I’d been to China at least 70 times, but my first visit as U.S. Treasury secretary, in September 2006, was very different from anything I’d experienced before. The sirens, the long motorcade, the six-lane highway emptied of cars as we raced to West Lake in the booming city of Hangzhou: all of this was thrilling, of course. Yet it was more than that—I didn’t kid myself into thinking any of that pomp was for me. No doubt I had made many friends as a businessman in China, but now, for the first time, I was representing the United States of America, and I felt an enormous sense of pride and purpose—and not a little pressure, because I had come to nail down the details of a plan for a new way to develop and manage U.S.-China relations—and I wasn’t 100 percent sure the Chinese would go along with it.
I had debated long and hard about taking the job at Treasury, and as we whipped along I remembered the words that Zhou Xiaochuan, the respected head of China’s central bank, had spoken to me privately just a few months before: Hank, you can make a difference.
Now, beginning with America’s relationship with his country, I believed I might be able to do just that.
Because symbols matter so much in China, we had put a great deal of thought into the details of this visit. First, we decided I should make a point of breaking with tradition and stopping some place other than Beijing, some place with a lot of private sector economic activity, to highlight the importance of reform. Located just southwest of Shanghai, Hangzhou was the capital of coastal Zhejiang Province and renowned for its entrepreneurship and vibrant, homegrown private sector. Low-cost goods poured out of its factories and onto container ships to be carried across the globe. I wanted to send a powerful signal that the new U.S. Treasury secretary understood economics and reform, had relationships that went well beyond the leaders of the state, and knew there was more to China than Beijing. I had also put a lot of thought into the person I would meet with first, and the province’s Communist Party secretary, Xi Jinping, was the perfect choice. A rising political star, Xi had been an extraordinarily effective leader in promoting Zhejiang’s private sector, and I thought that a meeting with him would send another strong signal to Beijing.
I had come to China on a very specific mission. U.S. president George W. Bush and Chinese president Hu Jintao had agreed to launch what we were calling the Strategic Economic Dialogue between our two countries. President Bush had placed me in a kind of “super-Cabinet” position to lead and coordinate the other Cabinet members in this effort, which I considered the best possible way to manage our economic relationship with China—in my view the most important bilateral relationship that our country had. Our dealings with China had become mired in perhaps a hundred diffuse low-level exchanges and needed to be coordinated and prioritized better. (I had learned, for example, that efforts to halt illegal logging practices had been stymied by inadequate communications made worse by poor translation of documents.) I intended to establish a top-down process that would address long-term concerns while delivering short-term results.
So here I was, two months into my new job at Treasury, speeding through Hangzhou to meet with Xi Jinping, who, as it turned out, would become China’s next leader. Joining me were National Economic Council director Al Hubbard, a tall Midwesterner with a boisterously infectious laugh; Treasury undersecretary Tim Adams, a Kentuckian who had also served in George H. W. Bush’s administration; and my soon-to-be SED coordinator from Treasury, Taiya Smith, a New Jersey native from a Quaker family, with a radiant smile and an iron will.
Born in 1953, Xi was the son of Xi Zhongxun, a veteran of the Red Army and onetime vice premier, who had played a crucial role in helping to launch China’s first special economic zones as Party secretary of Guangdong. Known for his personal integrity and unblemished reform credentials, the elder Xi was a close ally of reformist Party chief Hu Yaobang, whose death helped to trigger the student unrest in 1989. Xi Senior was sidelined soon thereafter.
Years earlier, when Xi Zhongxun was jailed during the Cultural Revolution, the 15-year-old Xi Jinping went from being the privileged son of a respected Party leader to seven years of hard physical labor in the countryside. Xi found his way back to China’s version of our Ivy League, earning degrees in chemical engineering and law at Tsinghua, then rose steadily through the Communist Party. He gained military experience serving as personal secretary to Geng Biao, a respected revolutionary general who was secretary general of the Central Military Commission and Defense minister in the early 1980s. Xi then worked in a series of local, county, and provincial government positions. Before coming to Zhejiang in 2002, he had been governor of the affluent coastal province of Fujian, just across the strait from vibrant Taiwan and home to one of China’s first designated special economic zones. In a glamorous contrast to the usual life story of faceless Party bureaucrats, Xi married the beautiful and much loved folk singer Peng Liyuan.
I had visited with Xi a few months before when he had come to New York at the head of a Zhejiang delegation looking to visit their sister state, New Jersey, and build relationships with select U.S. business and finance leaders. Tall and self-confident, Xi was a big presence who lit up a room and I could see why he had moved up the leadership ranks quickly. He was incisive and forward-looking. He stressed that China should replicate elsewhere the entrepreneurialism of Zhejiang’s thriving private sector before it lost its low-cost advantage in manufacturing as the price of labor rose because of growing prosperity. He was focused on the need to help industry in Zhejiang and other coastal regions move up the product value chain the way, say, Singapore had done in past decades.
“We need to foster a better climate for innovation,” Xi told me. “Small and middle-size companies in the private sector can lead the way.”
Crucially, too, he wanted China to make these changes while treating environmental protection as an “urgent priority,” as he put it. He commended my work in Yunnan with the Nature Conservancy and expressed his delight with a book on the birds of Central Park that my wife, Wendy, had suggested I give him.
This time I met with Xi at Hangzhou’s famous West Lake State Guest House. Richard Nixon and Zhou Enlai had come together at this beautiful lakeside spot during the American president’s groundbreaking 1972 trip to China, two days before the historic Shanghai Communiqué had proclaimed our two countries’ commitment to normalizing relations. Clearly, Xi had put as much thought into the symbolism of my visit as I had. He told me that he wanted to take the same walk with me that Zhou Enlai had taken with Nixon. It would underscore, he said, the importance of what I was trying to do for U.S.-China relations. As we traced the route Nixon and Zhou Enlai had taken, Xi’s words drove home the important responsibility that President Bush had given me. I saw myself as a custodian for this profoundly important relationship, and I dearly wanted to improve the way it was managed.
