The streets were quiet, the concrete vastness of Tiananmen Square mostly empty, as our car sped through central Beijing toward Zhongnanhai, the secluded compound of the Chinese leadership. It was the 25th of February 1997, a crisp, late winter day, near dusk. The globes of the square’s streetlamps had just come on. In my frequent trips to China, I had become used to the din and press of great throngs everywhere, not least on the roads with their ever-increasing ranks of cars, trucks, and buses. But today’s was an eerie quiet such as I had never encountered before. Deng Xiaoping, the paramount leader of China, had died the previous week, and the nation was in mourning. I was on my way, with colleagues from Goldman Sachs, to a private meeting with one of Deng’s protégés.
Deng had been the chief architect of the extraordinary changes sweeping China. With savvy, willpower, and relentless pragmatism, he had shucked ideological chains to devise a unique brand of “socialism with Chinese characteristics,” introduced market principles, and encouraged individual enterprise throughout the economy, starting with agriculture and extending into industrial and financial areas. The results of his “Reform and Opening Up” initiatives, begun in 1978, had been nothing short of spectacular. After the political and economic chaos of Mao’s last years, China’s gross domestic product had soared by near double-digit average annual increases for two decades, lifting hundreds of millions of people out of poverty. Once scarce food staples were plentiful. Previously unavailable, or unaffordable, consumer goods could be bought at rapidly proliferating retail outlets, and China was quickly becoming a global manufacturing and export powerhouse.
Deng’s death, though, raised questions of how far, and how fast, the country would pursue his vision. That morning Jiang Zemin, general secretary of the Communist Party and the nation’s most senior leader, had sought to reassure the country and the world that he would stay the course. In a teary eulogy delivered before 10,000 handpicked Party and military leaders in the Great Hall of the People—and an estimated 400 million on live television—Jiang had condemned the “grave mistake” of the Cultural Revolution and pledged to continue Deng’s policies of economic reform and international engagement. But, as I knew, certain hard-liners in the Communist Party and in the apparatus of the state were pressing to slow down or even halt reform. They feared that China would abandon Marxism or that the disruptions caused by the changes might destabilize the nation.
It was an altogether crucial juncture for the country. In July, a little more than four months away, Hong Kong was to be returned to China after more than 150 years under British rule. From this distance in time, it can be easy, especially for Americans, to forget just how momentous—and nerve-wracking—an occasion this was for all sides. Deng had devised a formula of “one country, two systems” to guarantee that Hong Kong could continue its capitalist ways, with some political autonomy, for at least 50 years after its return to China. But many in Hong Kong remained skeptical: a good number had fled China after the Communists came to power, and painful memories had been reawakened by Beijing’s harsh crackdown on protesters, mostly students, in Tiananmen Square in June 1989, nearly eight years before. Some 700,000 Hong Kong citizens, more than one in ten, had obtained foreign passports as a precaution, and a number of companies had changed their corporate domiciles.
I had flown up from Hong Kong that morning, eager and a little on edge. I was scheduled to meet with Vice Premier Zhu Rongji, the country’s economic czar. I knew that any matters involving reform or Hong Kong held the highest of priorities for China’s senior leaders and had to be dealt with just right. There was simply no margin for error. At the time, I was president and chief operating officer of Goldman Sachs, the investment bank, and, as it happened, I would be discussing with Zhu a matter that touched closely on both issues—restructuring China’s telecommunications system through an offering of shares in a newly formed Hong Kong–listed company. As part of its rapid modernization, China had been investing heavily in the area, keenly aware of how crucial state-of-the-art telecommunications were to a modern economy.
Western bankers were Promethean figures in this process: we jetted in and competed to show the Chinese how to kindle the fire of capital markets. Goldman had been discussing aspects of a listing for months with representatives of China International Capital Corporation (CICC), an investment bank that was a joint venture between one of the country’s four biggest commercial banks and Morgan Stanley. It was one of the many oddities of doing business in China that we found ourselves working closely with the most senior Chinese banker at the partner of our most intense U.S. rival. It was even odder that Morgan Stanley did not know what we were doing—and we had no interest in letting them find out.
Our team that day included John Thornton, a superb dealmaker who had helped establish our investment banking presence in Europe and had just been named chairman of Asia; Mike Evans, the head of our equity capital markets, who had worked on transforming state-owned industries into private companies across Europe; Hsueh-ming Wang, a seasoned relationship banker from the Hong Kong office; and Cherry Li, a native Chinese, who was our first representative in Beijing, where we had opened an office in 1994. John and Hsueh-ming had been working assiduously for months to cultivate the senior Chinese executives of CICC.
