Tuesday, May 30, 2006
Paulson experience with China may calm both sides By Greg Robb, MarketWatch
Last Update: 5:37 PM ET May 30, 2006
WASHINGTON (MarketWatch) -- The appointment of Henry Paulson as Treasury secretary gives the Bush administration a proven China hand with deep professional connections to the world's most populous country, though experts said his arrival should be not viewed as a shift in U.S. strategy towards the Asian economic powerhouse.
Paulson, the chairman and chief executive of Goldman Sachs Group, has made more than 70 trips to China over the last decade, and is considered an expert on issues American businesses face "on the ground' in China, and of the condition of Chinese banks. This experience is expected to serve him well as a member of the administration.
"He may be able to be more effective because he has a much deeper understanding and experience with China," said Nao Matsukata, former director of policy planning at U.S.T.R. and the chair of Strategic International Business Practice at Hunton & Williams.
Xiaobo Hu, a professor of political science at Clemson University, called Paulson "one of the pioneers to get into the Chinese market. "
By appointing Paulson, "it shows that the Bush administration is moving one step closer to a serious attempt at working together with and in the Chinese market, " Hu said.
But these same experts do not predict that Paulson's assumption of the top job at the U.S. Treasury will change White House policy toward China and its fixed currency.
"I wouldn't see any reason to think that we will have a new approach to China," said Desmond Lachman, formerly the chief emerging-markets economic strategist at Salomon Smith Barney and now an analyst at the American Enterprise Institute.
"On the direct issues, I can't think of any immediate impact" from Paulson's nomination, said Adam Segal, senior fellow for China Studies, at the Council of Foreign Relations.
"It's not a personality problem. There are huge structural problems that don't have an easy solution to them," Segal said.
The United States, along with multilateral institutions such as the Group of Seven, the International Monetary Fund and the World Bank, have argued that China's misaligned currency is one source of growing global imbalances that could threaten the robust global expansion.
Last July, China moved to decouple the yuan from the dollar, but there has been very little movement since that first 2.1% one-day move.
But to keep the yuan pegged to the dollar, the Chinese have purchased hundreds of billions of dollars worth of U.S. assets, primarily government debt and home mortgages.
U.S. and China appear to be at a standstill on the currency issue.
Despite "strong disappointment" in the slow progress being made on strengthening the yuan, the U.S. Treasury concluded earlier this month that China has not met the technical requirements to be named a currency manipulator. See full story.
The Chinese insist that they will move toward more flexibility on exchange rates at their own timetable. Essential institutions, such as the banking and payment systems, must be reformed first, they say.
Looming in the backround is Congress.
A bill written by Schumer, D-N.Y. and Lindsey Graham, R-S.C., would slap a 27.5% tariff on Chinese imports if China doesn't take a meaningful step to revalue its currency and set a timetable for an eventual float. The senators have said they will bring the bill up in September unless China moves further to allow its currency to appreciate versus the dollar.
Experts say it is difficult for the nomination of one man, even the U.S. Treasury Secretary, to alter these forces.
U.S. policy is driven by concerns about North Korea and Iran and China policy is driven by concern for its domestic economy.
But in sharp contrast with Treasury Secretary John Snow, Paulson has had "a tremendous amount of personal and professional experience in China," Matsukata said, which will be beneficial.
"He also has very good professional, if not personal, relationships with some of the most senior economic officials in China," Matsukata said.
Goldman owns a stake in one of that country's brokerages, Goldman Sachs Gaohua and has or will lead three of China's biggest initial public offerings. Among them: PetroChina, Ping An Insurance and Bank of China.
"He can help educate the members of Congress about the challenges China faces domestically," Matsukata said.
John Frisbie, president of the U.S.-China Business Council, a trade group for U.S. businesses with operations in China, said Paulson was a very good choice to help China reform the financial system. China's fixed currency is designed to protect China's weak banking sector. China still maintains capital controls. There is concern that removal of the controls would lead to a large outlflow of capital.
"Paulson understands China's financial sector. He understands the reforms that are needed, and I think he will be able to address those," Frisbie said.
During his visit to China last October, Snow sought to broaden the discussion of China's currency reform to include financial sector reform.
"Hopefully Paulson would pick that up and, given his background, take that even further ," Frisbie said.
On the other hand, Patrick Mulloy, a commissioner on the U.S.-China Economic and Security Review Commission, said he hoped Paulson would take the issue of China's foreign currency reserves move seriously that Snow did.
China is gaining "enormous leverage" over the U.S. economy through their dollar holdings, Mulloy said.
Paulson is on the advisory board of Tsinghua University School of Economics and Management, a virtual whose who of top U.S. businessmen in China including Craig Barrett, the chief executive officer of Intel Corp., Philip Condit, the chief executive officer of The Boeing Co., Douglas Daft, head of the Coca-Cola Co. and Michael Dell, head of Dell Computer Corp.