Talking through our interpreters, trailed by our security details and entourages, we strolled through an old pavilion, down a winding path planted with gorgeous red salvia, and under an ornate carved wooden gate to the shore of West Lake, rimmed with weeping willows and dotted with islands connected by graceful white bridges. The landscape was a marvel of botanical engineering, with perfectly cultivated gardens stretching to the water. I explained my view of the U.S.-China relationship and why the Strategic Economic Dialogue was important to it. As news photographers jostled one another trying to get a shot of us, we halted briefly to pose side by side under the gate, just as Nixon and Zhou Enlai had done. Xi was in great spirits and very friendly. As friends later told me, he was very appreciative that I had chosen to see him first on my maiden trip to China as U.S. Treasury secretary.
Meeting with Xi had another benefit as well. I had not yet been able to schedule a private meeting with President Hu, but I was determined to secure one and thought Xi might be able to help out. We’d heard that Hu was nervous about seeing me, that he didn’t want any surprises and was concerned that I might use the occasion to lecture him publicly about China’s undervalued currency—the single biggest issue that members of Congress cited when they complained that China was costing Americans jobs. But that was not my intention. I simply wanted to discuss the SED agenda with the president, and I made that clear to Xi. Even though I would be in Hangzhou just one night, I was betting that the message would get to Hu.
After meeting with Xi, I had dinner with a group of Chinese entrepreneurs at the 158-year-old Louwailou, a sprawling, noisy seafood place that an official from Zhejiang’s Foreign Affairs Office cheerfully noted had been Chiang Kai-shek’s favorite restaurant. I wanted to signal U.S. backing of private enterprise in China and lend support to Xi, who was pushing entrepreneurial efforts in his prosperous province. Among my dozen or so dinner companions were Lu Guanqiu, the son of peasants, who became an ironsmith at 15 and went on to found Wanxiang Group Corporation, China’s biggest auto parts manufacturer; Guo Guangchang, the son of a stonemason who, with three university classmates, had turned sales of a hepatitis testing kit into the Shanghai-based Fosun Group, a diversified holding company with interests in pharmaceuticals, real estate, steel, and retail; and Zong Qinghou, who had co-founded Wahaha, China’s biggest beverage company, with the help of two retired teachers. My dinner companions took the opportunity to argue for policies that supported their businesses—including the continuation of a cheap renminbi.
After dinner my Treasury team and I took a walk around town, officially for sightseeing but also to get some privacy. Indoors we were subject to the Chinese government’s pervasive eavesdropping; outdoors we could speak under cover of traffic and crowds. We headed down the hotel drive toward the lake only to become the focus of a minor power struggle as Chinese security forces joined our walk, positioning themselves in front and in back of our Secret Service detail and forcefully clearing pedestrians from our path. We wrapped up our discussion quickly to avoid causing a scene.
Still, I went to bed that night feeling good about my first day in China as Treasury secretary. I felt even better the next morning when I arrived in Beijing and learned that I had gotten the meeting with Hu Jintao.
When President Hu came to Washington in April 2006, I was invited to attend a lunch given in his honor by President Bush at the White House. I had been approached to become Treasury secretary and was asked to meet the president the night before, but I had decided not to accept the offer and would see President Bush only in passing at the luncheon.
A big Chinese delegation was in the capital for the event, including central bank chief Zhou Xiaochuan, who was visiting at the International Monetary Fund before the lunch. I went there to catch up with him outside the official whirl. Zhou asked me if I was going to take the job of Treasury secretary. There had been speculation linking me with the post, including an article in the New York Times, but Zhou sure seemed to know a lot more than what was in the papers. I told him I had declined an offer, as I did not see how I could be effective in the last two years of an unpopular administration. That was too bad, he said, adding that he spoke as a friend.
“It is a great honor to serve your country,” Zhou said. “More important, you never know what opportunity you may have to make a difference.”
Zhou’s words stuck with me, and I returned to them again and again over the next month or so as I began to second-guess my decision after some soul-searching and conversations with close friends. As it turned out, the White House was still interested in me, and I flew back to Washington in May to meet with the president to discuss the scope of the job.
President Bush and I talked about the need for entitlement reform, which I considered the most pressing economic issue facing the U.S. We discussed the important role the banking system could play in cutting off funds to terrorism and pressuring rogue countries to change their behavior. And I made sure to let the president know how interested I was in China. I told him how I thought the U.S. could improve its approach to the relationship.
“The Chinese think long term and strategically,” I said. “We should do the same.”
Since the 1972 rapprochement our relations with China had been determined by security concerns. That emphasis was a natural by-product of Cold War superpower politics that aligned China with us against our mutual enemy, the U.S.S.R. The world had changed dramatically—most obviously, the Soviet Union had long since collapsed—and we needed to refine our approach. Economic concerns were now paramount to the Chinese, as the president well knew. We needed to engage with them on that basis.
I recalled what President Hu had replied when President Bush had asked what gave him nightmares: having to create 25 million new jobs each year. The Chinese leadership sought stability above all else, and that meant having a strong economy. That in turn required additional market-oriented reforms and a mutually beneficial relationship with the U.S., its most important trading partner. The Communist Party had essentially made a deal with the people to provide prosperity in return for continued political power. The Chinese leaders’ credibility with their citizens was rooted in economic opportunity, job creation, and an ever-improving standard of living. It was the glue that held the system together. But China’s continued success had given its citizens higher expectations, and these were growing more difficult to meet as many more social stresses accumulated—from dirty air and water to gnawing disparities in income distribution.
If we got the economic relationship right, the rest of our issues with China would follow, I reasoned; the Chinese would respond positively to initiatives that contributed to a stable, growing economy. Alternatively, if economic relations spun out of control—through protectionist legislation that sparked a trade war, for example—it would fray the overall relationship. We would find it easier to solve almost any major global problem with the Chinese on board; without them, it would be much more difficult. To deal with China, we would need to be strong and clear, and we would need to get the right people from both sides involved. This would require a high-level, cross-agency approach with top decision makers from both countries sitting across from one another. We needed commitments from senior leaders, beginning with both presidents, to ensure the direct, top-down engagement necessary.
