August 2, 2007
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Transcript of Secretary Paulson's Press Roundtable
Beijing, China,
August 1, 2007

Secretary Paulson:  As I look around, since a number of you have heard me talk about this trip and put it in perspective, what I'm going to do is just be pretty brief, give you a few comments on the trip overall, then talk about some of the meetings, and then take your questions.  So we'll have plenty of time for questions.

I think you all know that the SED is not just about two meetings a year, two big meetings.  We have constant dialogue, accomplishments, steps toward reform.  I came here to follow up on some of the accomplishments coming out of SED II and to plan for our upcoming meeting in December.

I think just as a general rule, I've just learned this over the years, that you can do a lot on the telephone but you're better off if you can sit down face to face and have a candid discussion.  I found that the meetings with the Chinese leaders are particularly useful because they're pragmatic, there's a give and take, candid discussion.  We learn, they learn.  So they're just generally very useful.

As a general matter the topics we talked about most were currency reform, appreciation, energy and the environment and consumer product safety, food safety.

We had good individual meetings.  Why don't I run through some of those meetings quickly.

I had a lunch with Governor Zhou Xiaochuan. We talked about a wide variety of economic issues, talked in some depth about currency, talked about investment issues, talked about sovereign wealth fund issues, talked about our work together to keep the financial system free from abuse and illicit behavior. 

I had a meeting with Liu Mingkang, CBRC, and there the conversation was mainly about expanding market access, greater market access for foreign banks. 

The meeting with Shang Fulin, CSRC, largely following up on things coming out of SED II and talking about financial sector reform.  I was pleased to learn that they were moving forward to the date that we'd agreed to, we're moving it forward to lift the moratorium on joint venture security, joint ventures, and they're also broadening the scope of these joint ventures.

I met with, had lunch with Ma Kai at the NDRC.  We talked about a number of things.  Probably the one we talked about the most was climate change.  We talked about President Bush's initiative, their upcoming meeting in the fall and the importance of engaging major countries, developed and developing, and also that to really solve this issue it's going to take a concerted effort.  It's not going to be possible unless economies remain strong and competitive and healthy and it's going to take a big emphasis on low carbon technologies.

I talked with the SFA, the State Forestry Administration.  The topics there were sustainable logging which is fighting illicit logging, sustainable logging, either one, but it really is very important in terms of climate change and dealing with that issue.  We also talked about conservation initiatives.

And good substantive meetings with Wu Yi and with President Hu.  Probably on these meetings I'd never tell you as much as you'd like to hear because the real value of these meetings is they're private and if we go into a lot of detail then they lose their meaning.  That destroys confidence.

But good discussions.  I obviously talked about currency reform.

First of all we were talking about the SED.  Let me step back even before that and say one of the things that I had an opportunity to spend time with Minister of Finance Jin, who was involved in a number of the meetings.  He and I agreed to convene a meeting of the JEC in late October, around the time of the IMF World Bank meetings.  What we'll talk about there are global imbalances, so that will lead to discussions on currency reform, open investment policies, and financial sector reform.

I might add that as we think about the SED, the purpose is to manage this very important economic relationship between our two countries.  To take a strategic, forward-looking focus to deal with the most important issues at any one time.

Now every economic issue, even before we established the SED, was being talked about in some form.  The JCCT, the JEC, we had multiple dialogues going on in the energy side, environmental, all of the whole range of economic issues.  The purpose of the SED was never to replace those, it was to provide guidance to those initiatives, help prioritize and always deal with the most important issues at any one time. Again, the WTO compliance is very important.  We have mechanisms to deal with that.  We have mechanisms in the JCCT, USTR.  What is always most interesting to me was reform and the pace of reform.  WTO compliance.  WTO, what China agreed to to gain admissions to the WTO was to me represented a minimum level.  The interesting thing was when you reform beyond that.

Again, I look forward to a JEC meeting in late October.

Now back to the various meetings with Wu Yi and President Hu focused on the SED, the importance of the SED.  I talked about public sentiment in the U.S.; talked about sentiment in Congress; talked about a number of the congressional legislative initiatives; and then obviously talked about currency reform; talked about product safety; consumer safety; and energy and the environment.

Why don't I end it there and take your questions.

Question:  You mentioned sovereign wealth funds.  I was wondering if you could tell us what you told them and if you're worried about that hurting the Treasury market.

