 Very Hank Paulson with us today. He said I only needed to do a brief introduction, so I'll keep it brief. He ran Goldman Sachs for eight years. He was Secretary of the Treasury for probably what seemed like 20 years at times. And he now runs the Paulson Institute. He has taken time out of an incredibly busy schedule. And we are absolutely thrilled to have him and his wife Wendy and guests with us today. Secretary Paulson, writing your first book on the financial crisis was stressful, complete with, I guess, sleepless nights and such as you relive those days. Why did you decide to tackle this book now? Well, John, thanks. And before answering your question, let me say I'm delighted to be here. I really appreciate all you're doing to protect our security. I have a history with this place because my wife's father taught here years ago. So it's fun for us to be back. When I, you know, writing the first book was not a pleasant experience for me. So when I told Wendy I might write a second book on China, she said she thought she might date again. And she was, and she was, she wasn't kidding. And it took several years. But, you know, I dedicated this to my grandchildren because I want them to grow up in a, you know, a peaceful, environmentally healthy, you know, prosperous world. And I believe that it's going to be a lot more possible to do that if we're working in complementary ways with China and a lot more difficult if we're working cross purposes. And as I've talked with, about this book, and I've done a fair amount of it, I find two things. First of all, there's a lot of interest in China right now. And secondly, there's not a great understanding of China. And it's becoming a much more complicated, much more complicated relationship. I think the US-China relationship is by far the most important bilateral relationship in the world. When you think back on history, it's hard to come up with a situation where you have a predominant power and a rising power and they don't come to blows. I had someone the other day say, what about the UK and the US? Well, he forgot his history. They burned down our White House, you know? And so it's, and yet that's unthinkable to me that I don't think it's inevitable we come to blows. It's, and a Cold War I think would be disastrous. But we're dealing with a very different China that's emerging than the one that we've worked with over the last eight administrations, roughly 40 years. And that, because really despite all we've done to integrate them into the global economic system into the rules-based system, I think many in China believe now that the US wants to contain them and believe that we will never accept a country that has a political system that's so radically different than ours where they, you know, and where their leader has said, I don't aspire to have a multi-party Western democracy and I don't, we don't aspire to have Western values. And the US, many in the US, this consensus that working with China, looking to help China grow is gonna be good for us is breaking down. And so this new China is now emerged, they're a formidable competitor economically. They have a much more muscular foreign policy. There's a, there are many, many changes. So we're dealing with a new China and I think we need to take a, you know, we need to recalibrate. And it's, we have to recognize that we're gonna be competing in certain areas and we're gonna have differences and that there's nothing wrong with competition if it's healthy competition, if it doesn't degenerate and we need to deal with them where we have differences in a tough-minded, pragmatic way and we can't let that preclude and this is the key point, working together where we have all these common interests because there's such a thing as mutual interest dependency. If we care about global economic growth or if you like I am worried about climate change and the economic risk of climate change or what's gonna happen to our global ecosystem or denuclearization or terrorism, most of these big global issues are going to be much easier to solve if we can find common ground with China and much more difficult if we can't. So the key thing is how to navigate that relationship in this book and I'll be brief around your other questions but this book really tells a story of working with three different leadership groups in China to get things done and hopefully offer some insights on how we should work together. So the way you dealt with this complex relationship and found common ground when you were secretary of the treasury was in part through the strategic economic dialogue and this was a pretty ambitious and complex approach which focused a lot on process. I wonder if you could talk a little bit about that about your role in it and maybe what the role is for such an institution today. Yeah and I will won't be terribly brief here because I think this is fundamental. So the first part of the book details my experience working with Chinese leaders who a number of them are now very, very senior in China today but working to get things done in China where we have these landmark financial transactions bringing Western know-how and capital and opening up China to competition and so on. And what I learned in doing that was how their decision-making process worked and I watched the US government work with them and I just really thought we had a decision-making process that wasn't appropriate for dealing with China and I'll talk about that in a minute. So when George Bush asked me to be his treasury secretary and I'm glad I accepted, it took me a while. I turned him down the first couple of times and when I was, we were talking about the conditions. One of the things I wanted to really work on US-China relations and had an idea for a mechanism which really accommodates certain things. First of all, in China they have a very diffuse system of decision-making. It takes a lot of people to say yes to something and one or two saying no can kill it and often those that have direct responsibility are on the organization chart are responsible but there's a broader group of people that looking at the organization chart you'd never think they had responsibility but they do. So and I really saw it takes