Paulson’s Visit: Win, Lose, or Draw?

Sunday, September 24, 2006 15:24
Posted in category The Big Picture

For three days last week newly appointed Treasury Secretary Henry Paulson was in China meet with American and Chinese government officials and business leaders. Reading the news reports, the trip was a very successful one for Paulson, but was it?

The last few years prior to his visit and prior to his appointment have politically speaking been very focused on China’s role in job lose in America and the RMB being unfairly valued. Of course, there have of course been another topics that have come onto the radar screen during this time, but none have been so politically important in the U.S. or been a focus for so long.

With a reported 70 previous visits under his belt, Paulson is probably the most well qualified of Treasury secretaries to effectively understand the China issues, and how to build the path for future dialogues. As reported by Business Week, his first visit was going to be an important one. And as it is his first visit that his first priority should have been to focus on building the future path (prior to his trip, his priority was to work to understand the issues).

From all accounts (Forbes, and CNN), it looks like Paulson’s visit was a success, at least… it wasn’t a failure. Both sides reported good dialogue and a good first step, but yet the RMB was not revalued overnight as some in the U.S. Congress would like to see.

A few points that I would like to point out though are that one area that I believe U.S. officials need to understand and learn more about is that there isn’t a need to report anything. Reviewing Chinese reports of the trip vs. U.S. reports, it is obvious that Chinese officials are much more guarded and are far less likely to report much about the meetings. This is one point that I find quite interesting, and in other cases (like DPRK), it is often the case where the U.S. is often very public and vocal and China is less so…

Second, while Paulson was in China released a new VAT rebate structure, which while increasing the costs of many exports went completely ignored by the Western media. This is curious as U.S. officials have been pushing China to take more steps to reign in the flood of exports arriving in the U.S., and the Chinese have taken a major step to increase the prices of many goods (some saw an increase of 13%).

Another area that I will be curious to learn more about is why the U.S. government views the Chinese savings rate of 50% as being such a bad thing, or how the reduction of that to 40,30,20,etc will benefit the trade deficit that States has with China. My issues are twofold:

(1) With the Chinese government being afraid that a reduction of the savings in the banks (and the resulting reduced liquidity in the banks) could potentially have damaging effects to those banks, I have a hard time seeing how anyone thinks that would be good for either economy and
(2) Isn’t a large part of the problem the fact that the U.S. has a near zero savings rate, and thus is consuming too much?

One area that I believe the U.S. needs to really improve upon, is for the U.S. government tho acknowledge the actions that the U.S. needs to take domestically to correct some of the imbalance that may be in the market.  There is a tendency to be very critical of China while at the same time glossing over issues in the U.S. domestic market, and by doing so I believe the policy makers do a real disservice to the cause of having constructive dialogue.

With the November midterm elections coming into full swing soon, China will surely be a continue topic of interest. After all politicians need hot buttons to get re-elected on. However, I am 95% certain that between this time and that, little change will occur, and therefore the real expectations of his trip should be to have modest expectations short term and building the path for future win – win actions.

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