Former U.S. Treasury Secretary Henry Paulson joined “Bloomberg ” this morning to discuss the Chinese economy, corporate taxes, and the 2016 Presidential race.
On China, Paulson said it is “an economy in transition and it’s got some very serious challenges, short term, intermediate, and long.” He added: “the solution to all of them, rebuilding confidence and dealing with the debt and new drivers of growth are speeding up the reforms, and the reforms that they need to put in place to really scale back the state owned enterprises, these oligopolies, put them on a level playing field and let the private sector do what they need to do. And it’s a matter of political will.”
On Trump and 2016, Paulson said: “I don’t think we’re going to see a President Trump…I’m seeing things today that I never expected to see from either party and things that are very disappointing and disturbing to me, the level of the discourse… I’m not going to make a prediction on who our president’s going to be. But I will stick my neck way out and say, I don’t think it’s going to be Donald Trump.”
DAVID WESTIN: This week, U.S. Treasury Secretary, Jack Lew stunned investors with a harsh crackdown on cross-border mergers designed to avoid U.S. taxes. A treasury secretary shocking the street is not unprecedented. With us to talk about inversions, but really first about China, is former U.S. Treasury Secretary, Hank Paulson, also former Goldman Sachs chairman and CEO, and most important for this purpose, author of “Dealing With China”. Hank Paulson, welcome to BLOOMBERG . Great to have you here.
HANK PAULSON: Very good to be here.
WESTIN: OK, so let’s start with China, please, because this is what your book is about. You’ve spent a lot of time in China in different capacities, and you have a prescription for what we should be doing going forward, but before you do that, give us a snapshot of where the Chinese economy is, in your view, right now.
PAULSON: Well, it’s an economy in transition and it’s got some very serious challenges, short term, intermediate, and long. Short term, currency, which is moderating a bit, the challenge here, but overcapacity and confidence. Intermediate, you’ve got this debt which is a very big issue, and of course, looking a little bit further, they need a new growth model very much, new drivers of growth. And as I look at it, the good news is, the solution to all of them, rebuilding confidence and dealing with the debt and new drivers of growth are speeding up the reforms, and the reforms that they need to put in place to really scale back the state owned enterprises, these oligopolies, put them on a level playing field and let the private sector do what they need to do. And it’s a matter of political will.
Now, as I look at China, the market responds to volatility anywhere, but when you get a country as big as China and with the scale of their problems, it magnifies that volatility, and again, as I look at the country, I think the biggest problems are a few years in the future. They can be mitigated if, as I said, if they speed up their reforms, but I think what we’re going to be looking at for a number of years, because it’s very, very hard to reboot a $10, $20 economy, is you’re going to see continual bouts of volatility as you see the struggle between state planning and state capitalism and markets, and the leader there, Xi Jinping, has said, in the economy, I want the markers to be decisive. That’s a lot easier said than done when you’re talking about rebooting an $11 trillion economy.
WESTIN: So there’s a lot there to unpack. I want to make sure we talk about reforms, but first, let’s go to the short term you started with — yuan. In the short term, do you expect that to continue to depreciate against the dollar as they try to liberalize their currency?
PAULSON: So first of all, the interesting thing, it’s interesting the way you framed the question, because in Washington, people are accusing the Chinese of trying to drive down the currency, and they’ve been spending a lot of money to try to prop up the currency. I think that they’re ultimately, what they’re doing is moving toward a currency that is more market determined. I think right now in the short term, they understand how important stability is, because at a time when you’ve got speculative pressures to the downside, confidence to the downside, and really an understanding of the economy and what the leaders are doing at a low, this is a good time to have a stable renminbi. And so, but I think over time, you’re going to see a market drive renminbi, and frankly, I don’t want to opine what I think the value is at a time when there’s, again, so little understanding in the markets about what’s actually going on in China and what they’re doing to deal with it.
STEPHANIE RUHLE: OK, then care to opine? Does the U.S. have a China policy? If so, what is it, or what should it be?
JOHN MICKLETHWAIT: Can I join to that? I was in China ten days ago. You see the Chinese leadership, there are three people they talk about they know in America. They know you, they know Henry Kissinger, they know Bob Zoellick. Why aren’t there more people in America who have that sort of relationship with the Chinese leadership?
PAULSON: Well, I would say this. In China, the biggest ties between our two countries have been the economic ties because we’ve had really quite a robust economic relationship for some time, and this is a very troubled relationship right now in the sense that they’re under stress and a lot of people in the U.S. are rethinking, what is the value of having a good relationship with China? What is the real value of that? And as I look at it, this is a time when never has that relationship been more important, because despite the differences, and we could spend a lot of time talking about the differences, we have many issues where we have a common interest and it is just so essential that we keep this relationship on an even keel, because it’s in our interest, it’s in the United States of America’s interest to get some things done where we have these complementary —
MICKLETHWAIT: Would a President Trump be a useful ingredient to that long term stability?
