Dealing with China

How do you turn a poor agrarian state into an economic superpower within a single generation? Henry Paulson’s account shows that China’s transformation was not a miracle—it was deliberate experimentation, blending state control with market dynamism. Deng Xiaoping’s reforms after 1978 shifted the economy from isolation to integration, building what Paulson calls “socialism with Chinese characteristics.” That hybrid model—part central command, part competitive capitalism—reshaped global trade and investment.

Reform as Experimentation

Deng’s mantra, “crossing the river by feeling the stones,” captures China’s incremental reform strategy. Policies often began as local tests—household responsibility in agriculture, township and village enterprises, and special economic zones like Shenzhen—before scaling nationally. Pragmatism trumped ideology. The state loosened controls where markets worked but maintained authority over strategy, credit, and core assets. By combining an abundant labor force with imported technology, China became the world’s factory floor and the anchor of global supply chains.

Scale, Trade, and Disparity

By the early 2000s, China was an industrial colossus—producing half the world’s coal and metals, consuming staggering volumes of energy, and poised to surpass the U.S. in total GDP. Yet per capita income ranked around 80th globally. That disparity drove a new policy agenda: pursue quality, not just quantity, of growth; raise consumption; and balance efficiency with equity. The combination of world-beating scale and uneven prosperity shaped everything that followed—from privatization to banking reform, urbanization, and diplomacy.

Beyond Growth: Complexity and Reform Cycles

Growth unleashed contradictions: environmental degradation, local debt, and governance gaps. Each reform wave—privatizing SOEs, restructuring banks, opening markets—was both a response to these cracks and a training ground for better management. Paulson’s experience, first as Goldman Sachs CEO and later as U.S. Treasury Secretary, makes the book a study in learning-by-doing at national scale. China’s leaders continually tested and refined the boundaries between state control and market freedom, and foreign advisers like Paulson played critical roles in helping shape pragmatic solutions.

A Core Idea

China’s rise is a story of institutions adapting faster than ideology: markets as instruments, not as creeds, guided by political caution and relentless experimentation.

Why This Matters

For you—as an investor, policymaker, or student of global systems—the takeaway is that China’s transformation is not a closed chapter. Its hybrid model continues to evolve, and understanding how it balances control and openness, growth and risk, cooperation and competition remains crucial to anticipating global economic shifts. Paulson’s lens, grounded in direct dealmaking, banking reform, and high-level diplomacy, reveals not just what China became, but how its methods may now influence the next frontier of global capitalism.

Paulson’s firsthand stories from China’s boardrooms and ministries reveal that doing business there is as much about reading power as reading financials. Rituals, hierarchy, and sponsorship define decision-making. Success depends on decoding signals rather than demanding explicit promises. Meetings often unfold as theater—formal seating, scripted remarks, and strategic silences that communicate more than words.

Authority Flows Through People

Every deal needs a high-level political sponsor. For Goldman Sachs, Vice Premier Zhu Rongji’s subtle endorsement in a meeting without relevant ministries said more than a signed contract. Influential intermediaries like Wang Qishan bridged the divide between local priorities and foreign partners. In China, bureaucracies are moved by perceived political intent, and “face”—status and trust—dictates how commitments translate into outcomes.

Trust Before Transaction

Building enduring relationships came to define Paulson’s strategy. Deals like China Telecom’s IPO were years in the making, rooted in small acts of respect: punctuality, patience, fluency in symbol and ritual. Paulson learned that face-to-face reassurances and persistence often mattered more than speed or paperwork. In China’s consensus-driven system, “nothing is done until it’s done”—but when trust is earned, execution can be swift and decisive.

Practical Lesson

If you operate in China, focus as much on relationships and political choreography as on spreadsheets. Influence travels through people, not process charts.

Privatization in China was never simple divestiture—it was restructuring under political supervision. Paulson demonstrates how Zhu Rongji turned global capital markets into reform tools. IPOs for firms like China Telecom and PetroChina forced businesses to adopt audits, governance, and modern accounting. Listing became leverage: foreign investors imposed discipline that bureaucrats alone could not.

Corporate Surgery as Policy

Paulson and his Goldman team engineered listings by carving assets, recruiting cornerstone investors, and introducing governance features modeled on Western precedents. The political dimension was constant—leaders debated pricing superstition (like Wang Qishan’s favored HK$11.88) and symbolism alongside economics. PetroChina’s listing sparked protests abroad and labor discontent at home, but it also cemented a shift toward market-based performance expectations.

Banking as Systemic Reform

The restructuring of China’s banks—the Big Four—was a monumental extension of that same logic. Recapitalizations, asset management companies, and Central Huijin stabilized the system. When Goldman invested in ICBC under Paulson’s watch, it was not just a bet on finance but on institutional evolution. CEO Jiang Jianqing and technocrats like Zhou Xiaochuan transformed ICBC into a model for how foreign expertise could graft onto state DNA.

Core Lesson

Market reform in China worked not by shrinking the state, but by wiring transparency and global standards into its arteries.

Paulson’s narrative of the Guangdong Enterprises (GDE) collapse and later the 2008 global financial crisis shows reform under stress. Both crises demonstrated China’s evolving approach to accountability and global integration. The GDE workout in the late 1990s, led by Wang Qishan, broke with the past by forcing losses on creditors and refusing central bailouts. That experience hardened China for tougher fiscal discipline later.

Guangdong’s Reckoning

GDE’s insolvency exposed how local governments had abused quasi-financial vehicles and implicit guarantees. Wang Qishan’s principle—“Whoever makes the mistake must be responsible”—marked a new doctrine: market consequences would not be endlessly socialized. Goldman Sachs aided with forensic restructuring, introducing frameworks for creditor committees and asset transparency that became blueprints for modern China workouts.

