“Time is of the essence,” Henry Paulson told the capacity crowd at Burden Hall on the Harvard Business School (HBS) campus Thursday afternoon (May 3). China needs to make some critical economic reforms — floating its currency, reforming its capital markets, and restructuring so that domestic consumption plays a bigger role — and the time to make them is now, when China is booming and the global economy is strong.
“All of us recognize,” Paulson said, “that over the past three or four or five years we’ve seen a global economy as strong as anything I’ve seen in my business career … and as you look at the past five years, the U.S. and China have accounted for about half of that global growth.”
The secretary of the U.S. Treasury was on campus to speak to students of Harvard Business School, the Kennedy School of Government, and Harvard Law School on the U.S.-China relationship.
“One of the lessons I’ve learned over the years is it’s always easier to make changes, reforms, when things are going well,” he explained, adding that the kind of opening for China to trade in goods and services that’s needed would go “far beyond the requirements of WTO [the World Trade Organization]; WTO is just a minimal point.”
Paulson was in Shanghai on March 8, just days after the dramatic drop in the stock exchange there that touched off a round of market volatility in capital markets around the globe. While acknowledging the progress the Chinese have made, he was blunt in insisting that their capital markets are not reflective of their economy as a whole: “They need to do more work on their capital markets,” he told the Burden Hall crowd.
Specifically, he mentioned that the $2 trillion in individual savings accounts in China is earning an annual return of some 2.5 percent — “not a positive return when you allow for inflation and taxes.” But China, he noted, is growing at 10 percent a year, and the Chinese savings rate is about 50 percent. Clearly, he suggested, something is out of whack.
The currency, Paulson explained, “is a symbol for the pace of reform.” There are plenty of countries whose currency is controlled by the government rather than the market, he said, but none of them so big, or so well integrated into the global economy as China.
He called the exchange rates “unsustainable in the long term.”
But if he had a number of policy prescriptions for China, he also acknowledged, “China is a sovereign nation so they are going to do things that make sense for them.”
With China on pace to overtake the United States as the world’s largest emitter of greenhouse gases, the question of energy and the environment is necessarily an aspect of the U.S.-China relationship. Paulson sounded bullish on technological solutions to the problem of climate change.
Since he came to Washington last year after a long career at Goldman Sachs, Paulson said, “I haven’t found that many of the problems, as I’ve looked at them close-up, look easier. But the area where I’ve received the most good news is spending time at the Department of Energy and with others, and learning about some of the technologies we’ve got coming.” He cited cellulosic ethanol as an example.
Both China and the United States need alternative sources of energy, Paulson said. “We’re talking a lot about sharing technology.”
Paulson ticked off several items on the running agenda he maintains with Chinese Vice Premier Wu Yi, his opposite number in the two countries’ Strategic Economic Dialogue, the next session of which is to be held in Washington later this month:
- An open skies agreement for airlines
- Expanded relationships in tourism
- Reducing tariffs and nontrade barriers for environmental goods
- Coal-fueled power technology with zero emissions
- Managing and protecting intellectual property
In response to a question about the Dubai ports debacle of last year (which occurred before he took office, he noted) and the problem of balancing national security and economic openness, he said, “National security trumps everything,” but added, “It shouldn’t be difficult to balance the two. We’ve done it for many years.”
Paulson, an ebullient optimist who couldn’t resist prefacing his talk in Burden Hall with some career advice, told his audience, “It’s going to be a terrific time to go out and get jobs,” because the problems keep getting “more and more interesting.”
He urged even those students not working for global companies keep a “global mind-set.”
He continued, “So many people want to be career engineers … avoid short-term-ism. The important thing is to learn and to grow.”
Asked about the challenges of balancing the long and the short term, he said, “In every walk of life, that’s the most important question.
“The really outstanding CEOs are the ones that manage for long-term success. But if you don’t pay attention to the short term, you won’t make it to the long term. You’ve got to make it through the night.”