We drove in two cars past the Forbidden City, the immense former imperial palace, and then past the Xinhua Gate, the ornate, imposing southern entrance to Zhongnanhai. We turned north onto Fuyou Street, which traced the red walls, topped with traditional cylindrical tiling, of the leadership compound, before being admitted through the northwest entrance. Guards had already been informed of the license plate numbers of our cars, and after a quick head count, they waved us into the grounds with smart salutes.
For the center of power in China, where members of the leadership have worked, and sometimes lived, since the revolution, the compound itself was unprepossessing and understated. It resembled nothing so much as the campus of a small college during winter break, with traditional Chinese structures scattered among small-scale beige and gray buildings, perhaps three or four stories high, that were bland and uninspired from the outside, what an architectural historian might call Soviet-style. Originally an imperial park and garden, Zhongnanhai had housed several palaces alongside its lakes. Following the fall of the Qing dynasty, it served as the headquarters for the government of the Republic of China until 1928, then became a public park until the Communists came to power in 1949.
Zhu Rongji had chosen to see us at the Purple Light Pavilion, set near the edge of a lake. It was a striking, pagodalike structure, with vermilion walls and green roof tiles; it dated to the Ming dynasty and had long been used by the leadership to meet foreign guests in a more private manner. Chinese aides informed us that Zhu Rongji had not yet arrived and we had a few minutes to wait, so we hopped out of the cars into the brisk late afternoon air.
We strolled across a grass verge dotted with sycamores and conifers, mostly pines and cedars. I heard the rasp of a magpie but saw nothing when I peered into the branches of the trees. Across a small lake I could see the outlines of the palace tops behind the immense walls of the Forbidden City, ghostly in the fading light. A military guard unit quickstepped past, their arms swinging in that stiff, elbows-locked way favored by the People’s Liberation Army.
I did a last-minute run-through in my mind of the points that I wanted to make. My approach by necessity would have to be a bit circuitous. I wanted to be careful not to presume that any specific deal might be done, or to drag Zhu Rongji too deeply into the details, or worse, to give the impression that I might somehow be asking him to make a decision in favor of us, right then and there. But I wanted to make it clear that we understood how important reforming the economy was to China’s future and how crucial modernizing and overhauling state-owned enterprises (SOEs)like China’s telecom business were to that process. And I wanted to make clear that Goldman Sachs was the best bank in the world to get done all these things that we were not going to specifically speak about.
I asked Mike Evans if I was forgetting anything.
“You’re set,” he said. “Just remember how much reform matters to Zhu.”
I had met Zhu Rongji a few years before, when China was planning to raise money in the international bond markets and we had advised the country on how to work with the credit agencies. He was a formidable figure. Tall and erect, he had been plucked by Deng from his post as mayor of Shanghai and installed as vice premier in 1991. Though officially the country’s economic portfolio fell under Premier Li Peng, Zhu ran the economy day to day and was expected to succeed Li when the new leaders of the government were selected over the coming year.
Zhu had done a first-rate job. When the economy overheated in 1993, he had taken direct charge of the central bank and put in place a series of tough austerity measures and smart administrative fixes, battling inflation, which would rise to more than 20 percent before he guided China to a soft landing. Privatization efforts, which had begun in a modest way in 1992 and 1993, had been shelved temporarily, but now as the economy recovered, these had come to the forefront again in discussions with individual ministries and the State Council, China’s equivalent of the U.S. Cabinet.
Selling shares in the telecommunications system to the public was meant to be a showcase and the cornerstone of the next ambitious phase of reform, the restructuring of the giant state-owned enterprises that dominated Chinese commercial life. In anticipation of membership in the World Trade Organization, Zhu Rongji had in mind a thorough revamping that would modernize these lumbering money-losing behemoths and make Chinese businesses more efficient and more competitive. He would accomplish this in part by bringing in foreign know-how and investors that he believed would push for global standards of management, controls, operations, and governance.
If Deng was the architect of reform, and Jiang Zemin the general contractor carrying out his vision, then, to borrow a term often used to describe me, Zhu Rongji was the hammer. He had no shortage of big ideas himself, but above all he got things done. He was frank, practical, and to the point. I never doubted for a second what he wanted, nor did his subordinates. Known as the Boss, he was tough, demanding, fond of imposing unrealistically tight deadlines: in short, a man after my own heart.
