We also focused on very high levels of corporate savings in China, particularly in the state-owned enterprises. So yes, I was mindful of the imbalances.
Fukuyama: We’ve been talking until we’re blue in the face about the kind of liberalization you’ve just mentioned, and of course about revising the value of the renminbi. The results have been uneven, have they not?
Paulson: Yes, they have. While I was Treasury secretary, we saw substantial movement in the renminbi. That shows, I think, that the right way to deal with the Chinese is directly and in private, recognizing that they place a huge priority on economic development and reform. We need to continue to make a broad case for reform that includes several dimensions.
There’s a lot of emphasis placed on currency, because that’s easy for people to understand. But the currency issue is just one of a number of significant factors. I continue to believe that it’s in China’s interest, as well as our own, that it continues toward a full transition to a market economy. We need to privately, continuously, and forcefully make the arguments as to why it is in China’s best interest, however, and avoid finger-wagging and lecturing them in public.
Fukuyama: Let me play devil’s advocate on this. It seems to me that no American policymaker has taken a hardball option with them very seriously. One way of thinking about Chinese currency policy is to liken it to a form of industrial policy. But unlike the Koreans and the Japanese, the Chinese aren’t subsidizing one particular sector, like petro-chemicals.