Book Review: Dealing with China

BOOK review: Dealing with China
Author: Henry M. Paulson Jr.
Publisher: Headline
406 pages
Price: 389

The jacket on the book says it all: "Dealing with China takes the reader behind closed doors to witness the creation and evolution of China's state-controlled capitalism". It also provides a glimpse of what the future holds out for this country."

Authored by Henry (Hank) Paulson, Jr., former US Treasury Secretary and former head of Goldman Sachs, the book is based on the author's intimate engagement with top people in China as it struggled to carve a place for itself in the sun. Paulson states in his preface: "This book is my attempt to address [several] concerns (like What do the Chinese really want? Why are they spending so much money on their military? Are they friends or enemies, trading partners or commercial and geopolitical adversaries? How do we deal with China?)."

He adds that his book is the perspective of "a businessman who brings a first-hand financial knowledge of China and its corporate and political leaders. I have gleaned this over more than 100 visits to the country and nearly 25 years of dealing with Chinese officials on commercial matters while at Goldman Sachs, on affairs of state and macroeconomic policy while US Secretary of the Treasury, and, nowadays as head of the Paulson Institute, which promotes sustainable economic growth and a cleaner environment through greater cooperation between the US and China."

The book provides invaluable insight into the way the Chinese decision-making process works – and the way it has changed based on Paulson's observations while he worked with senior leaders of the last three administrations in China – the Jiang Zemin and Zhu Rongji administration in the 1990s; the Hu Jintao and Wen Jiabao regime in the early 21st century and the present Xi Jinping and Li Keqiang government — to bring in much-needed economic reforms and initiate the US-China Strategic Economic Dialogue.

The style is almost racy. It reads like a business thriller, as it takes the reader through the turbulent financial crises that rocked the world in the 1990s and then in 2008. It narrates how China managed to list its biggest companies on US stock markets in spite of the gloom and doom that enveloped the capital markets during those dismal years.

For instance, the first deal to list China Telecom was almost traumatic for the Chinese. Till the last day, nobody was sure whether China would 'lose face' (and the consequences would have to be borne by the officials who caused this 'shame' on their country). The tension is palpable as the shares opened for trading on Hong Kong's markets on 23 October 1997. It was raining heavily that day. Paulson was worried ("We were sailing into a raging headwind"). But the Chinese saw the rains as a good omen. Vice Premier Zhu Rongji was anxious. Then news came in that the stock had bounced back. Later, one of the Chinese informed Paulson that China Telecom's listing code number on the Hong Kong Stock market was 941. "These numbers, as pronounced in Chinese, mean 'survival in the midst of dangers'."

The first deal was crucially important for China because it would announce the country's arrival on the global markets. It would also pave the way for other large offerings from China. For China, it was a question of "face" on one hand, and an economic strategy for integrating with global capital markets on the other. The money was needed to finance its transition from a state-owned business enterprise to a market-oriented one. Any failure at this stage would affect all future plans. For Paulson too, this was immensely significant, because the reputation of Goldman Sachs as a market maker depended on the success of the first listing – it had just managed to trounce Merrill Lynch in bagging this deal. Any failure would have meant that it would be cut off from all future deals.

The following pages are similarly racy. Whether it is about how PetroChina is prepared to approach markets, or if it is Bank of China. Each story comes with the names and roles of people who made the deals possible, and how they massaged the political system to ensure the deals did not get unstuck. The glossary is very useful to check the names of the many who populate the book's pages.

Xi Jinping's words to Paulson in July 2014 in the Great Hall of the People are almost prophetic: "There has been a pattern of suspicion leading to fear, which in turn leads to hostility. This is the kind of logic we need to prevent. We need to identify where our common interests lie." In fact, any China observer should view this remarkable video (http://youtu.be/CXov7MkgPB4) on how China can be easily misunderstood.

Paulson's book provides many anecdotes which reiterate how slippery the paths can be. Conclusion: an immensely readable and information-packed book.