’s confidence and communication skills were impressive, as was his memory for facts, but I also found him overbearing and aggressive. I’d seen him correcting his translator on certain interpretations. This made quite an impression on me - not just his understanding of English but the peremptory way he overrode the translator, who was, I should note, a remarkable character in her own right.
We focused less on particular policies than on the process itself: what was the most efficient way to build trust and get things done, how to concentrate on shared strategic interests and avoid getting bogged down by ad hoc disputes.
We want to design a structure that would deal effectively with China’s complex mix of top-down yet consensus-driven decision making. Because of China’s concentrated power structure and legacy of state planning, we knew we had to involve officials at the pinnacle of the hierarchy to win approvals for policy changes. But China’s strong tradition of consensus meant we would also need to find a way to win the approvals of as many ministers and influential officials as possible, including those who did not have direct responsibility for a given issue. As I had long since learned: no one person could say yes, but many could say no. And you always wanted to get a blessing from the very top.
The way the US managed relations when I started at Treasury was simply too diffuse to be effective. We maintained well-intentioned dialogues across many departments and agencies; there were joint commissions, forums, and partnerships on subjects ranging from commerce and trade to economic development and science and technology. But discussions got mired in detail, and people lost sight of the big-picture issues. Though out China policy was coordinated at the highest level of government, each Cabinet secretary inevitably thought his or her issues should have top priority. The Chinese needed a clearer message about what we wanted and what we would give in return.
We concluded that while the SED would focus on long-term strategic goals, it would have to deliver short-term results to show we were making progress and win political support. Accomplishing this would require not just periodic official meetings but a continuous process of negotiation and discussion at ministry and agency levels to build trust and help defuse any crises that would inevitably arise. This trust building would make it easier to discuss sensitive subjects, such as China’s aggressive quest for resources in developing countries. All decisions would be carefully tracked and followed up on to make sure they were implemented.
Traditionally, high-level conversations with China could be frustrating gabfests, with each side talking past the other as they read prepared statements - an unsatisfying process with little substance. We envisioned a more dynamic approach with the SED. The US would make, say, environmental arguments not just to China’s environmental officials, who likely had limited power, but to other ministers, vice premiers, and member of the Party’s Standing Committee - that is, officials with broad portfolios and wide-ranging powers. When we had a big breakthrough in negotiations, top government officials, from the US Cabinet and China’s State Council, would be there to ratify it on the spot.
I recalled what President Hu had replied when President Bush had asked what gave him nightmares: having to create 25 million new jobs each year. The Chinese leadership sought stability above all else, and that meant having a strong economy. That in turn required additional market-oriented reforms and a mutually beneficial relationship with the US, its most important trading partner. The Communist Party had essentially make a deal with the people to provide prosperity in return for continued political power. But China’s continued success had given its citizens higher expectations, and these were growing more difficult to meet as many more social stresses accumulated - from dirty air and water to gnawing disparities in income distribution.
To switch from a command and control economy to one that is more market oriented requires commercial banks and, eventually, capital markets. Banks come first. They play a crucial role in allocating capital efficiently. They make loans to businesses and individuals, help depositors safeguard and grow their savings, and provide a host of day-to-day transactions - from letters of credit and trade finance to lockbox services and funds transfer - that most people don’t think much about but that grease the wheels of commerce.
The way I see it, a business education should be as much vocational as academic. Teaching business is like teaching medicine: theory is important, but hands-on practice is essential. Medical students learn from cadavers and hospital rounds; business students learn from case studies - a method pioneered more than a century ago by Harvard Business School that engages students in analyzing complex real-life dilemmas faced by actual companies and executives. Tsinghua’s method of instruction, like too much of China’s educational system, relied on rote learning - lectures, memorization, and written tests - and did not foster innovative, interactive approaches to problem solving. Students needed to know how to work as part of a team - a critical lesson in China, where getting people to work collaboratively can be difficult. At Harvard Business School we weren’t told the “right” or “wrong” answers but were encouraged to think for ourselves and defend our ideas before our peers and our at-times-intimidating professors. This helped hone my analytical skills and confidence, and I believed a similar approach would help Chinese students.