Secretary Paulson:  The conversation about investment was with Zhou Xiaochuan, and we made the point that I've made often publicly but I will say it again.  First of all, I emphasized how committed we, the United States, are.  This administration has open investment.  I mentioned that the President recently signed CFIUS legislation which I believe is a step forward, a better CFIUS bill.  It's focused on national security and the relatively few investments that involve national security every year.  When we talk about sovereign wealth funds.  I separate the sources from the uses.  In other words, you can have discussions about what are the policies that lead to the imbalances and the buildup of reserves, but then once countries have reserves we expect them to naturally invest them in ways that make sense economically, to get risk-adjusted returns.  We welcome foreign investment in the United States from sovereign wealth funds or any direct foreign investment.  I believe that that's the highest vote of confidence anyone can pay to our economy or any economy is to make a direct investment.

We emphasized, and it's not just with China, sovereign wealth funds around the world, but the importance of transparency.

Question:  You don't think there's a fear that they might be shifting to [inaudible]?

Secretary Paulson:  I can tell you what I said.  I think foreign direct investment is a good thing.

Question:  Can I ask about your discussions about the [inaudible].  Your previous trip would suggest that China might be [inaudible].

Secretary Paulson:  Let me say on currency, and this is the case with many of the areas of reform.  The positive, and we should never lose sight of the positive, is there's not a difference as to principle.  I heard from everyone right up at the top, they are committed to currency flexibility, they're committed to currency reform. I would just say to you as an aside, as someone who watches this carefully, that the rate of apreciation has increased over the last year and over the last six years.  It's increased.  I don't believe it is fast enough.  I make the case that they and the whole world economy would be better off and they would have greater financial security and greater stability if they increased the pace in the short term and worked toward the measures that would let them have a market-determined currency in the intermediate term.  That is why I emphasize so much financial sector reform.

I believe that competitive, efficient capital markets are a key to more balanced, higher quality economic growth on China's behalf and toward a market determined exchange rate.

Question:  [Inaudible] some concern that the stock market [inaudible] generally quite strong.  They're reluctant [inaudible] financial reforms that [inaudible].  The best example [inaudible].  Do you have any --

Secretary Paulson:  I would say that the biggest reforms, the significant ones I'm talking about, would increase the financial security and the stability because I believe a competitive, efficient capital market that had sophisticated institutional investors, had a well developed bond market, would provide more financial security. And so the reforms I'm talking about are greater access by the best of class foreign firms. 

As I emphasized to the Chinese, there are two issues.  One is their regulatory structure and the range of products they allow and the rate at which they open up the markets.  The other is what is the quality of competition they allow.  For the life of me I cannot understand why competition and letting strong firms in that are regulated by the Chinese would endanger the stability.  As a matter of fact that would promote the stability of the market.

I think the resistance, it's easy to say stability, but I think resistance comes from entrenched domestic competition with an interest which every market-driven firm has and every economy.  They all like competition in areas other than their own.  Everyone would like to have a little bit of protectionism.  That's my view on stability.

Question:  You mentioned sentiments in Congress.  What can you go back and tell, for instance, the Trade Representative in Washington about this meeting that's going to make them want to postpone drastic action?

Secretary Paulson:  In terms of what they will or won't do, I can't speculate.  I can just say several things about this.

I talk with many leaders in Congress.  I understand their frustrations.  I share a similar objective with many of them of wanting quicker reform of the currency and China to move quicker to open up their markets.  They know that I don't believe legislation is the right way to proceed.  They know I believe that the right way to make progress is through direct engagement bilateral and a multilateral basis.  They know I believe we're making progress.  They know I believe we should make quicker progress.

I think legislation would be counter-productive and undermine what we're trying to accomplish here.

Having said that, I have explained to leaders of Congress why I'm going here, just as I've explained to you, so I don't need to repeat it.  This is to follow up on the last SED, to plan for the next one.

I also will tell them when I come back that I explained also to the Chinese, the Chinese had an opportunity to hear directly from the leadership of Congress and from the Senate Finance and the Ways and Means Committee when they're over here.  I have updated them on developments in Congress.  I've told them of the views of a number of congressional leaders.  I've obviously communicated that.  I don't think anyone that I know of in Congress is expecting me to come back with some deal on the currency.  They know what the SED is trying to accomplish. Everyone talking to me directly has been very respectful about that.  Some of them have, just as I've respectfully said I don't think legislation is the way to go, I think direct engagement; they respectfully said continue with your direct engagement, Mr. Secretary, but we have a different plan.  So I've got more work to do with Congress.

