China experience counts for new Secretary of the Treasury

PUBLISHED : Thursday, 29 June, 2006, 12:00am
UPDATED : Thursday, 29 June, 2006, 12:00am

Former Goldman chief Paulson has an understanding of the mainland leadership and its policy that will prove beneficial

He has been deeply involved in China's economic reforms, his communist party connections are excellent and in the shark pool of Beijing policy-making, he enjoys the support of China's leadership.

Hardly typical qualifications for being United States Secretary of the Treasury, the most powerful economic position after the chairman of the Federal Reserve.

Former Goldman Sachs chairman and chief executive Henry Paulson (right) - 'Hank' to his friends - brings more China experience to the US Treasury than any of his predecessors, a fact the mandarins are pleased to point out.

'Mr Paulson really understands conditions on the ground in China and that will benefit the bilateral relationship,' said China Construction Bank chairman Guo Shuqing.

The sentiment was echoed by China's top banking regulator, Liu Mingkang. 'I extend my hearty congratulations to Mr Paulson. He is very qualified to be the treasury secretary and I think he will help China in Washington.'

Mr Paulson has travelled to China more than 70 times in 15 years and met often with Mr Guo and Mr Liu, as well as former president Jiang Zemin and President Hu Jintao whom he accompanied on a 2002 visit to the site of the September 11 attacks in New York.

He also counts Beijing mayor Wang Qishan and former finance minister Xiang Huaicheng among his intimates.

However, it remains to be seen how his China credentials will play in Washington's political jungle.

'They picked someone who is right at the heart of the firestorm - the problem is that he himself might become the firestorm,' said David Zweig, director of the Centre on China's Transnational Relations at the Hong Kong University of Science and Technology.

Mr Paulson sailed through his three-hour Senate confirmation process on Tuesday with promises to get tough on China over currency reforms, but Washington's anti-China lobby is already casting aspersions on his close ties to Beijing.

'Goldman Sachs is not just in bed with the Beijing regime; they've married and raised a family,' wrote William Hawkins, a senior fellow for national security studies at the US Business and Industry Council, a lobby group for small and medium-sized businesses.

'Will Paulson use his position in the Cabinet to urge continued appeasement of China around the world to protect his business connections?'

Unlike predecessor John Snow, whose demands for faster yuan appreciation were largely ignored in Beijing, Mr Paulson has a deep understanding of the problems facing China in reforming its financial infrastructure.

'We can expect US policies towards China to be more tailored to the reality of the situation,' said Chen Xiaozhou, a deputy chief executive at Cinda, China's largest disposer of bad loans and another of Mr Paulson's Beijing contacts.

On Mr Paulson's watch, Goldman Sachs sold shares in more Chinese companies than any other foreign firm, including the first mega-listing abroad when China Mobile raised US$4.2 billion in New York in 1997, the US$2.9 billion PetroChina listing in 2000 and Bank of China's recent US$11.2 billion IPO.

Beijing-based bankers say Goldman had a near-perfect record in China until two months ago, when, because of a perceived conflict of interest, it missed out on underwriting the forthcoming flotation of Industrial and Commercial Bank, China's biggest lender.

In recent years the company has sensed official unease over how much it was making through the purchases of non-performing loans, so Mr Paulson decided it was best to step back from that line of business.

Goldman's preference for being 'long-term greedy', rather than seek fast profits, has served it well in China, as has Mr Paulson's ability to nurture connections.

'Although he has an imposing physical frame [he played American football at university] he's an incredibly down-to-earth guy and a very good listener,' said an associate.

'He'll be off preserving wetlands in rural China [as chairman of environmental group, the Nature Conservancy] and the next morning he's in a boardroom pitching to China Netcom and the highest levels of the Shanghai government to underwrite their IPO. He sits back and listens and offers colour and advice when he needs to. He's very savvy and he's doing all this without being some kind of swashbuckling [foreigner].'

His concern for the environment has added to his contacts. The Nature Conservancy counts Richard Li Tzar-kai and Victor Fung Kwok-king among its supporters, as well as former Singaporean leader Lee Kuan Yew.

Probably one of his closest mainland relationships was solidified not long after the China Mobile offering in 1997 - a deal led by Mr Wang, a former China Construction Bank governor.

In December 1998, Mr Paulson flew into Guangdong and stood by Mr Wang as the then-vice governor of Guangdong announced that Goldman would commit almost US$20 million of its own money and lead the reorganisation of bankrupt Guangdong Enterprises, the provincial government's investment arm in Hong Kong.

When Mr Wang was made acting mayor of Beijing during the Sars crisis in 2003, Mr Paulson was the first big-name foreign executive to fly in to congratulate him.

'Hank is very good at identifying and networking with future leaders in the corporate and political world,' said an associate.

As a founding member of the board of the Tsinghua University Management School, he also personally supports the development of those future leaders.

It is partly his personal involvement that allowed Goldman to become the first foreign firm to secure effective control of a domestic brokerage through a complicated arrangement in which it paid US$68 million to clear the debts of bankrupt Hainan Securities in exchange for being allowed to establish Goldman Sachs Gaohua along with star banker Fang Fenglei.

But courting important officials does not always pay off. Goldman was not even in the running to underwrite the initial share sale of Industrial and Commercial Bank of China, seen raising as much as US$15 billion later this year. Its absence is striking since a Goldman-led consortium paid US$3.78 billion for a 10 per cent stake in ICBC.