Paulson should not have taken Bernanke with him to

Paulson, Bernanke and the Strategic Economic Dialogue

Those of us who are familiar with doing business in China would have immediately recognized what “Hank” Paulson was doing when he led a contingent of economic policy makers to Beijing. What he did was unprecedented. Pulling all the stops to impress the Chinese leadership of his own influence and charisma in DC. But isn’t that exactly what all of us who are in love with the romance of doing business in China do? We are in love with the square room setting, where seating is by protocol. We are in love with the constant pouring of tea by the attendant. The phrasing of words correctly so that we are not misunderstood in translation. The sensitivity to things Chinese. The desire and ability to be useful in this large and inviting country.

Never has Western civilization bent over backwards for any other civilization as it is doing for China today. In business. In government. If it was business with any other country, the profit motivation is up front. With China, “profit will come later.” If it was policy issues with any other country, “negotiate from a position of strength”. If it is China, “China is different.”

In Paulson’s case, he was visiting China as a government official, but carried with him the mind-set of the “can-do” businessman from his days as CEO of Goldman Sachs. He was a businessman, not a statesman on this trip. The idea of a Strategic Economic Dialogue from a political perspective may be good idea, but the one thing he should not have done however was to have persuaded Ben Bernanke along with him on this trip. Bernanke on his part should not have gone with the political entourage, even if he took the trouble to travel on a different flight and had generally a different agenda.

Alan Greenspan never visited China when he was chairman of the Feds, and he is still loathe to travel there personally, even when invited by organisations like ours to be a speaker in Beijing. I had the pleasure of hosting Greenspan’s vice chairman, Roger Ferguson, when he was a speaker at one of our own conferences in Beijing in October. During that trip, as I accompanied Ferguson on his personal visits around to some of the same people as Bernanke and Paulson visited. A number of them commented to Ferguson that they saw very little of him when he was in office, and that they met as regulators mostly through tele-conference sessions.

Seasoned regulators have a very established sense of territory. They meet regulators from other jurisdictions only if invited, at meetings with the Bank for International Settlements or during the annual meetings of the World Bank and the IMF. They are always very careful to keep the meetings within the ambit of their own remit, and almost never as part of a broader economic dialogue.

Outside of these, the role of a central banker is to keep his own house in order, and not go around advising others. In the case of the US central banker, he would know that whatever he decides within his own house will affect every other house on the planet. For exactly this reason, he has to keep his distance and therefore his neutrality. Also, central bankers all over the world fight to maintain their independence from politicians. In this regard, this joint trip with the politicians comes across like a lack of political sophistication on the part of Bernanke.

Pulling out all the stops did not result in any transformational shift in Chinese policy. What did Paulson expect the Chinese to do? The final agreed statement between the two countries said that one of the items agreed to was that China will get its people to spend more and the US will get its people save more. In essence, that meant that you do your own thing in your own backyard, and we will do our own in ours. It is okay for politicians to agree on feel-good statements like these, and leave it to the administrators to chisel meaning out of it later. There was no reason to pull a central banker into the picture as well.

Having said that, a good politician would have organised a trip like this so that the unsaid was more powerful than what was said. I absolutely agree with one comment in a newspaper editorial that suggested that Paulson should have also visited Korea and definitely Indonesia as part of a regional tour that could have brought him to China at the end of it. These other countries are silently carrying the weight of the burden of having fully convertible and floated currencies that punishes their economies as their exports to the US suffers, and a good word from Paulson would have put the global imbalance in better perspective and strengthened his hands in his negotiations with the Chinese.

In terms of international relations, China is both an emerging economy and a global powerhouse, and it is a very adolescent time in its development. Like a young girl, they are coming to terms with their own identity and their ability to influence the world, but still have many limitations to overcome. It is exactly for this reason that any relationship with China at a political level should be done on a statesmanlike basis and not in too familiar a manner.

Nobody can put a finger on the what was wrong with the charm offensive by both Paulson and the Chinese vice premier, Wu Yi, seen holding hands and just being complimentary about each other. But somehow, a guarded mutual respect at this stage would have set the tone for tackling the difficult issues better. In other words, this was the one time when political sophistication would have helped the US better, but they behaved like hopeless romantics, as everybody else does, including me, when it comes to China.

All of us who do business with the Chinese elite in Beijing realise that they are actually very hospitable people, and it always a joy to make friends easily in this ancient and proud capital. But the unwritten rule has always been that the Chinese have never ever give away anything tangible to the foreigner. It is you who chose to go there to do business. So, you sort out how you would like to profit from it. It’s your problem, not theirs.

The Chinese are always happy about friendship with foreigners, but as long as you know how to behave in their homes and leave everything as it is. Although it may sound sophisticated in economic language, what the Americans were there to do was to ask the Chinese for a favour and revalue their currency so that some money goes back to the US. Now, why should any country, let alone the Chinese, do another country any favours unless there is something in it for them, and there was very little discussed on that point.

All the goodwill that Paulson developed was essentially for himself and not necessarily transferable to future generations of negotiators. I know for a fact that there will be some changes amongst the key people in Beijing in spring next year. Some of those involved in banking have already indicated to me that they wonder if they will be in their respective positions next year. The US-China Strategic Economic Dialogue is essentially a Bush initiative and future administrations may set a different tone, depending on how desperate they are. But Paulson will be back, later as chairman or advisor to some other business and meet with some of the people he met on this trip at a different level. That is the most important benefit I see from all this.

But let’s see what happens in May when it is the Chinese turn to go to DC – take note of who will go and who will not go. Then the Chinese themselves will realise that creating a contingent as large as the US secretaries represented in this trip is politically way too sensitive as it exposes too many of their senior executives to global prominence when they may not even have the internal mandate within the People’s Congress to deal with these issues. The same delineation of authority in the US executive arm is not mirrored in the Chinese version, and playing the difference out in public may result in a loss of face for some of these Chinese executives and they may not go to the US in May. But let’s see.

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