Global Crisis, Global Relationships

Fast forward to 2008: now as U.S. Treasury Secretary, Paulson faced a global panic where China’s decisions mattered. Holding over a trillion dollars in U.S. securities, China could have destabilized markets. Instead, trust built through years of SED dialogue led officials like Wang Qishan and Zhou Xiaochuan to hold steady. When Paulson briefed them on the Fannie Mae and Freddie Mac conservatorship, their confidence helped steady global lenders.

Historical Echo

From GDE to Lehman, the pattern is clear: crisis tested relationships more than spreadsheets. Personal credibility kept financial contagion in check.

China’s urban transformation created enormous wealth—and financial fragility. Over 300 million people migrated in just a few decades, reshaping economies and skylines. Paulson explores the machinery behind this shift: the hukou system, land-driven finance, and local debt. Migrants built China’s cities but often remained second-class citizens with limited welfare access, constraining domestic consumption.

The Hukou Barrier

Household registration binds social services to birthplace. Reforming it means turning migrants into urban consumers, a linchpin for China’s next growth stage. Leaders like Li Keqiang framed it as building an “olive-shaped” income distribution—broad middle-class prosperity. Yet reform is uneven: smaller cities open faster while megacities stay guarded.

Fiscal Balancing Acts

Local governments financed expansion by selling land and borrowing off-the-books via local government financing vehicles (LGFVs). This debt-fueled model funded showpiece infrastructure but left fiscal cracks. Paulson warns that reliance on one-off land revenue trades sustainability for speed. Pilot municipal bonds and property tax reforms aim to shift financing toward transparency and accountability.

Designing Livable Cities

Paulson’s field visits highlight divergent paths—Chongqing experimenting with rural land conversions and housing policy; Changsha struggling with transport; Baoding showcasing the paradox of “green” industries amid heavy pollution. His message: China’s urban century will depend on connecting fiscal reform, social inclusivity, and urban design instead of chasing short-term growth metrics.

State-owned enterprises (SOEs) remain both China’s backbone and bottleneck. Paulson traces how successive leaders used reforms—and foreign agreements like the Bilateral Investment Treaty (BIT)—to loosen their grip without triggering instability. SOEs dominate strategic sectors but stifle innovation and efficient capital use. Reform means finding incentives that align state control with market principles.

Structural and Political Entanglements

The Communist Party’s Organization Department still controls top appointments, making SOE reform a political process first. Many enterprises created listed subsidiaries while parking weaker units off balance sheets. The Third Plenum’s pledge that “markets play a decisive role” was a signal of intent, but bureaucracy and vested interests remain obstacles.

Using Treaties as Leverage

The proposed U.S.-China BIT became a tactical lever for reform. By promising reciprocal openness and defining “negative lists” of restricted sectors, leaders like Wang Qishan and Liu He sought external pressure to drive domestic liberalization. Paulson argues this external anchoring echoes China’s earlier WTO strategy—commit abroad to compel action at home.

Key Point

China’s modernization advances when leaders use international engagement to overcome internal inertia—treating openness as an instrument for governance repair.

No reform mattered if China’s environment collapsed. Paulson’s environmental chapters—spanning Yunnan, Qinghai, and the Ten-Year Framework on Energy and Environment—blend fieldwork, diplomacy, and science. Conservation became both moral conviction and policy opportunity. By aligning ecological goals with poverty alleviation and local pride, Paulson’s efforts through the Nature Conservancy and later the Strategic Economic Dialogue turned environmentalism into partnership.

Yunnan and the Local Model

Yunnan’s “Three Parallel Rivers” region became the prototype for conservation with cultural sensitivity. Villages protected sacred forests while earning from ecotourism. Jiang Zemin’s endorsement helped scale this model nationally. The message: to succeed in China, environmental projects must fit political narratives and economic logic.

From Qinghai to Global Framework

Paulson’s symbolic visit to Qinghai Lake before meeting Hu Jintao brought ecological crisis to the top table. Out of those moments grew the Ten-Year Framework, institutionalizing bilateral cooperation across clean water, air, and energy efficiency. Subsidiary “EcoPartnerships”—like Seattle–Dalian on ports—translated diplomacy into projects.

Practical Takeaway

Environmental diplomacy works best when it connects field empathy with institutional persistence—turning shared experiences into long-run policy courage.

The Strategic Economic Dialogue (SED) and its aftermath define Paulson’s ultimate insight: sustained, structured engagement beats reactive diplomacy. Created under the Bush administration, the SED institutionalized U.S.-China cooperation on finance, trade, and environment. It allowed technical experts and political leaders to coordinate responses beyond headline disputes.

Institutionalizing Trust

The SED’s process—meticulous preparation, cross-ministerial teams, and repeated contacts—created habits of candor. Deliverables like the Open Skies aviation accord, expanded market quotas for foreign investors, and joint safety standards validated this method. When crisis struck in 2008, relationships formed at the SED table turned into lifelines, ensuring clear communication with Chinese financial officials.

The Broader Lesson

Paulson closes with a conviction: in an interdependent world, economic stability depends on dialogue that weds technical competence to political legitimacy. Where politics fan rivalry, institutionalized cooperation provides sanity and continuity. From banking reform to wetland protection, every success in the book follows that principle: trust built through structure sustains progress across crises.

Final Message

In global affairs, dialogue is policy. The infrastructure of cooperation—meetings, cadres, frameworks—is as crucial as treaties or markets themselves.