China’s President Will Drive Change, Paulson Says

Chinese President Xi Jinping is “all about driving change” in a country that is trying to reform its economy and political system, former U.S. Treasury Secretary Henry Paulson said.

“He understands business, understands the private sector,” Paulson said today at “The Year Ahead: 2014,” a two-day conference in Chicago hosted by Bloomberg LP.

Paulson, who has known Xi for years, called the Chinese leader “a very good politician” who “understands the people and relates well.”

China’s leaders are preparing for the broadest policy changes since the 1990s, which were presented last week after a four-day policy summit with a target for implementation by 2020. The moves range from easing the one-child policy to increasing farmers’ land rights and are aimed at sustaining long-term growth and boosting incomes while maintaining the Communist Party’s grip on power in the world’s second-largest economy.

“It’s a very, very ambitious set of reforms,” Paulson said. “That’s the good news. The bad news is there’s a lot of resistance.”

Change is bound to come slowly, Paulson said, because of opposition to change, its complexity and the corruption that he said is endemic to a government-run economy.

‘Heavy Lift’

“This is a system that is still evolving,” Paulson said. “I think they’ve got a lot of work to do. I hope they succeed, and I’m cautiously optimistic because it will be good for China and good for all of us. But this is a heavy lift.”

Even with China’s rapid growth, there are “very few” companies in the country that are “truly outstanding,” Paulson said.

China’s powerful state-owned companies “need to be run on a commercial basis” without the “special subsidies” provided by the government in Beijing, he said.

China’s leaders are also learning that the pace of economic growth has been damaged by lax environmental regulation that has caused major pollution and health problems.

Pollution has become “a big drag on the economy,” costing as much as 3.5 percentage points to economic growth, Paulson said.

Dirty Air, Water

“Dirty air and dirty water are killing people,” he said. “It’s just not acceptable. The challenge is they don’t have the legal system, they don’t have the regulatory system to operate the way we do.”

Paulson said China is taking steps such as evaluating civil servants on their environmental performance, and may take further measures, such as a cap-and-trade system, before the U.S. does.

Paulson, 67, a former chief executive officer of Goldman Sachs Group Inc., was secretary of the Treasury from 2006 to 2009 under President George W. Bush. In 2011, he formed the Paulson Institute to promote international engagement, with a special emphasis on relationships between the U.S. and China.

Paulson attended Dartmouth College in Hanover, New Hampshire, and Harvard Business School. He was CEO of New York-based Goldman Sachs from 1999 to 2006.

China’s growth in gross domestic product rebounded to 7.8 percent in the third quarter from 7.5 percent in the previous three months. The median estimate in a Bloomberg survey of 34 economists last month was for fourth-quarter expansion of 7.6 percent.

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