I was completely frank as we sat together that Saturday morning in the Treaty Room, which served as the president’s study in the residence on the second floor of the White House. Nothing could substitute for long-standing personal relationships with top Chinese decision makers, and I told the president I wanted to put mine to good use.
“Of course,” President Bush said. “I would like to take advantage of your experience.” He said he hoped that among other things I would help us make progress with the Chinese on the hard issues of Iran and North Korea.
Even before my talk with President Bush, I had decided to accept the Treasury job. You certainly don’t agree to meet with the president and then turn him down, but I wanted to be clear on the scope of the job. I didn’t immediately tell anybody at Goldman Sachs of my decision. On May 25 I took a two-day trip to China—my last as head of the investment bank. One highlight was a dinner Fred Hu and I had with Xiao Gang, chairman of Bank of China, who was basking in the glow of his company’s just-launched $11.4 billion IPO, which my colleagues at Goldman Sachs had managed.
The next day Fred, Mike Evans, and I also met with Finance Minister Jin Renqing, and to my astonishment Jin said, “I understand from my friend John Snow that you’re going to be the next Treasury secretary.”
Now, John Snow—the former chairman of CSX Corporation who was then Treasury secretary—certainly didn’t know I was going to succeed him. I had only known for a few days myself. I made a joke and changed the subject, and Jin let the matter drop. Afterward, Mike said, “How could the Chinese think you’d leave your job as CEO of Goldman Sachs to join the sinking Bush administration?”
That summer, after I’d accepted the Treasury job, I sat down to figure out how a new engagement with China might work in practice. I turned for help to Deborah Lehr, who had frequently advised me on China when I was at Goldman Sachs. A trained economist, she had served in the Clinton administration as a top China trade negotiator, dealing, among other things, with China’s accession to the WTO. She had worked with Chinese companies as well as with U.S. companies doing business in China, and I trusted her advice. She is married to Goldman chief of staff John Rogers, and that summer I often met with her in the living room of their D.C. home to hash out the basics of the Strategic Economic Dialogue.
With Deborah typing, the two of us would sit side by side on the Lehr-Rogers family sofa, batting ideas back and forth. The SED, we eventually decided, should have three overarching goals: to advance the economic relationship between the U.S. and China by improving cooperation between our two countries; to speed up China’s economic reforms; and to encourage China to be a responsible member of the global economic system by opening up more markets to competition, doing more to protect intellectual property, and accelerating its move to a market-based currency. We focused less on particular policies than on the process itself: what was the most efficient way to build trust and get things done, how to concentrate on shared strategic interests and avoid getting bogged down by ad hoc disputes.
We wanted to design a structure that would deal effectively with China’s complex mix of top-down yet consensus-driven decision making. Because of China’s concentrated power structure and legacy of state planning, we knew we had to involve officials at the pinnacle of the hierarchy to win approvals for policy changes. But China’s strong tradition of consensus meant we would also need to find a way to win the approvals of as many ministers and influential officials as possible, including those who did not have direct responsibility for a given issue. As I had long since learned: no one person could say yes, but many could say no. And you always wanted to get a blessing from the very top.
The way the U.S. managed relations when I started at Treasury was simply too diffuse to be effective. We maintained well-intentioned dialogues across many departments and agencies; there were joint commissions, forums, and partnerships on subjects ranging from commerce and trade to economic development and science and technology. But discussions got mired in detail, and people lost sight of the big-picture issues. Though our China policy was coordinated at the highest levels of government, each Cabinet secretary inevitably thought his or her issues should have top priority. The Chinese needed a clearer message about what we wanted and what we would give in return.
We concluded that while the SED would focus on long-term strategic goals, it would have to deliver short-term results to show we were making progress and win political support. Accomplishing this would require not just periodic official meetings but a continuous process of negotiation and discussion at ministry and agency levels to build trust and help defuse any crises that would inevitably arise. This trust building would make it easier to discuss sensitive subjects, such as China’s aggressive quest for resources in developing countries. All decisions would be carefully tracked and followed up on to make sure they were implemented.
The SED would not replace but rather supplement and help coordinate ongoing discussions and existing entities. Each Cabinet member would continue to direct his or her own interchanges, while gaining a more prominent platform through the SED. The Joint Commission on Commerce and Trade, for example, would continue to be led by the Commerce secretary, Carlos Gutierrez, and U.S. Trade Representative Susan Schwab, and their forum would follow up with Chinese officials to resolve day-to-day trade and investment problems ranging from intellectual property protection concerns to antidumping trade disputes in the steel and textile industries.
Traditionally, high-level conversations with China could be frustrating gabfests, with each side talking past the other as they read prepared statements—an unsatisfying process with little substance. We envisioned a more dynamic approach with the SED. The U.S. would make, say, environmental arguments not just to China’s environmental officials, who likely had limited power, but to other ministers, vice premiers, and members of the Party’s Standing Committee—that is, officials with broad portfolios and wide-ranging powers. When we had a big breakthrough in negotiations, top government officials, from the U.S. Cabinet and China’s State Council, would be there to ratify it on the spot.
The president had assured me I would be in charge of all economic issues for his administration, and we decided to define “economic” broadly, as the Chinese did. Why shouldn’t it include such vital matters as energy and the environment—or food and product safety? The way I saw it, the SED should embrace everything except national security and foreign policy. This would require me to take on a leadership role with my fellow Cabinet members on U.S.-China relations. I understood the inherent problems with that. Some would surely see it as a power grab. That wasn’t the intention: if the SED was going to be successful, someone on the U.S. side had to prioritize our objectives and then negotiate at China’s highest levels across a range of subjects and controversies. President Bush couldn’t do this twice a year, but I could.
The super-Cabinet position would make clear to the leaders in Zhongnanhai that we took the enterprise seriously and would give me the “face” I needed in China, which regarded the positions of our Cabinet members as ranking below that of their vice premiers. At the same time, it would give me the standing necessary inside the U.S. government to make things happen. I wouldn’t just lead the delegation. I would coordinate everything we did. Treasury staff began feeling out Chinese contacts to see whether they would be receptive to a broad dialogue with the U.S. I broached the subject within the administration, starting right after my July 10 swearing-in.