China’s concern for political stability allowed its people little latitude to discuss human rights issues or civil liberties, much less argue the merits of the Chinese system of government or one-party Communist rule. But the pragmatic Chinese leadership tended to take a different view of economics, and public discussion or criticism of government economic policies was more tolerated.
Capitalism without bankruptcy is like Christianity without hell. The fundamental principle of a market economy is that the winners win and the losers lose.
“There were rules prohibiting bribes. They were enforced selectively, so it incited fear, but everyone broke them,” one of China’s most respected business leaders once told me as we reminisced about that period. Reflecting on his distinguished career, he said, matte-of-factly, that his greatest success had been “surviving in the system for so long.”
As much as the casual observer might think of the central government as an all-knowing, all-powerful monolith, Beijing doesn’t always find it easy to control, much less dictate, activities in the provinces, especially ones as big and energetic as Guangdong. The tension between central administration and regional autonomy is an enduring concern in a country that has been beset by warlords for long stretches of its history, including the decades leading up to the Communist takeover in 1949. Even today China rotates its senior political leaders and military brass through provincial posts and regional commands to prevent anyone from building up too strong a local power base.
CNPC’s social service functions were easy enough to identify, but they accounted for only part of the excess staffing. Another factor was that just about every operation was done in-house - dozens of functions, from surveying and drilling to construction and engineering. This no doubt reflected the legacy of self-sufficiency, as well as the fact that before reform, no private marketplace existed in which companies could be formed to compete to supply these services. Outside of China major oil companies outsourced most similar functions, reducing overhead and other expenses.
The SEC was unhappy that PetroChina was required to renew its production permits annually with the Chinese government. The requirement, though a formality, created uncertainty. What if regulators suddenly denied the renewal? PetroChina’s reserves would be worthless.
How many people like Mike Evans do you have in Goldman Sachs?
Only one. He’s the best in the world at what he does.
Mr. Evans, if I had ten people like you, I’d turn around all of the state-owned enterprises. If I had 100 people like you, I’d turn around our whole country.
Management is backward and needs to become more modern and progressive.
But he felt he could go only so far. SOEs needed foreign capital, but the Chinese could not surrender control - for a simple reason. SOEs lost money in part because they had too many workers; if foreigners took control, they would lay off many employees - he estimated up to 80 percent. Doing that without an adequate social security system would threaten stability. China would have to build a safety net and in the meantime use the equity markets for its version of partial privatization.
I also wanted to establish a personal rapport with Wu and to demonstrate how high a priority we placed on China Telecom. As COO of a global investment bank, I could not oversee the deal day to day, but I could take direct responsibility for it. This was essential to the Chinese, who may be among the most status- and rank-conscious people on earth.
She understood the importance of “face” and worried that we would send the wrong people to Hainan. If we sent junior bankers to talk about finance before a senior minister like Wu, we might lose any chance of a mandate right then and there.
We had just appointed John Thornton chairman of Asia, but he was in his early 40s, and it was felt he lacked Wu’s stature. Fortunately, 53-year-old Bob Hormats, vice chairman of Goldman Sachs International, agreed to make the trip. John, who was on our six-member executive committee, far outranked Hormats internally, but Bob had been on the US National Security Council staff when Henry Kissinger had made the opening to China in 1971, and he had been involved in the discussions that led to normalization of relations in 1979. The Chinese, with the abiding respect for such long-term connections, were pleased for him to substitute for me.
Wang Qishan was the head of China Construction Bank, not the head of the Ministry of Posts and Telecommunications, the actual client. But he was never just a banker. Wang was working for Zhu and China, and he would make his decisions accordingly. Zhu depended on a network of allies and proteges, men and women committed to reform, who had the drive and executive ability to cut through bureaucratic lethargy and overcome political opposition to push forward changes while time and momentum were on their side. And Wang was emerging as on of Zhu’s key lieutenants.