To get a meeting in China with an important government figure requires a sponsor. Our meeting with Zhu had been suggested and arranged by Wang Qishan, the head of China Construction Bank (CCB), the bank partnering with Morgan Stanley in CICC. Wang was a warm, dynamic leader who exuded charisma and intellectual curiosity and had an uncanny ability to connect with people, Chinese or Western. I could see he was gifted and going places. Today, after several years as a vice premier overseeing finance and trade, Wang Qishan serves on the Party’s seven-member Politburo Standing Committee, China’s most powerful body, and heads its Central Commission for Discipline Inspection, tasked with rooting out corruption.
The previous summer Wang Qishan had stopped by my office at Goldman Sachs in New York to gauge our interest in helping to take China Telecom public. China Construction Bank was unhappy with Morgan Stanley and looking for an alternative. My colleagues and I were eager to work on a groundbreaking transaction of such importance to the future of China, but we were also wary. Taking China Telecom public would involve an immense amount of work, because, to begin with, there was no such thing as a company as we understood it in conventional terms. There were customers, there were phones, there were exchanges, there was a small but rapidly growing mobile telephony business, but it was all scattered throughout the country in the village, township, city, county, and provincial outposts and headquarters of the Ministry of Posts and Telecommunications.
The MPT was a creaky bureaucratic holdover of the Maoist era that had under its purview more than a million employees and thousands of local bureaus. It had little in the way of modern management systems or controls, much less a sound capital structure. Building and upgrading the communications infrastructure had been a focal point of one national five-year plan after another. China had spent $35 billion since 1992 and was adding more than 16 million lines a year. But phone access was still minimal, and coverage was spotty. In a country of 1.2 billion, there were just 55 million landline subscribers, concentrated in coastal cities and special economic zones.
Several Chinese aides escorted us inside the pavilion, up a set of steps flanked by traditional stone lions, and around an imposing, intricately carved wooden door screen. We entered a bright, airy wood-framed room that soared to coffered ceilings perhaps 20 feet high; these were painted in pastels—salmon pink, green, and blue—and trimmed in gold. Zhu Rongji greeted us warmly, shaking our hands and inviting us to take our seats.
I sat to Zhu’s right. Cherry Li, acting as my interpreter, was behind me and to my side, while Zhu’s interpreter was behind him. Wang Qishan sat to Zhu’s left, flanked by additional executives from China Construction Bank. Chinese meetings have a definite choreography and ceremony to them, and it is within this context that you look for the signals being sent and the messages being given. In general, everyone sits in chairs set out in a horseshoe or U-shaped arrangement, with the most senior Chinese official at the closed end of the U and the most important visitor to his right; other Chinese officials and members of the visiting delegation are arrayed in descending rank on the flanks of the horseshoe, facing one another. In the old days the chair backs were quaintly covered with antimacassars; you see fewer of these Victorian artifacts today.
Meetings are anything but free-form. The host and his guest take turns speaking, followed by their interpreters, who usually sit behind the leaders. The rest of the attendees do not speak unless spoken to—which often means not at all. There is no interchange or dialogue in the conventional sense. There can be a stilted, scripted feel to the proceedings. On the Chinese side, a bevy of officials and aides, young and old, junior and senior in rank, assiduously take notes. Note taking is de rigueur, a ubiquitous element of Chinese official life—even today when so many more sophisticated recording methods are available. Indeed, when I met with the now-disgraced Chongqing Party secretary Bo Xilai in Chongqing in December 2011, I was amused to see a handful of note takers diligently copying down everything we said, even though I had noticed the lights of recording devices blinking away under our tented name cards on the broad conference table.
Note taking allows Party and government officials to get quick reads on what went on at meetings they didn’t attend. Senior officials can disseminate information internally as well as keep a close eye on what’s being said by others in the hierarchy so that messages don’t deviate from expectations. I can recall only a few times I went to a meeting in China where I was not reminded, one way or another, by a senior official of something that had come up in an earlier meeting with one of his colleagues. It does tend to keep you on your toes. Private meetings with senior government officials without recording devices or note takers are rare and highly sought after.
