Yahoo Finance Fmr. Treasury Secretary Paulson says China is at a critical moment
1.4 billion people. The second largest economy in the world. And China is at a critical moment.
“They have an economic model. It’s taken hundreds of millions of people out of poverty,” says Henry Paulson, the former U.S. Treasury Secretary and CEO of Goldman Sachs, “but it’s running out of steam.”
Double-digit growth is a thing of the past. The target for 2015 growth in China is just 7%—the slowest rate in 25 years. But Paulson says he doesn’t look at the growth rate—he looks at the source of the growth.
In his new book, Dealing with China: An Insider Unmasks the New Economic Superpower, Paulson points to the economic transformation of China and its challenges. Paulson says the Chinese economy is too reliant on exports and government investment in infrastructure. Its day of financial reckoning is coming.
Paulson tells Yahoo Finance in the video attached that debt has been built up at the municipal level in China much more quickly than the country's economy is growing. “The municipal finance system needs to be fixed,” he says. But, Paulson explains, “I take some comfort in the fact that the leaders understand this. They are focused on this. They have the tools to manage this.”
The Chinese understand the problem, but "it’s easier said than done to reboot a $10 trillion economy,” he says.
Watch the entire Yahoo Finance interview with Fmr. Treasury Secretary Paulson
“If you have government policies, banks and capital markets, there will be financial crises. And the key is to make sure that when they come, they’re handled in a way in which they don’t do real damage to the underlying economy,” he says.
The former Treasury Secretary has been to China more than 100 times, first as CEO of Goldman Sachs (GS), then as Treasury Secretary of the United States. Today, he is head of the Paulson Institute at the University of Chicago where the mission is clear: economic and environmental challenges can be solved only if the United States and China work together. The key is leadership.
Paulson believes President Xi Jinping is "a remarkable, remarkable leader in the sense that I don’t think ever in the history of the world have you seen any leader try to make such massive changes on the scale that he’s doing this,” says Paulson. He points to changes to political and social systems as well as cleaning up the environment.
Get the Latest Market Data and News with the Yahoo Finance App
But some of the leader's reforms are controversial. China's strained relationship with Japan and the government is cracking down on media and social media use. “This region has benefited greatly from the economic linkages and integration and... the more foreign policy I think threatens to undermine those economic linkages.”
Being tougher on human rights and the media may seem like a contradiction to many Americans for a leader who has laid out a plan for economic reforms.
“Ultimately this is self-defeating… if you want to innovate and succeed in an information economy, you need to be open to the free flow of ideas."
So where does that leave the United States? Paulson says the U.S. needs to find common interests with China to keep the bilateral relationship moving forward. Both nations need each other. “I think this is by far our most important bilateral relationship. You see a country that is a formidable competitor and you know, as I said, much more active in terms of its foreign policy and it’s very, very important that we deal with them in a pragmatic, strategic kind of way.”
More from Yahoo Finance
Fmr. Treasury Secretary Paulson wants Jeb Bush for 2016
China looks 'a lot like the U.S. in 2008'
Why nearly 200,000 of these good-paying jobs will go unfilled