President Bush was, of course, the most important person who had to sign off on the SED. Despite his earlier encouragement of my ideas on improving the U.S.-China relationship, and despite positive feedback from White House officials, I knew that I was tiptoeing through a bureaucratic minefield and that selling the SED to my fellow Cabinet members might prove tricky. Fortunately, I had a great source of immediate support in National Security Adviser Stephen Hadley. He had worked after me in the office at the Pentagon where I had my first job following business school in the early 1970s. We had many mutual friends, and he welcomed me to the Bush White House and helped me to explain the idea to the president and others in the administration—and ultimately to make the interagency process work.
Among those with the most at stake was Secretary of State Condoleezza Rice, with whom I had lunch the day after my swearing-in. I’d met Condi only once before, when she had been interviewing for a job at Goldman Sachs before deciding to join the Bush campaign. Although we got along great, she had some understandable initial reservations—she did not want two secretaries of State when it came to China. I assured her that I had no intention of usurping her role, and she ended up being a great backer of the program. I also won the support of Defense Secretary Donald Rumsfeld, whom I had known as an active director of Sears when I was advising the board on restructuring the company. I expected him to oppose the SED and was surprised when he didn’t. He left office, in any case, just a few months later, in December 2006. Officials who might have been justifiably suspicious of a power play on my part, like Commerce’s Gutierrez and U.S. Trade Representative Schwab, became big supporters once they saw how the SED could work, particularly in the way that it gave them access to a wide range of Chinese ministers and allowed them to make their case directly to President Hu Jintao and Premier Wen Jiabao.
Not everyone was as accepting. Some of my colleagues were none too keen initially about being subordinate to the Treasury secretary in the SED. Some didn’t think we needed another U.S.-China forum and weren’t eager to add annual trips to Beijing to their busy schedules. Others cautioned me that the timing could not be worse: U.S. midterm elections were a few months away, the 2008 presidential campaign was beginning to take shape, and China was always a touchy subject for our politicians.
In addition, China was on the verge of announcing a leadership change in 2007, and we still had to sell the idea to the Chinese. We knew that we could not rely on the usual bureaucratic channels to get our message across. These could prove slow and counterproductive—everyone on the State Council would want to weigh in, there would be endless debate, and our elegant idea for a joint dialogue would get turned into so much Chinese sausage. We needed to find someone who had the connections in Beijing to take our message directly to the top levels of the government.
The messenger would turn out to be an old acquaintance, Zhou Yongkang, whom I had first gotten to know nearly a decade earlier when he was in charge of China National Petroleum and Goldman was preparing for the landmark PetroChina IPO. In the middle of that process, he had been shifted over to run the Ministry of Land and Resources, a post he didn’t much care for. I’ll never forget visiting him once in early 1999 in his Beijing office, when he said to me, “Hank, you know important people in our government. Use your influence and get me out of here.” I laughed. The Party later that year appointed him secretary of Sichuan Province. By December 2002 he was back in Beijing as minister of Public Security. As head of China’s internal police system—with 1.6 million to 1.7 million police officers and commissioners—Zhou had become one of the most powerful officials in the government.
He had come to Washington on an official visit, with a substantial delegation, to confer on matters of mutual security. He was scheduled to see, among others, Steve Hadley, Attorney General Alberto Gonzales, and Michael Chertoff, secretary of Homeland Security. We decided to take advantage of my prior relationship with him to request a meeting at Treasury to raise concerns about illicit activity in the Chinese financial system. I knew that Zhou Yongkang, as a member of the Politburo, could help us leapfrog the bureaucracy and bring our idea for the SED directly to Hu Jintao.
I met with Zhou Yongkang and his delegation on July 27 in my large conference room, which, in keeping with the Treasury Building itself, was decorated in the 19th-century style, complete with antique wall sconces, gas chandeliers, and mahogany chairs with U.S. dollar signs on their backs. Zhou and I faced each other across the long table, as we moved through an agenda that included everything from the proliferation of weapons of mass destruction to financial system abuse by North Korea. After a while, I laid out my thoughts for the strategic dialogue, which didn’t come as a complete surprise to Zhou. The evening before, I’d given our ambassador to China, Sandy Randt, a heads-up that I planned to do this, and we had requested the meeting through an old friend, China’s ambassador Zhou Wenzhong, telling him we had an important initiative to present. The ambassador, who was at the Treasury meeting, later told me that our request raised eyebrows in the Chinese Ministry of Foreign Affairs; they wondered what important matters the U.S. Treasury secretary could want to discuss with China’s head of Public Security.
“Minister Zhou,” I said, “we’d like you to take the proposal back to President Hu and present it to him.”
Zhou was clearly pleased to be asked and promised to relay the idea to Hu “as soon as I return to Beijing.”
After the meeting formalities were over, I gave him a quick tour of my office, showing him some Treasury memorabilia. Zhou Yongkang showed a particular interest in the pistol confiscated from Roaring Twenties gangster Al Capone.
We heard soon enough through back channels that Hu Jintao had responded positively to my overture. In early September we had arranged a call for President Bush with Hu, and the two leaders agreed to launch the Strategic Economic Dialogue by year-end in Beijing.
The SED was scheduled to be announced officially in Beijing on September 20, the day after my meeting at West Lake with Xi Jinping. I was to meet with China’s top officials on September 21 to hammer out the details, but I had more on my mind than just the SED. Back home, protectionist pressures were rising in advance of the midterm elections. Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) had drawn up bipartisan legislation to punish China for manipulating the value of the renminbi. It was heading toward an up-or-down vote by the end of September, and I hoped to emphasize the need for currency flexibility to the Chinese.