Zhu apologized for his tardiness; he had just come from another meeting. Then he invited me to speak first, and I began by expressing my condolences and those of my colleagues at Goldman on the passing of Deng Xiaoping. And while commending Zhu’s success in reducing inflation and guiding the economy to a soft landing, I expressed confidence that under his leadership, “the pace of reform [would] speed up a notch.”
The competition to work with the government would be intense, so I reviewed Goldman’s extensive experience in advising governments. And I reminded Zhu of our senior executives whom he knew personally—men like Brian Griffiths, Baron Griffiths of Fforestfach, who had run the Thatcher government’s privatization efforts, and Peter Sutherland, the former head of the General Agreement on Tariffs and Trade and subsequently the first director-general of the World Trade Organization. Zhu was spearheading China’s effort to join the WTO, which would not only bring economic benefits but serve as a welcome outside source of pressure to promote his program of domestic reform.
I spoke for several minutes, stopping after every couple of sentences for Zhu’s translator to pick up the thread and repeat it in Chinese. I watched as Zhu nodded both at my words as I said them and at the translation. He spoke English fairly well and understood it even better, and later, as I got to know him, he would frequently slip in a sentence or two of English.
Following a suggestion from Wang Qishan, I focused on our work with Deutsche Telekom. I explained how Goldman had led the German company to its successful IPO the previous November. That had come after nearly eight years of our advising the Germans on how to revamp a bloated government department, akin to China’s Ministry of Posts and Telecommunications, with posts and telecom business mixed together, which was plagued by low-quality service, low work efficiency, and weak finances. The IPO had raised $13 billion, financing the development of telecom industry infrastructure, particularly in the former East Germany, the once Communist state. The deal had strengthened Deutsche Telekom domestically, made it competitive in the vast international market, and allowed it to take care of pension and medical insurance costs for retired and redundant workers.
The last point was a big concern for Zhu Rongji: reforming China’s state-owned enterprises would mean breaking the so-called iron rice bowl, the cradle-to-grave care and support guaranteed by the government through the big companies people worked for. The risk was that these changes would result in soaring unemployment that might lead to social unrest, and Chinese leaders feared instability more than anything. The Party had made a simple bargain with the people: economic growth in return for political stability. That in turn meant Party control. Prosperity was the source of Party legitimacy.
National pride was also at stake. “It was not just Deutsche Telekom listing, but also Germany itself listing on the market, and the image of Germany improved as well,” I said. “Nineteen ninety-seven is a crucial year, and in keeping with the Handover, telecom reform should start in Hong Kong and become a catalyst for pushing the development of the entire Chinese telecom industry.”
I am sure that little I said came as a surprise to Zhu Rongji. He would have been well briefed by Wang Qishan, with whom I had been discussing these issues at length, and I stuck largely to the points Wang Qishan had advised me to make. But it was important that I make a strong case directly to Zhu Rongji to demonstrate Goldman’s bona fides and my personal commitment to the success of China’s efforts. Moreover, Wang Qishan wanted to work with Goldman, and I had to deliver for him, as well as for Goldman.
When I was done, Zhu nodded and began to speak, addressing two key points on the collective leadership’s mind: the importance of reform and Hong Kong. But first, he spoke with some feeling about the passing of his mentor, declaring that “the Chinese people… will unswervingly carry out Reform and Opening Up. They will turn grief into strength and achieve Comrade Deng Xiaoping’s wishes.”
I was glad he addressed the subject of Deng, because I had gone against my advisers’ counsel in mentioning him (they had believed it would be inappropriate for a foreigner to speak of the passing of the paramount leader). But I simply couldn’t imagine meeting Zhu and not expressing my condolences under the circumstances. While I always listened carefully to my China team, and usually took their advice, there were times, like this, when I went with my gut instinct. I had learned that the Chinese valued authenticity and had come to expect me to speak my mind.
“China’s favorable economic situation,” Zhu said, assured that “there will not be any problems with the return of Hong Kong. I think the majority of people have confidence in the continued prosperity of Hong Kong.” He reiterated that after the Handover, Hong Kong would be administered under the “one country, two systems” model and that the “Chinese central government will not interfere with Hong Kong Special Administrative Region political or economic issues.” China’s leaders took every opportunity they got to make this point. They wanted to reassure the residents of Hong Kong, Macau, and just as important, Taiwan, for which this model was also intended.