direction from above but to help form consensus below. So we set up this strategic economic dialogue and before we put it in place, I think there was almost maybe a hundred dialogues going on or in the administration, in the economic area writ large and we were prioritizing the Chinese couldn't figure out what we thought was important or not. So the way we set this up in the US, I headed it up as Treasury Secretary but it wasn't my role as Treasury Secretary it was sort of a super cabinet position to coordinate the others. We defined economic issues very broadly. So they included energy, the environment, a whole range of other things. And so this meant we had a big group of US cabinet members involved and officials and a big group of Chinese. So if I wanted to talk to them about currency I would Ben Bernanke the Fed was there. And when he talked on currency it just wasn't the head of the central bank taking notes there are all kinds of other senior people taking notes. And so and then the other thing about Chinese they don't work well together. They're not team players and the current President Xi Jinping the reason he wants the country to play soccer and do a better job is they're a country of single family children. So they don't, and so the SED we are able to our staff was able to help work with bring different Chinese agencies together to form a consensus. So the idea was we picked some very important long-term issues to talk about and build relationships. We met twice a year and but we're busy working all in between times. So you built good relationships and you worked on longer term issues. We put together a 10 year framework on energy and the environment which was the basis for the climate change agreement that just was done. It helped set the stage for that. So some were longer term but then you always would negotiate some shorter term deliverables which were real accomplishments because you can have all this mutual interest but if you don't turn them into tangible results that both countries populations can see to demonstrate there's a value in their relationship I don't think the common interests make a difference. So we put that in place. Now, so your question is what's the role in other why shouldn't we do it with a lot of other countries? And I would say right now the Obama administration has expanded so it's the strategic and the economic dialogue. And so it's much broader. It's more confusing because the Chinese always wanna know who's in charge, who's coordinating. And some parts it doesn't work quite as well as you'd like because they view energy and the environment as an economic issue and we've got that on the State Department side but still this is something that takes a lot of time and you can't afford to spend the amount of time with every country. And I just thought because this was so important and we tend to go from crisis to crisis and if we spent more time getting U.S. China right some of the crises might go better but I think this could work well with different designs for other countries. I think it could. Let's see. During the financial crisis, the Western financial crisis, a friend of yours long, Xi Shan turned to you and said, I'm not so sure we should be taking advice from you anymore or something to that effect. So clearly the U.S. may have lost some influence. Was this a permanent loss of influence and what's your assessment today as to whether you're looking to us? I'm gonna go a little bit because you're hitting some very interesting questions. So this guy is Long Xi Shan and he's a major character in the book. So I worked with him on the very first big IPO they did China Mobile. I worked with him on the first bankruptcy in China which is a revolutionary concept for the Communist Party letting a company fail as revolutionary. And he did that. And so he was my counterpart during the financial crisis which was a huge advantage of the SED because during the financial crisis the Chinese were very good partners and it was shocking for them to see these household I'd been fighting to open up the Chinese market to competition from Western financial institutions. Not because I was trying to do a favor for our banks but because it's hard to have capital markets work and have the kind of liberalization you wanted without having capital markets. And so the reformers wanted to do it but there's huge resistance from all the protectionists in China. So there was a big resistance going on then we had the financial crisis. And at first there was just shock on their part these household names, city group, Morgan Stanley what's going on. Then there was absolute fear because they had all these investments and owned our securities. So I was calling him on the phone at night what Congress was pounding me and tell me how can you, we're not gonna give you the authorities you need for Fannie or Freddie and the Chinese had 700 billion of it. And I tell the story the Russians had come to them with a sort of a plot, why don't we unload this and see what these Westerners do. And so I was saying, well, guess what our political system is messy and we're just saying that but we'll get all the authorities we need then I was sort of crossing my fingers. But so then we, and they stuck with us and they're good partners. So when he said this to me, when he said to me when he showed up it was actually at the Naval Academy where we had an SCD meeting in June of 2008. And he said to me, and I was still fighting to open up the markets. And he said to me, Hank, you used to be my teacher but I'm not sure my teacher looks so smart today. But what the interesting thing was he, of course he still, he now was unable to press and get the kinds of reforms they needed. But at the G20, which we put together and China really worked with us in putting that together they were in the forefront of fighting for capitalism and for reforms and so on. But it really set China back a lot also because their banking system which had been defunct 10 years earlier was used to fund all kinds of stimulus to help power them through the crisis which has created all kinds of problems. But the lesson I learned there big time which is a major lesson we should all take away and never forget. People