China’s exchange rate policy had increasingly become a hot-button issue. Dating back to the days of the command economy, Beijing had pegged the value of the currency to the dollar. As the economy opened up, the renminbi had been continually devalued, from 1.50 to the dollar in 1980 to a low of 8.62 in 1994. As China’s current account balance improved, the government stabilized the exchange rate at 8.27 to the dollar from the late 1990s to 2005, when it decided to take the renminbi off a strict dollar peg. The renminbi was still tightly managed by the central bank, but it was now valued against a basket of currencies, whose composition was kept secret, though it was widely assumed the dollar was the main component.
Many Americans believed China was still holding down the value of the renminbi to give its exports an unfair advantage. Its manufacturers were booming, and its coffers were overflowing, while our companies, the argument went, were unable to compete on price and were closing or shipping work overseas. And the U.S. trade deficit with China was gaping. I empathized deeply with the concerns of the public and their representatives on Capitol Hill about job losses and the pressure on American workers. Global trade had brought benefits like cheaper imported goods and lower inflation, but companies had been forced to downsize, and families, businesses, and in some cases entire communities had been devastated. A good deal of this pain had hit close to my home in the Midwest.
This suffering resulted in part from the artificially low value of the renminbi: economic analyses indicated that it should have been stronger but for Chinese market interventions. But the problem, and its solution, were much more complex. China’s currency, while important, had become an oversimplified and misunderstood issue. It wasn’t the main cause of our trade balance woes. After all, we ran negative balances with just about every major economy. Rather, the deficit with China stemmed from a range of structural issues that caused the U.S. to save too little and borrow too much, even as the Chinese saved too much and consumed too little. Fixing this was the key, and getting the currency policy right was one part of that.
And there were clearly other reasons for U.S. job losses. These included the advent of new technologies that were squeezing out jobs in manufacturing and in many professions, as well as an education system that was no longer producing enough workers with advanced skills to meet the needs of our fast-evolving economy.
A currency should reflect the strength and dynamism of a country’s economy. I’ve always been an advocate for a strong dollar. It should be the result not of exchange market maneuvers but of a strong economy whose sound macroeconomic policies and commitment to property rights and market principles inspire investor confidence. An artificially weak renminbi was not the way to maintain a strong dollar.
Because China had become such a major factor in the world, its constant interventions to keep the renminbi artificially low created harmful distortions that were not good for it, the U.S., or the global economy. One of these distortions was an overreliance on export-led growth at the expense of developing domestic consumption. This would become painfully apparent when the financial crisis hit in 2008 and dried up much of the demand for China’s goods in Europe and the United States.
If China truly wanted a market-based economy, it needed its currency to reflect economic realities. A freely exchangeable, market-determined renminbi was very much in China’s interest—and ours. It would yield more accurate, more realistic prices, which are necessary for efficient markets. It would lead to better capital allocation and help China rebalance its economy, spreading the benefits of prosperity more broadly.
Before China could fully float the renminbi, though, it would need to develop a modern banking system, which was why I would eventually lean on the country to open up its capital markets to foreign competition. Structural reforms and greater market access for U.S. companies and products would benefit U.S. workers more thoroughly than adjusting the currency alone. A stronger Chinese economy would become a magnet for U.S. investment and exports.
Ultimately, the currency issue mattered because it was a highly visible indicator of the pace of reform in China. To move forward on necessary changes to its economy, it was essential for China to keep appreciating the renminbi to reflect economic reality. The Chinese knew this very well. Our public disagreement was over the speed and amount of change.
One week before this trip, I raised the debate in a speech at the Treasury Department that some in the press, including the New York Times, had interpreted as a “warning” to China. My remarks may have been what had concerned Hu Jintao about being lectured on currency matters, but they were also useful in holding off action by Senators Schumer and Graham, who were waiting on the results of my trip before they pushed forward with their legislation. Chuck and Lindsey were smart and generally well informed about China, but they were locked onto the currency issue because it was an easy one for the public to understand, and they saw it as a way to goad China to reform. Fortunately, they were willing to give me a chance to prove the SED could work. “I hope that Hank returns with tangible results,” Schumer said publicly. “But if the disconnect between China’s rhetoric and actions is any guide, we’ll have no choice but to call for a vote.”
It was still not decided who would lead the Chinese side in the SED, and that was proving to be a thorny issue. Just as President Bush had agreed to give me super-Cabinet status, it was essential that my counterpart rank high enough, or be given the authority, to wield power over the ministers in the State Council. The logical choice would have been Executive Vice Premier Huang Ju, a member of the Communist Party Standing Committee, who had oversight of finance and banking, but Huang was terminally ill.
In his place, we pressed for Wen Jiabao, but we got a lot of pushback from Beijing that was understandable, given the unequal pairing of China’s premier with the U.S. Treasury secretary. But we were also told that it wasn’t clear whether Wen would even be part of the SED or what role he would play. This was perplexing until someone on the Chinese side took one of my key people aside and said, “Would you stop pushing for Wen? Hu Jintao wants to do it.”
This was a development we hadn’t foreseen, but a very fortunate one indeed. The Chinese were basically saying that Hu Jintao was such a big supporter of the SED concept that he wanted to keep it under his own control. For obvious reasons, he could not be my counterpart, but he would be actively involved. Instead, the Chinese appointed Vice Premier Wu Yi to lead the Chinese side.
Wu Yi was one of four vice premiers, but she was handling much of Huang Ju’s job and effectively acting as executive vice premier. She was the most senior woman in the Chinese government. A chemical engineer by training, the 67-year-old Wu had been born in Wuhan, in central China, and began her career at a refinery in western China’s desolate Gansu Province, before rising through the ranks of the petroleum industry and then being named vice mayor of Beijing in 1988. In the 1990s she had served as minister of Foreign Trade and Economic Cooperation, where she helped negotiate China’s entry into the WTO—indeed, Wu Yi played a critical role in making her country an export powerhouse. With her reputation for getting things done, she had been asked to take over the portfolio of an incompetent minister of Health during the SARS crisis, and she was respected for having helped guide the country through the pandemic. Wu Yi was already involved in discussions with the U.S. as the senior Chinese official on the Joint Commission on Commerce and Trade; her portfolio as vice premier had expanded as she took on more responsibilities after Huang Ju’s illness.