PAULSON: Listen, you know the answer to that as well as I do, and I don’t think we’re going to see a President Trump.
RUHLE: You don’t think we will? What do you think we will have here?
PAULSON: I don’t — listen, I shouldn’t even have made that comment, because I’m — I’ve got to tell you, I’m seeing things today that I never expected to see from either party. Never expected to see, and things that are very disappointing and disturbing to me, the level of the discourse, and I think what we have is, when you have the American people as angry as they are, that this is — this makes them ripe for populism, and I think what we’re seeing is rooted in that populism, so, but I’m not going to make a prediction on who our president’s going to be. But I will stick my neck way out and say, I don’t think it’s going to be Donald Trump.
WESTIN: OK, Hank, we did have this announcement from Jack Lew, that they’re proposing regulations on inversions. The team to be targeted, specifically, Allergan. What do you make of that regulation to try to stop inversions?
PAULSON: I’m surprised and disappointed. I think we all know that the root cause is about this antiquated corporate tax that puts our multinationals at a big competitive disadvantage with their foreign competitors, and I believe that that really undermines our economic security and our economic competitiveness because these multinational companies (ph) aren’t going to headquarter here and it’s a significant advantage. So what we need is, we need to go on a territorial system so they pay the same taxes their competitors pay and then they’re not penalized if they want to bring money back and invest it here. So that’s the way to go. This is dealing with a symptom, not with a problem, and I think the right way to deal with a symptom is not, keep changing the rules, because we’re a country that’s, I think our whole economic system is embedded in the rule of law.
MICKLETHWAIT: Do you think we should have a corporate tax rate? There are economists who look and say it’s crazy to have corporate taxes. Why don’t we just, companies should not pay tax. The investors in them should pay tax through what they get out of it?
PAULSON: Well I think, in theory, you’re probably right, because a corporation, what is a corporation? It’s just a legal entity. So the taxes are either paid by the workers, the investors, or the consumers, and so that $300 billion or so that’s raised from corporate taxes is a very expensive 300 billion in terms of what it does to impede economic growth. But we’re always going to have a corporate tax. That’s a political reality. So we are going to have a corporate tax, let’s understand it. So what we need to do is come up with a corporate tax that let’s us raise the money we need while not impeding growth in competitiveness, and that is quite doable and I think it’s something that’s long overdue.
JONATHAN FERRO: Hank, to tie all this together just very quickly, the brutal force of capitalism, and we go back to the too-big-to-fail, many of these big companies didn’t fail, and what it feels like this week at least is a regulatory war against big business, because businesses get big and they don’t feel the brute force of capitalism when they fail. Is that what this is, a war against big business, because of the moral hazard that was created?
PAULSON: Well, you’re tying a lot of things together, OK. I think for a long time, big business has been the boogeyman, and a small business can do almost anything, that’s sort of the third rail, and big business is the enemy. But when you look at the multinational companies, it’s a huge advantage to have them headquartered here in terms of the jobs they create in this country, the wages are way above the average, the exports — the export vehicles they provide, and so on, so a huge advantage. Now in terms of the war against big business, I think there is a backlash still against the banks. And there’s no doubt about that, because if you’re looking for a boogeyman right now, the banks, they’re an easy target to blame. Now as I look at what’s going on and what’s creating this angst in the American public, because these are powerful economic forces that have been at play for a good while, and I would cite something like, just look what’s going on in terms of the disruption in the labor markets.
RUHLE: But why would big business continue to be the bad guy, or banks public enemy number one, when it’s banks that provide mortgages and loans to small businesses and big businesses that give us healthcare?
PAULSON: You’re totally right. So, I agree. I take a look and say that our banking system is the envy of the world in terms of, it’s the best financial system, it is the most competitive financial system, and it really is the fuel that helps our economy grow. But the point that I was trying to make here was, the forces that are really hurting the middle class right now are forces that are much more difficult to deal with. So you look at technology which is the future, it’s providing a great advantage for all of us, but you — it’s hard to come up with an industry where technology is not disrupting the labor force, destroying more jobs than it’s creating, exacerbating income inequality, and this change is happening at warp speed, faster than the public can understand it.
RUHLE: Mr. Paulson, thank you so much. Former U.S. Treasury Secretary, Hank Paulson, author of “Dealing With China”, and our own John Micklethwait, editor in chief of Bloomberg.