The lesson I drew was that you need to listen hard to what your counterpart is really saying they want - and, if it’s not unreasonable or unethical, do your best to meet their objectives or convince them they can’t be met. That’s true anywhere, but especially in China, where it’s so easy to use the same words and phrases and yet mean very different things. You may think you have the same purpose in doing a joint venture, but it turns out your partner’s interested in something entirely different.
As the country opened to foreign investment, almost every transaction was debated at the highest level of government; the decision making was complex, diffuse in that it involved the approval of many officials, and opaque to outsiders like us. Many memoranda of understanding were signed that went nowhere; informal negotiations took place with officials who lacked proper authority or couldn’t “sell” projects to their superiors. Moreover, China lacked a strong adherence to the rule of law. Instead, the rule of men was the norm, which meant that building strong personal relationships was essential for doing business. For this reason, I travelled frequently to China, especially in the early years. Over time we learned to identify the most viable transactions, involving the right clients and the support of the right Chinese advocates. But on any number of occasions as we were learning to work in China in the early days, we were disappointed by abrupt and bewildering changes in direction. The rug could be pulled out from under you at any point.
In the audience was a woman named Li Xiaolin, a young power industry bureaucrat, who happened to be the daughter of Li Peng, the country’s premier, and a leading conservative opponent of rapid reform. The next thing we knew, we had been instructed to pull the deal. As we were told, Li Peng was unhappy about the high rate of return to the foreign investors. The Shandong power deal was cancelled in December 1993.
We came away with a crucial lesson: many officials could approve a deal, but it took only one well-placed official in a consensus-ruled system to kill it. We subsequently learned to spread our efforts wide to every conceivable person or agency that might have an interest in whatever we were focused on and to work relentlessly to bring them to our side.
Straight out, KS asked Goldman Sachs to spend $2M to buy advertising on it. He certainly did not need the money, and the amount in the absolute terms was trivial for him. I saw it even then as a symbolic gesture, but one that was very important to him because he wanted his sons’ first business venture to succeed.
After lunch KS walked me to the elevator and rode down with me, a gesture of such politeness and familiarity that I soon found myself adopting it with Asian visitors back home.
In the US some clients were nervous if you wanted to invest with them. In Hong Kong it was the opposite. Putting your money on the line alongside your clients’ earned you their trust and admitted you to the club.
We subsequently did quite a lot of work for KS and his companies, helping him to finance, buy, and sell a number of businesses. Making a simple $2M commitment didn’t win us these other assignments. KS was too good a businessman for that: we had to earn every bit of work we did for him. But it did get us a seat at the table so we could compete for the business, and it helped to make our name in Hong Kong, and later in China.
All of this was quickly disappearing. On subsequent visits I watched the old neighborhoods being torn down as fast as you could blink, replaced by massive building housing government ministries and office, residential, and hotel complexes. The pace of change was stunning. Landmarks seemingly disappeared between trips. As bewildering as it was to a visitor like me, it must have been deeply disconcerting to the Chinese.
Shenzhen was a gold mine for Hong Kong entrepreneurs, who were pouring in money to start businesses they could run at almost no cost. The Chinese government took care of benefits and what little healthcare there was for the workers, who toiled round the clock. The Hong Kong manufacturers paid bare minimum wages. They transferred their product at cost into Hong Kong, where they paid no corporate taxes. They marked it up and shipped it to the world’s consumers. How could you have a better deal than that?
The arrangement worked for the Chinese, too. I’m not minimizing the dreadful working conditions in some factories - long hours, few if any bathroom breaks, poorly ventilated factory floors - but millions of jobs were being created, and the economy was booming. For the first time, people had money to spend and plenty of appealing and desirable goods to spend it on. People from all over Guangdong were flocking to the SEZs, and people all over the country were pouring into Guangdong and the other coastal provinces where the experimentation was most advanced.
Chinese bodies, foreign technology. Chinese learning as a base, Western learning for practical applications.