I had a few concerns about Wu Yi at the start. To begin with, she was a longtime trade negotiator, and she hadn’t earned the sobriquet Iron Lady for nothing. In my experience, professional negotiators don’t believe in win-win; they just want to outmaneuver you—to get as much as they can while giving up as little as possible. And she was a relentless negotiator. I was also concerned that Wu Yi didn’t have the background for many of the issues we’d be dealing with in the SED. Furthermore, I doubted she had the power to make deals on behalf of China.
The important thing, to me, was that China’s president, Hu Jintao, wanted to be actively involved and that I would have direct private access to him when I was in China. In turn, the Chinese delegation as a group would meet with President Bush in the States. As the protocol evolved, our entire senior delegation would be invited to see Hu at the Great Hall of the People after each SED meeting. Then, following a 45-minute meeting that enabled my fellow Cabinet secretaries to make their case on key issues directly to the Chinese president in front of his ministers, our delegation would file out while I stayed behind to visit with Hu. At that time, it was unprecedented for someone who was not a head of state to meet privately and alone with China’s president. (The SED would open the door for other ranking U.S. Cabinet members to enjoy similar access on occasion.) I remember discussing the arrangement with President Bush sometime later. When I told him that I saw Hu alone, the president replied, “Alone? What do you mean by ‘alone’?”
“Alone,” I said. “Just the two of us.”
“I’ve got small-meeting envy,” the president said.
To announce the creation of the Strategic Economic Dialogue, the Chinese hosted a big press event at the Great Hall of the People. Every ministry in China involved with economic matters attended. At this gathering I met my official counterpart for the first time. Gray-haired, barely 5 feet tall, Vice Premier Wu Yi grabbed my hand and gave it a hearty squeeze.
“I know you didn’t want me,” she said bluntly. “I know you don’t think I’m strong enough. But I’m going to show I’m as strong or stronger than you are.”
That was my introduction to China’s Iron Lady, and the beginning of a soft spot in my heart for her. I appreciated her directness, not to mention the strength of her grip. She was a force of nature. I would find her, in time, to be a tough negotiator and an efficient communicator who didn’t twist words and was never discourteous or disrespectful. That day, looking around the vast high-ceilinged reception room thronged with dark-suited men, I instantly understood the struggle it must have been for her to make her way to the top ranks of the Party and state. China is in theory an egalitarian society, and I’ve met many dynamic and powerful women in business throughout the country, but Wu Yi was the only woman in the top government ranks—there was no other woman in the 25-member Politburo and just four among the 205 members of the Central Committee. I felt an admiration for her that would shift over time into professional affection.
It was still unclear how much time I would get with Hu Jintao on that trip. My calendar was stuffed with other meetings. One memorable sit-down came with Commerce Minister Bo Xilai at the ministry’s offices on Chang’an Avenue, a short distance from Tiananmen Square. Bo was a rising star, a smooth politician with a strong populist bent, a flair for publicity, and a love of the limelight who was thought by many to have a shot at the Standing Committee of the Politburo, the most powerful body in the country. There was no hint in 2006 that Bo and his wife, Gu Kailai, would end up at the center of the country’s biggest political scandal six years later.
Bo Xilai had been born in 1949, the year of Mao’s victory, and was a true princeling. His father, Bo Yibo, was a leading economic planner and swimming partner of Mao’s, who was purged in the 1960s, then rehabilitated after Deng Xiaoping came to power. He was one of the “eight immortals,” influential Party elders of the Chinese Communist Party, under Deng. The younger Bo, like so many others of his generation, suffered during the Cultural Revolution, spending time in jail and at hard labor, but he’d followed those travails with a swift climb up the Party ladder. As mayor of the northeastern economic hub of Dalian in Liaoning Province from 1992 to 2000, he had overseen rapid growth and prosperity. He’d next served as governor of Liaoning, where he’d helped oversee the revitalization of its troubled industrial sector before becoming Commerce minister in 2004.
This meeting proved Bo to be a shrewd, exceedingly well-prepared advocate for China. He told me that he welcomed the launch of the SED and that Hu Jintao placed great importance upon it. For every point I brought up with him, he had a swift and dismissive response. Why were we so worried about the currency? he challenged me. The U.S. deficit with Asia-Pacific countries as a percentage of U.S. GDP had declined over the past six years. That was good, wasn’t it? He pointed out that U.S. exports to China were up 20 percent, and that, in any case, most of China’s exports to the U.S. came from foreign-invested enterprises operating in his country. I assured Bo that President Bush and I both believed protectionist measures were unhealthy and that I would work to persuade senators not to pass the Schumer-Graham bill. Bo conceded that a flexible rate would be good in the long term, but he contended that China’s cheap labor would always give it a competitive edge. I was struck by the difference in his approach to that of Xi Jinping in Zhejiang. Xi was already looking to the day China lost that cost advantage and thinking of how the country could learn to innovate and compete higher up the value chain.
Bo’s confidence and communication skills were impressive, as was his memory for facts, but I also found him overbearing and aggressive. I’d seen him correcting his translator on certain interpretations. This made quite an impression on me—not just his understanding of English but the peremptory way he overrode the translator, who was, I should note, a remarkable character in her own right. Our people knew her to be absolutely precise and nuanced in her translations, which meant, of course, that Bo was grandstanding when he interrupted her. She also had a flair for the dramatic. She would passionately deliver Bo’s arguments in her dead-on English, then throw her pen down on the table for emphasis.
The following day I met with Hu Jintao, who was accompanied by a large group of Chinese officials at the Great Hall of the People. Hu was warm and welcoming and very supportive of the SED, acknowledging the importance of having a forum to discuss long-term policy issues. I made the point that, while the SED wasn’t the venue to hash out short-term differences in areas like trade, nonetheless, we did need to deal with the most serious or politically sensitive issues as they arose, sometimes unexpectedly.
