Bloomberg New Economy Forum

Not in US' interests to decouple from China, says former US treasury chief Henry Paulson

The virtual summit on Monday between President Joe Biden and his Chinese counterpart Xi Jinping is a step in the right direction, but the world needs more certainty around how the US and China are going to compete, says Mr Henry Paulson. PHOTO: BLOOMBERG

SINGAPORE - There are those in the US who advocate financial decoupling from China, but wholesale financial decoupling is impossible and partial decoupling is likely to make America, China and the world more susceptible to financial crises, said former US treasury secretary Henry Paulson on Thursday (Nov 18).

It is crucial to have a mechanism for the world's first- and second-largest economies to coordinate, as this is the only way to put out the next big financial and economic fire, he said on the second day of the Bloomberg New Economy Forum in Singapore.

Mr Paulson said the United States benefits from having its pre-eminent financial institutions operating in China on a level playing field. Chinese capital markets will also be safer if the world's leading institutions are present in the country, as they have best-in-class practices in relation to management accounting and governance.

"US regulators will have first-hand market knowledge. And if US firms don't operate there, it will be difficult to maintain their global leadership when the British and European and Japanese firms do," he said.

He acknowledged that China's "opaque accounting and murky corporate governance rules" need a lot of work, but stressed that the more important issue is that governments should cooperate to end the Covid-19 pandemic, spur growth and minimise antagonism.

Said Mr Paulson: "Nowhere is this clearer than in the current state of US-China economic relations. Some believe we shouldn't do any business with China, that it's impossible to compete and collaborate at the same time... But this is a false choice.

"Is it really in American interests to walk headlong down the path of a wholesale decoupling from China? I hardly think so. Let's be clear - the rest of the world isn't going there.

"So for the US alone to break global supply chains and cut off US workers from some of the largest and fastest-growing markets in the future (is not wise). Without cooperation in the internal system, there will be chaos."

Mr Paulson said that while Monday's virtual summit between President Joe Biden and his Chinese counterpart Xi Jinping is a step in the right direction, the world needs more certainty around how the US and China are going to compete, where they are going to cooperate and how they are going to manage their relationship.

"Great powers rarely desire to go to war. But history is replete with horrifying examples of how they stumbled into it nonetheless. It's always important we act now to prevent strategic competition from turning into terrible conflict," he added.

Mr Paulson said there is incentive for both sides to work together on climate change - and that it is important for China, with its sprawling and energy-inefficient industries, to accelerate its investments in clean technologies and environmental services.

The US can also do more with its allies, such as Britain, the European Union and Japan, by working with them to eliminate tariffs on environmental goods and services.

"The problems we are talking about are difficult, but not intractable... We should advocate for solutions that demonstrate how market-based principles can improve people's lives," said Mr Paulson.

"Almost every major breakthrough in history has been spawned by a big problem, and the pandemic has been our wake-up call. We have a generational opportunity to step up to this historic challenge."

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