As Zhu spoke in Chinese, he mostly engaged me directly, once in a while looking off to where my colleagues sat. No one else from the Chinese side spoke. I happened to look down to where Zhu rested his black shoes in the thick rug, and I noticed the edge of his long johns peeking out under his trouser cuff. He was, as I’ve said, a very practical man, and the old offices in Beijing in those days could get awfully cold and drafty.
Then he spoke the first of the words we wanted to hear: “Of course, we will consider your opinions, and we hope to cooperate with you. If you are interested in cooperating with the Chinese government in the area of telecommunications, I think you can communicate further with the Ministry of Posts and Telecommunications.”
That was it, but it was everything. The meeting had been set up without any representatives from the Ministry of Posts and Telecommunications present. We were scheduled the next day to see Minister Wu Jichuan, a powerful longtime telecommunications official. We had been working for some time with representatives of CICC, the investment bank, and the ministry, but we were concerned (and I think CICC was, too) that MPT might have other ideas about whom to use in the transaction. Zhu’s words, of course, would get back to MPT and Minister Wu posthaste.
When Zhu had finished, I jumped in. Keenly aware that the competition for the deal would be intense, I cited Goldman’s prowess in doing deals of this sort around the world and noted that we had done more privatizations of state-owned enterprises than the next three investment banks combined. “This will be a complicated program,” I said. “But we will spare no effort to provide our skills and specialized knowledge.”
Zhu nodded and wrapped up our meeting, saying: “I welcome you to further cooperate with China Construction Bank. By cooperating with your company, CCB will benefit in its commercialization process and speed up its modernization process.”
With that he thanked us, and except for some parting pleasantries, the meeting was over.
The Chinese leaders are charming hosts and interlocutors, skilled at making you feel good, leading you to think you’ve heard what you wanted to hear. It’s easy to become giddy and overly optimistic. I had listened very carefully to Zhu Rongji and felt great about the meeting. But once we were outside, I turned to my colleagues for a quick reality check.
“How did we do?” I asked my team.
“I can’t imagine that could have gone any better,” John replied. Mike and Hsueh-ming agreed.
So, in short, we had just concluded a meeting about doing an initial public offering in which we hadn’t said a word about a specific deal, much less its timing, size, or pricing; the powerful senior minister of the business we would work with had not been present; and the company itself did not exist in any real sense: we would have to create it. It was not the kind of deal we could have done, or would have thought about doing, almost anywhere else in the world.
But this was China in 1997, and we felt pretty good about where we stood.
Messages in China are sent in ways that aren’t always direct; you have to read the signs. Perhaps the most important aspect of the meeting was not so much what Zhu Rongji had said. It was that we had had the meeting at all. There were plenty of other ways he might have communicated with us. On a day when much of the government’s business had been shut down, he made a point of seeing us—about a controversial deal that would be the linchpin and showpiece of his future reform program. The man running China’s economy, who would be crucial in all future decisions, had appraised us in person, and we appeared to have passed muster.
He had encouraged us to work with China Construction Bank and the ministry that oversaw telecommunications, and he had lent to us, publicly, his weight and prestige. This was a powerful signal to give to us and to send out to the Chinese state and Party bureaucracies. The meeting would not seal the deal for us. I knew that. Zhu’s blessing was a comfort but no guarantee. We would still have to continue to compete, to go through the formalities and navigate layers of decision making below Zhu. We had a leg up, but we could easily lose our advantage if we weren’t relentless. I’d been down that road many times. It was the nature of dealing with China: nothing was done until it was done. We’d seen any number of seemingly surefire business opportunities simply fail to materialize. But this deal seemed certain to get done, and every bank would be fighting for it, pulling strings, working the system. Months of hard work and careful maneuvering lay ahead before we could be given the formal mandate for what seemed sure to be the biggest IPO by far of any Chinese state-owned enterprise.
We drove past Tiananmen Square on the way back to my hotel. I caught a glimpse of the giant two-story portrait of Mao on the wall of the Forbidden City and wondered, for a moment, what he would have thought of capitalist bankers selling shares in one of his country’s state-owned companies to foreigners. In front of the National Museum of China, which faced the Great Hall of the People across Tiananmen Square, I could see the huge digital clock counting down the number of days until Hong Kong was returned to China: 124.
The sight gave me a start. We weren’t on the same timetable as the Handover, but I couldn’t help thinking: we had just a few months to complete a deal that in a well-oiled Western economy would take at least a year.
I turned to Mike Evans beside me in the back seat of the car: “How exactly are we going to get this done?”