As our session wrapped up, the U.S. delegation left the room, along with most of the Chinese, except for Wu Yi, Finance Minister Jin Renqing, and Dai Bingguo, vice minister of Foreign Affairs. This gave me the chance for a brief, intimate meeting with Hu. I pressed the currency issue some, explaining that apart from long-term concerns, each side needed to point to short-term successes to show that our dialogue was making progress. I noted that outside of China—and to the U.S. Congress—currency flexibility was seen as an indicator of his country’s reform efforts. That was about as much as I felt I could say in front of the other Chinese officials. But, as the meeting ended, I was able to get the president and his interpreter alone so I could be more specific on currency.
I began by emphasizing that I was not asking him to do something that wasn’t good for China. In fact, I was making this request because I believed moving the currency was very much in his country’s best interest. At a minimum, it would help us avoid protectionist actions from the U.S. Congress. Then, in a way that could only be done in a truly “private” meeting, I said something that I never divulged to members of the Congress or even to my fellow Cabinet members. (I did, of course, report this exchange to President Bush.) I gave him a number to work with.
“Mr. President,” I said, “if your currency appreciated 3 percent against the dollar before the end of our first SED session this December, the result would be good for China and it would help me convince Congress that the SED is working.”
There was no magic to the number I gave. But I knew that with less than three months until the first SED, a 3 percent bump would amount to an almost 15 percent annualized increase. I was looking for a good-faith gesture that was tangible and meaningful but that wouldn’t seem insurmountable or impertinent to the Chinese, who rightly viewed the currency as a sovereign matter. So I took care to present my proposal as a constructive suggestion and not as a demand to be negotiated. Moreover, I believed that specifying a reasonable amount and timing for the move would encourage the Chinese to act. It would also preempt a Chinese rejoinder that almost any realistically achievable appreciation in their currency would not make a big difference in the trade deficit, which was largely determined by other factors, and would always be labeled as insufficient by their critics unless and until China had a market-determined currency.
The renminbi had increased by 2.4 percent since July 2005, when China dropped the dollar peg. The Chinese were determined to keep moving the currency—but not too fast, because they believed that doing so would not be good for stability in China.
Hu listened carefully to my proposal and said: “I understand.”
Still, he was cautious and noncommittal. But he heard my message very clearly. I subsequently took Wu Yi aside and emphasized that it was important that we see some movement in the renminbi soon, even though there were more important concerns for the U.S. and China.
“If currency isn’t the issue,” she asked, “why do you keep talking about it?”
“It’s a huge symbol in the U.S.,” I explained. “If I don’t talk about it, I’ll lose credibility back home.”
I came away confident that the Chinese would move the currency. I briefed President Bush on my return and called Senators Schumer and Graham. They withdrew their bill on September 28.
My confidence in the Chinese was well placed: they had listened and let their currency appreciate more rapidly. It would climb 1.3 percent from September 2006 to the end of our first SED meeting in December, and 2.2 percent through the end of our second SED meeting in May 2007. In what would become a familiar pattern, the pace of appreciation quickened as we approached each new SED and picked up even more during the meeting. By the time I left Treasury, the renminbi was up 13.8 percent from that September 2006 meeting with President Hu in Beijing, but the critics of China’s foreign exchange policy were not satisfied, nor, frankly, should they be—until the value of China’s currency is completely determined by the marketplace.
The first Strategic Economic Dialogue was held in Beijing on December 14 and 15, 2006. The 28-member delegation—the greatest number of Cabinet members and agency heads to travel in a single group to China from the U.S. until then—included our ambassador, Sandy Randt, and six of my fellow Cabinet members: Carlos Gutierrez of Commerce, Elaine Chao of Labor, Michael Leavitt of Health and Human Services, Samuel Bodman of Energy, U.S. Trade Representative Susan Schwab, and Environmental Protection Agency administrator Stephen Johnson. Federal Reserve chairman Ben Bernanke and Export-Import Bank head James Lambright also came. The Chinese side included 14 ministry-level officials, including central banker Zhou Xiaochuan, Finance Minister Jin Renqing, National Development and Reform Commission chairman Ma Kai, Labor and Security Minister Tian Chengping, and Commerce’s Bo Xilai. This unprecedented high-ranking lineup showed the seriousness of both sides.
No one took the SED more seriously than I did, and I meant to leave nothing to chance. I had slow-boiled through too many ceremonial meetings in China and elsewhere at which delegate after delegate would deliver a speech, then sit down and nod off while the next delegate rose to deliver his or her prepared remarks. That was not how I intended the SED to work. I didn’t want speakers drily reciting scripted talking points. I wanted real working meetings, where key issues were identified through candid presentations and frank discussions that fostered the kind of understanding and trust that would help us reach agreement on various actions, or so-called deliverables. The formal SED sessions themselves wouldn’t be for nitty-gritty negotiations; these took place through my regular phone calls with my counterpart, on the margins of our sessions, or between meetings at the staff level, led by Treasury’s Taiya Smith and her Chinese counterpart, Zhu Guangyao, then head of the international department at the Ministry of Finance.
“We’re not just going to talk,” I promised the Chinese. “We have to get short-term deliverables as well.”
To the U.S. delegation I laid down Paulson’s Rules of Order: “No using your BlackBerry. No taking calls. Everyone has to participate in every session. This is a real dialogue, and in a real dialogue, you focus on what’s being discussed.”
The two large delegations met inside the Great Hall of the People, in the cavernous Golden Hall, facing each other across long tables covered in green baize. Video screens were set up between the tables to allow for easier viewing of PowerPoint presentations. Each place was set with a name card that could be turned on its side to signal a participant’s desire to speak: all were equipped with state-of-the-art microphones (superior to those in use at Treasury, though I noticed they appeared to be foreign-made, despite China’s government procurement rules requiring domestic content). Decorated with fine paintings and hung with chandeliers, the vast yellow-walled room was hardly an intimate setting for discussion. But the Chinese had taken their usual care with details, setting pots of bright poinsettias around the room and, as ever, dispatching elegantly dressed young women to pour tea with near-synchronized precision. I learned later that the exacting Wu Yi had personally reviewed all the preparations, from menus to flower arrangements.