Question:  Mr. Secretary, with markets tumbling around the world over the last 24 hours, we're obliged to ask for a comment or observation on what may be going on there.  You stated clearly in recent weeks and months that you think the housing market's near a bottom, that the collapse of the sub-prime markets is contained.  Yet markets continue to fall, companies report their profits are shrinking because of the effects from the housing market.

Have you seen anything that's changed your view on what's going on?

Secretary Paulson:  No.  Kevin, let me be pretty clear about what I've said before.  When I said the housing market, that there had been a major correction and the housing market was at or near the bottom, I also have said that I thought this would not resolve itself any time soon, and that it would take a reasonably good period of time for the sub-prime issues to move through the economy as mortgages reset.  But that as, even though this, and it is a cause of concern, the impact on individual homeowners, and we care a lot about that, but I said as an economic matter I believe this was largely contained because we have a diverse and healthy economy.

I also said I thought in an economy as diverse and healthy as this that losses may occur in a number of institutions, but that overall this is contained and we have a healthy economy.

Now to talk about what's going on in the markets, my comments -- and let me say that in my career at Goldman Sachs, I traveled a lot, and I stayed very close to the markets.  In today's world, it's quite easy to stay close to the markets, and it's my job to be vigilant and stay close to the markets.

I've also, in watching markets for a long time, I'm never surprised by volatility or adjustments.  My starting point is what is the state of the economy?  We have the strongest global economy I've seen in my business lifetime today.  We have a healthy economy in the U.S.  So what is going on in my judgment is a reassessment of risk.  There are adjustments and market adjustments going on as risk is being repriced.  Again, when we have the benign markets and strong economies for extended periods of time you tend to see excesses.

We talked about the sub-prime.  There are some excesses there.  We've also seen excesses in terms of other lending behavior.  Some of the loans to fund leveraged buy-outs.  These loans have not had traditional covenants.  So now the market is focused on this.  There's a wakeup call and there's a, as I've said, an adjustment to this repricing of risk.  But I see the underlying economies being very healthy.

Question:  On the [inaudible], did they give you a timeframe for which [inaudible]?

Secretary Paulson:  We originally talked about getting that done by December.  Shang Fulin now said he's going to be able to move that forward and do it earlier in the fall.

Question:  For the meeting in October or --

Secretary Paulson:  I don't want to be that specific.  But it was meaningfully earlier.  And I'm always glad to hear that news as opposed to something slipping.

Question:  On the currency issue again, in your meetings and discussions with the Chinese [inaudible], did he give a sense of frustration on the part of them maybe not being able to feel like they ever satisfy the Members of Congress or [inaudible]?

Secretary Paulson:  Let me say this.  We agree on the principle.  They emphasize that they're committed to reform but they believe financial stability is every bit as important, China's financial stability is very important to China, but very important to the U.S. and the rest of the world.

I have also been quoted often frequently as saying the same thing.  So many of the people that have concern about China are worried about the wrong thing.  They're worried that China's going to out-compete and overtake every other economy, as opposed to worrying about a financial problem in China which would impact us all negatively.

So I do believe the Chinese are patient, and I believe they ask themselves, they say we're moving the currency quicker.  Our stability is important to you as well as to us.  They also make the point, which we agree with, which is as important as the currency, is it is not the key driver toward dealing with the economic imbalances and the trade imbalances.  It is a factor but the biggest issues are the structural issues in the various economies. With China it's their very high savings rate and so on.

So they're too polite to say they're frustrated, but I do believe they're asking themselves will they ever be able to satisfy us.  But again, the case I make is that the rate of appreciation so far, there's no evidence it's hurt the Chinese economy, and if they accelerate the pace I believe they will make it easier to use more traditional monetary policy, to dampen overheating, and they will be able to hasten their development of the economy toward higher value-added products. 

The Chinese economy, much of what they export to the U.S. is assembled in China.  And they are the last point in a manufacturing chain, an integrated chain throughout Asia where they import commodities, components, and assemble them, and that their value-added is often relatively low.

So as they seek to develop their economy, if they have a currency that gives market signals it will be better for them.

In any event, you don't need to hear all that.

Thank you for your time.

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