http://www.usatoday.com/story/news/2015/04/12/hank-paulson-dealing-with-china-book/25596947/

Hank Paulson: Economic challenges, China — and the birds

 Susan Page, USA TODAY9:44 a.m. EDT April 13, 2015

Former Treasury Secretary Hank Paulson answers five question with USA TODAY's Susan Page. USA TODAY

(Photo: Anne Ryan, USA TODAY)

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BARRINGTON, Ill. — Hank Paulson, scanning the horizon, sees a day of financial reckoning approaching. But for China, not the United States.

The former Treasury secretary, who was at the helm of U.S. economic policy when the most serious financial crisis since the Great Depression broke, says changes in American banking and government regulation since then have created a more stable system that has stronger ways to respond to the ups-and-downs of a market economy.

But in a new book, he warns, "It's not a question of if, but when, China's financial system, particularly the trust companies, will face a reckoning and have to contend with a wave of credit losses and debt restructurings" — though he also expresses confidence that  Beijing  has the tools to manage that and avoid the sort of far-reaching crisis that hit the United States in 2008.

"It is important that China stop its over-reliance on municipal debt to finance infrastructure," he said in an interview. "I take comfort in the fact that China's leaders understand this."

Henry M. Paulson Jr.  has been watching China's emerging economy up close for a quarter-century. While at  Goldman Sachs , he negotiated early deals with China — including the biggest private equity investment the firm had ever made, a $2.6 billion investment in the  Industrial and Commercial Bank of China . While leading the Treasury Department during the  George W. Bush administration , he helped create the Strategic Economic Dialogue to foster regular, high-level consultations between the two nations.

In Dealing With China: An Insider Unmasks the New Economic Superpower, published Tuesday by Twelve Books, Paulson argues that the United States needs a more clear-eyed, coordinated and consistent approach toward the formidable challenge from China. In an interview, he says that should include a more welcoming stance than the  Obama administration  has taken so far toward the new Chinese-led Asian Infrastructure Investment Bank.

But the question he gets most often is whether the financial meltdown in the United States seven years ago, which has had consequences that continue to ripple through many Americans' lives, could happen again here.

"Of course it could," he responds, sitting at a game table in the rustic home he and his wife, Wendy, built four decades ago. It is tucked amid white oak trees in the neighborhood where he grew up, abutting a Cook County forest preserve where they can indulge their passion for bird-watching. "But I don't see anything the magnitude we dealt with happening in the U.S. anytime soon. We have already taken some very, very significant steps. Our banks are much better capitalized. They're much better managed. We have better regulation. We have better risk control.

"We still have plenty of problems we need to correct, and there are plenty of risks in the global economy. Financial crises happen every 8, 10, 12 years. But the key question Americans should be asking themselves, do we have the tools necessary to make sure we don't have the sort of crisis we had or it spills over into our economy?"

Do we?

"I believe we've got the necessary tools," he replies, "and I don't see those sort of excesses building up any time soon."

Former Treasury secretary Henry Paulson and his wife, Wendy, in Barrington, Ill. (Photo: Anne Ryan, USA TODAY)

THE BOBOLINKS ARE BACK

There are binoculars hanging around Hank Paulson's neck, and Wendy Paulson is toting a tripod with binoculars attached as they tromp across a muddy field. In recent days, they've spied Sandhill cranes, yellow-shafted flickers and a yellow-bellied sapsucker, which has left tell-tell holes drilled in a tree. Bobolinks, grasshopper sparrows and Henslow's sparrows have returned to this land, where controlled burning has helped restore it to its native state.

At the moment, though, there only seem to be hordes of blackbirds, cawing overhead.

They have gone birding all over the world. Her binoculars are dented from a fall in Belize . Their favorite sighting happened just last year, in China's eastern  Jiangsu province , when they went in search of an iconic shorebird on the verge of extinction.

"There were sheets of rain," he recalls. The wetlands muck was so deep that Wendy's boots were sucked off her feet. "We were freezing. I could hardly feel the binoculars with my fingers. Just when we thought we weren't going to see it, suddenly my wife Wendy spotted it and we got it in the scope and we saw the spoon-billed sandpiper."

The spoon-billed sandpaper: Paulson grins at the memory.

Now 69, he has a distinctive raspy voice, balding pate and earnest manner that became familiar on TV news shows when the Bush administration was scrambling to prevent a financial crisis from sparking a depression. He points out with pride the driveway he cleared with a chainsaw in the 1970s, when they built their house a stone's throw from a childhood home, where his mother still lives. He dragged rocks to form a low retaining wall. The living room sports the wood-burning fireplace they installed then to hold down on heating bills.

His schedule has slowed since the frantic days of the financial crisis, but he's not really the retiring sort. In 2013, he helped launch Risky Business, an initiative with former  New York City mayor  Michael Bloomberg and billionaire activist  Tom Steyer that focuses on the economic costs of climate change. (He calls climate change the biggest single risk to the global economy.)

He also founded the Paulson Institute at the  University of Chicago , which aims to promote economic ties and environmental cooperation between the United States and China.

China has long been a draw for him. He has visited it more than 100 times, first as a business executive interested in making deals and then as a government official trying to shape policy. He first met the current Chinese president,  Xi Jinping , when he was a provincial official, greeting a visiting American businessman.

Paulson returned from his most recent trip less than three weeks ago. He's scheduled to go back in June.

"Virtually every significant global problem, whether you're talking about how do you sustain global growth or protect the environment, to minimizing the threat of terrorism or the threat of nuclear proliferation, all of these become easier if you're working in a complementary way with China and much more difficult if you're working (at) cross-purposes with them. . . .

"The stakes are very big, and they're big on the upside and the downside."

Then-Treasury secretary Henry Paulson and Xi Jinping, then the Zhejiang Province Communist Party secretary, chat at a pavilion on Sept. 19, 2006, in Hangzhou, China. (Photo: Eugene Hoshiko, AP)

'A FORMIDABLE COMPETITOR'

For the United States, relations with China have been shadowed by domestic politics and overshadowed by recent international crises with ISIS, Iran, Iraq and  Syria .

That worries Paulson. He faults the Obama administration for not designating "one go-to person" to speak for the president and coordinate policy with China, and he thinks it was a misstep when the U.S. urged European allies to rebuff Beijing's invitation to join a new Chinese-led international investment bank, called AIIB.

Germany, France, Italy, England and others joined anyway last month.

Instead, he says, the United States should have told China, "We want to work with you and give you ideas and advocate" for international standards, perhaps joining the bank as an observer rather than a member.

"It's a new China in that it is now a formidable competitor," he says. "It is flexing its muscles on the global stage. Chinese President Xi Jinping isn't waiting for us or anyone else to declare them a great power. He believes he already is one, and so they are starting to be more assertive in terms of their foreign policy. That shouldn't be a shock. That's what every other great power has done."

Besides, China is not the biggest threat to the preeminence of the United States in the global economy, he says. The United States' own dysfunctional political system is.

"I have people come up to me all the time and they're concerned that maybe China has devised a better form of capitalism; they're going to eat our lunch," he says. "Let me tell you, there's no way they have. The United States has by far the strongest, deepest, most innovative economy. We can make as big a mistake exaggerating Chinese strength as we can underestimating their potential."

More perilous, he says, is the failure of America's political system to address seriously the nation's most pressing economic problems, among them a growing national debt and increasing income inequality.

"The United States' fate is in our own hands," he says, banging the table with the flat of his hand. "The biggest risk is not China, but the biggest risk is that our own political system won't do the things that we need to have it do in order for us to remain strong."