believe in the American dream as long as we're successful with our economy. And when we have troubles or we're not doing well or we can't fix our problems no one wants to follow us. It's not the example. Now in terms of where we stand today, the Chinese leaders and that same man and I tell the story of the book early on while many in their country were being triumphalous. They looked and said the US economy is much stronger than people think it is and we've got our share of problems. And the US economy has been doing relatively well when you look at Europe and a lot of other places in the world. And so I think the lesson to take away from that is when people say if we don't participate in the TPP or if we don't do other things to show economic leadership or if we don't continue to strengthen and do the things we need to make our economy competitive I think we're gonna have a real serious problem. Asian Infrastructure Bank as well. How is China doing today in terms of the liberalization and have the reforms peaked and are we on the downtrend in China in terms of especially financial liberalization? Well I'm gonna try to do this one because you can make, people have said to me all the time have the Chinese invented a better form of capitalism. Are they gonna eat our lunch? And I say trust me, they haven't. There's no system on earth and no country that's gonna outlaw economic gravity. And reform stalled in China for 10 years. The current leader inherited an economy that has really run out of steam. And it needs radical reform. And basically if you look around the world you could say maybe not Europe, the US, Japan, Brazil, most major economies, the economic policies that worked in the past aren't working in the future. And it's controversial and difficult to change them. And so these are political issues. Well so Xi Jinping has an economy that had been overly reliant on exports. And of course that game is not gonna continue to work to the same extent. And much more disturbing for them, they had a growth model that relied very heavily on municipal debt to build infrastructure. And so they built up all, debt much faster than the economy was growing, great corruption associated with that build up in that huge excesses. And mayors didn't have the funding sources they needed. So if they needed money, they took someone's property, they sold it to a developer. And so this debt is backed by real estate so they've got their own little real estate bubble and floating great bank borrowings. So they've got these very big excesses. They understand the problem. They've got financial capacity to deal with it. But it's gonna be very difficult to do the things they need to do. And this man is accumulating huge power but there's still no consensus. So he's laid out a reform agenda which is the economy, the markets are gonna be decisive and when it comes to allocating resources. Now they got a long ways to go to get there because their government is sort of the exact opposite of what we would think you would do. Government very involved in the economy when it comes to the social safety nets and the social security system medical care and so on, government not involved. So he's trying to roll back the state-owned enterprises, open it up to competitions after the jobs have to come from. Meanwhile, he needs to create a new tax system, a new municipal finance system and redefine the relationship between the central government and the provinces. So their problem are significant and I think you could make at least as big a mistake exaggerating China's strength as you could in underestimating its potential today. So they've got their hands full but all those that are hoping that they fail should be careful what they're wishing for because when you look at what happened to the global economy and what the impact would be on us and a lot of others. So this is important and there's some very competent people focusing on it in China, but it's a big job. It's a shift a little bit to security. It seems like, although it's related to this question, it seems like the mood has changed a bit in the last few years. Security has come to the fore on this notion of do we need it? Do we want a strong China? And I think at the end of the book you mentioned somebody asked you, hey, why are you helping China? Why do you want China to be so strong? What's your sense in Washington and elsewhere as to whether there is a serious mood shift about hey, we need to think about them maybe not helping so much and maybe worry a little bit more about security and focus on that as opposed to this common ground of economic growth or things changing? The security relationship is much, much more tense and becoming much more complicated. That to begin with, I read something, I had a tour of the Naval War College and I forgot one of your leaders at the Naval War College was quoted and I think this is where the foreign officers program talking about how it was important to get to know each other and have friendly relations. I forgot, interpersonal. And the fact is all of the channels and the linkages we have right now with China that are stronger on the economic side. And I think by and large their military does not like our military right there surveilling off their shore. Ours, the war games they're on the other side. When you look at what's going on right now with the islands in the South China Sea or what's going on with Japan in the East China Sea, there's a whole lot of tension. And it's serious and it's something I take very, very seriously. I had someone ask me about that and ask what is it, what is she trying to accomplish? Xi Jinping who is, I think most of you probably know but he's the current leader. I've never seen any leader, you'd have to go back to Mao to see someone that's accumulated so much power so quickly. And he basically controls all of the military, the foreign policy, the economic arena right now, what is he, what's he up to? Because traditionally, you know, what Deng Xiaopeng, who was the leader who started the economic reforms, what he had always said was concentrate on domestic affairs and lilo in terms of foreign policy. So now you've got, so what are they, and you hear about theories about