Friend of China

At this point in our history, is what we really need a Treasury Secretary who is a pedigreed "Friend of China?" That is a term the Communist Chinese apply to individuals who have proven their affinity for the People’s Republic by service of one kind or another. Communist China arguably has no better or more powerful friend in the whole of the Western world than the man President Bush has just appointed to be this nation’s chief financial officer: Henry Paulson.

Mr. Paulson has made a very successful career, an immense personal fortune and an astounding financial empire at the New York-based investment house, Goldman Sachs. In no small measure, those accomplishments are a product of his extensive personal and professional dealings with the People’s Republic of China.

In fact, in his role as chairman of that enormously successful firm, Mr. Paulson proudly notes that he has made about "seventy trips to China since late 1990." No one logs that kind of time, or enjoys the kind of entree to the Communist power structure it suggests, unless he is considered a true "friend of China."

Why should we be concerned that an individual who has played, according to Goldman’s Vice Chairman, Robert Hormats, a "very crucial" role in the company’s many China-related financial transactions – including "really immers[ing] himself in a lot of activities in China " – would become Treasury Secretary?

Whither China?

The U.S.-China relationship is a complicated one – and is likely to become considerably more so in the years ahead. On the one hand, China is a very important trading partner with this country, albeit one that engages systematically in unfair practices, often in violation of obligations it assumed upon entry to the World Trade Organization, at enormous cost to this country’s balance of payments. The PRC is also the largest holder of American debt; its unwillingness to buy more Treasury notes, let alone to unload even a portion of the hundreds of billions worth it is holding now could have profound, adverse repercussions on our economy.

On the other hand, as a Pentagon report issued shortly before the Paulson nomination was announced makes clear, Communist China is translating some of its vast new wealth into activities and capabilities clearly antithetical to U.S. interests and security. These include: the rapid modernization of the People’s Liberation Army and its air, naval and space warfare elements, to give the PRC vastly increased offensive capacity against even modern militaries like ours; the acquisition of forward operating facilities in key strategic chokepoints and regions around the world, including the Caribbean and Latin America; close ties with every despotic regime on the planet; and direct control of, or at least assured access to, an ever-larger percentage of the world’s energy resources.

Decisions, Decisions

Against this backdrop, what sort of role will a "friend of China " like Henry Paulson play in a Bush Cabinet where he has been assured that he will get to shape policy, not simply flack for it?

Let us stipulate that, as his spokesman at Goldman Sachs put it recently, "When Mr. Paulson becomes Secretary of the Treasury, he will have totally divorced his interests from those of Goldman Sachs." Even if he were actually to liquidate his huge holdings of Goldman stock (as opposed to merely placing them in a "blind trust"), he will have a difficult time avoiding a conflict of interest in addressing issues that will have huge implications for his friends and former colleagues at the firm – and for the United States.

Consider the following items that clearly fall within his prospective portfolio, to say nothing of what his input might be on matters directly related to national security policy and China:

-The revaluation of the Chinese currency to reflect more accurately its true value and reduce the contribution it makes to the PRC’s competitive trade advantage. Friends of China have long made excuses for Beijing and resisted efforts to pressure it to float its currency.

-The offerings of PRC state-owned enterprises on the U.S. capital markets – many of which are economic dinosaurs that use the proceeds of such often-Goldman-managed and wildly oversubscribed stock sales to prop up their operations and free up Chinese government funding for other, nefarious purposes.

-This is especially true of Chinese "banks" – which the blue-ribbon U.S.-China Economic and Security Review Commission last year established amounted to "slush funds" available for Beijing to use to finance not only the business ventures of well-connected "princelings," but all manner of other nefarious activities in which the PRC engages overseas. These include: technology theft, espionage, intelligence operations, arms sales, alien smuggling and drug-running. Goldman is the lead investment bank for the IPO of one of the most egregious of such state-owned enterprises, the Bank of China.

-Chinese acquisitions of U.S. assets will fall under the ambit of the Secretary of Treasury in his department’s capacity as chairman of the dysfunctional Committee on Foreign Investment in the United States (CFIUS). CFIUS has been reluctant – if not utterly unable – to see threats to American interests and security posed by acquisitions, some of which have been managed or endorsed by Goldman Sachs. It seems unimaginable that it will do better under the direction of one of China ‘s best friends.

The Bottom Line

Henry Paulson is clearly a capable man and, but for his ties to China, would bring to Treasury stature and skills that are much needed. Those ties have earned him the right to be a Friend of China. They should disqualify him from being Secretary of the Treasury.