For the first SED we had placed several key topics on the agenda for discussion: China’s economic development strategy, making China’s growth sustainable, promoting trade and investment, and addressing specific energy and environmental issues. We spent some time discussing the renminbi, but we also talked about sulfur-dioxide controls, high-tech trade, restrictions on the U.S. entertainment industry, pirated DVDs, and China’s efforts to increase consumption, as well as health and rural development. We discussed China’s view that the U.S. refused too many visas and our belief that China’s financial services sector should be opened to outside investment. And we explored China’s rural-urban imbalance, encouraging leaders to address the structural causes of recent unrest in the countryside, including official corruption, the lack of property rights, and the need for better access to health care and education.
There were promising moments of frank talk. Fed chairman Ben Bernanke urged Chinese officials to increase public spending on pensions and health care and to improve access to private insurance. With China’s high level of precautionary savings hobbling consumption, such measures would do more to address the underlying cause of our negative trade balance with China than appreciating the renminbi. National Development and Reform Commission chairman Ma Kai—who in 2013 would become vice premier responsible for industrial, transportation, and financial services policies—admitted that insufficient health insurance was a problem but pointed out that the government was trying to raise the incomes of farmers and poor city dwellers. When Trade Representative Schwab asserted that China was backtracking on reforms, Wu Yi and Ma Kai gave spirited responses. Ma Kai politely, but doggedly, questioned Schwab’s facts, then challenged her analysis, arguing that some macro control by the State was inevitable even in a market economy. What is regulation, after all?
“Our reform has to be market oriented,” he declared. “The key criterion to determine whether China’s market-oriented economic system is established should be whether the market is playing a basic role in allocating resources instead of equating any macro control with backtracking on reform.”
Striking a more defiant tone, Bo Xilai went on the offensive in responding to Secretary of Commerce Carlos Gutierrez, who had said, “We welcome Chinese investment.” Bo shot back, “America is not open to Chinese investment. Look what happened when China National Offshore Oil Corporation tried to buy Unocal.”
That was an episode I knew only too well, since Goldman Sachs had advised CNOOC on its high-profile, controversial deal. I can only imagine Bo thought he’d put me on the spot by mentioning it. If anything, though, I welcomed his assertiveness. He was saying what his Chinese colleagues were thinking, and I wanted the SED sessions to be lively, open, and thought provoking. To be honest, Bo aside, the initial SED was a bit too formal and static, as each side felt the other out, and speakers relied too frequently on set pieces or talking points. That would change over time as the principals got to know one another and the staffs for both sides worked closely between sessions to reach the milestones we set.
As for CNOOC, it was true the company had been forced to withdraw its $19 billion bid for a U.S. company, Unocal Corporation, which had most of its oil reserves in Asia. I explained that we were as open as any country in the world to foreign investment but that CNOOC had run into a political backlash because it was a contested deal and Unocal had already signed a contract with Chevron. I didn’t say what everyone knew to be the case: that CNOOC had offered a higher price but was forced to withdraw its bid for political reasons. Bo, in fact, was right. It was an early example of China’s growing global ambitions running up against reflexive U.S. protectionism. I did note that China’s energy sector was not open for investment.
The first SED gave the U.S. Cabinet officials an opportunity to meet, and raise issues directly with, Premier Wen Jiabao and President Hu. Without the SED they would have had very little chance of seeing these leaders. Wen clearly had arranged our meeting with him to let us know he expected to participate in the dialogue. He told us he would speak for 35 minutes—and to our amazement he spoke for exactly 35 minutes, during which he said that China had selected a U.S.-based corporation, Westinghouse Electric Company, to provide the technology for four nuclear plants, something I had pushed hard for. China had been reluctant to approve the Pennsylvania-based Westinghouse because of its Japanese parent, Toshiba Corporation. Wen’s news came as a bit of a surprise, since the Chinese had not yet received our last changes to an agreement we had been negotiating through the SED.
After our formal meeting with Hu, I met privately with the Chinese president, conveying President Bush’s best wishes. I pressed Hu again on continued currency flexibility, warning that the next Congress would be tough on this issue. I emphasized that opening up financial services would be critical for China’s development and beneficial for its relationship with the U.S. Hu agreed about the importance of opening financial services. But he cautioned me that in this area, leaders had to proceed slowly and “eat one mouthful at a time.”
As I had hoped, the first SED was able to claim some immediate, specific successes. On the touchy subject of trade, we concluded an agreement that facilitated financing to support U.S. exports to China. The Chinese allowed the New York Stock Exchange and the Nasdaq Stock Market to open business offices in China and agreed to restart stalled negotiations to expand flights to and from the country for U.S. carriers. And we agreed that both sides would work to enable China to join the Inter-American Development Bank, which provides development financing in Latin America. These were modest accomplishments, but the important thing was that we had met, wrangled over hot topics, reached agreements, and, most important, set a tone of cooperation and put in place an effective process for the future. As soon as the sessions ended, I called Schumer and Graham, as well as their fellow senators Max Baucus (D-MT) and Chuck Grassley (R-IA), to report that we were off to a good start, noting that the renminbi had popped by more than 1 percent since September.
The most moving moment for me came on the first night of the SED. Our delegation had taken an evening tour of the Forbidden City. It was followed by a splendid banquet, complete with a Chinese band playing Western music, at the Beijing Hotel, which is located at the corner of Wanfujing Street and Chang’an Avenue. Wu Yi proudly announced that she had arranged something special for us. We were led out to a windy hotel balcony, high up over the city, with Wu Yi warning me, “Please stand back when you go outside.” Apparently, she was worried that I might topple over the low railing.
Coatless, I shivered in the December night air. Aides cautioned me against staying outside and catching a cold, but there was no way I was going to miss what our hosts had arranged for us, especially given Wu Yi’s obvious excitement about the treat.
Then I forgot all about the temperature as I beheld an astonishing sight just a few blocks away: all of the lights in and surrounding the Forbidden City had been turned on. The vast old palace complex, witness to centuries of empire, war, revolution, and protest, was ablaze in a welcome just for us.