Finlandinization, Finlandinization, you know, are they trying to break up our alliances and what's going on? So the first thing I would say to people, and I'd say to this audience, because you're focused on security, I'll tell you, maybe the interesting news to you is when Xi Jinping has got, in my judgment, one overriding priority, bar none, is a preservation of the Communist Party and strengthening the Communist Party. So that's number one, keeping control. He views that as the key to stability in China. So you start there. And so then you say, what does that mean? Well, that means that before he gets to anybody, when he's going out with a foreign policy or the military, the seven or eight things he worries about, top things are not security. He's worrying about, how do I fix this economic problem? Because the deal that the Communist Party has had, which is jobs for stability, security. He's got to create 10 or 11 million jobs a year. He's got to reboot a $10 trillion economy. That's a lot easier said than to do. He's dealing with serious demographic issues, which were made worse by the one child policy. Beginning when about the time that sonograms became cheap in 1989 or 90 and all the female fetuses are aborted. There's 30 million Chinese males, marital age that aren't going to have wives. He's dealing with dirty air and water to the point it's a flash point. The Communist Party, unless they do things with this pollution, are going to have problems. He's dealing with property rights issues, what to do with the social safety nets. So he's got his hands full, number one. And then I think when he's looking at the Pacific and what he's doing, I think the other thing you need to understand is nationalism in China. And his Chinese dream is about restoring, restoring China's greatness. And so a lot of the foreign policy build up, part of the foreign policy comes from, as their reach has grown around the world, as their ambassador said, so of their interests, and so you got to expect them to be more involved. But he's thinking about their place in the world and in the Pacific and he knows there's no great power, including the United States who doesn't have a strong navy, doesn't have a strong military. He's not waiting for us or anybody else to declare them a great power. He thinks they are a great power and they're gonna start acting like it. But when people start thinking about all this, you know, what's gonna happen to our alliances, let's start with saying, even if the US didn't exist, just look what's in Asia. You've got three very big economies and countries when you got Japan and India and Russia. You've got Korea and Australia, two middle-sized. So they're not going to just seed the ground to China. And then we have a lot of arrows in our quiver if we use them, you know, they understand strength. We need to be strong militarily. We need to invest in our military capability. We need to be strong diplomatically and we really need to be strong economically because no nation continues to be a great power if they don't have a strong economy and fiscal discipline and so on. So I go crazy when I look at Democrats. The Chinese are using their economic linkages to promote their policies, their foreign policy, their economic objectives, that's what we did. We gotta expect them to do. They're gonna act in their self-interest, we're gonna act in ours. So when I find, you know, and I'm not a partisan person, I worked as well as the Democrats as the Republicans, but when I see Democrats, you know, trying to sabotage Obama's ability to deal with the TPP, at the same time Republicans are not approving, you know, funding for the XM Bank or the IMF. You know, how are we gonna be a global leader if we, so when people say to me, are we gonna be a great, what's China gonna do to us? If we deal with our own situation, we'll be a great power for many years, no matter what happens in China and if we don't, we won't be, so. Yesterday, Andy Creppen-Evich from CSBA was here and referred specifically to the Finlandization issue. Yeah, that's why I mentioned that because I think that's sort of a, I think it's a bogus thing. Yeah, okay, because who knows whether they're, whether they're looking at Finlandization, but I don't think that, I think, regardless of the United States, and we're not going to, we've been a big power in the Pacific for a long time and China and the whole rest of the world is benefited by the security we've provided and the economic integration. I think one of the risks of China's action, which is not, at the time they've got all their economic issues, raising the tensions in the South China Sea is that I don't think war is likely, but what I'm concerned about is also what this is gonna do to all the economic linkages in relations and what impact there is gonna be. You mentioned South China Sea. In your book, you write about oil having a special role in the consciousness of China. You were involved in some of the IPOs of some of those companies. Do you think South China Sea problems are related to energy, energy resources? Is it about something else in your sense? Yeah, I don't think, I've read all the theorists in China with oil and minerals and the South China Sea. I think that's about sovereignty and it's about China's role. And it's a fascinating thing. I run a think and do tank, which is a not for profit. And I have 15 people in Beijing and a number of them are obviously Chinese. They love the US, they're educated here. They agree with me on most things. When I bring up and question some of these actions, they all immediately side with Xi Jinping. I mean, they're all, well, gee, you fought on our side, look what the Japanese did to us in World War II. They're very nationalistic. So now oil. So here's what you need to understand about oil. I spend a lot of time thinking about these environmental issues. And so China, we talked about the US being dependent on oil. China's dependent on coal. So if you look at China's energy mix, 70% is coal, 20% is oil, 10% everything else. And they became a big importer of oil around 1993 and they get about 60% of their oil is imported oil. And they're very concerned because they get their oil from dodgy places, instability in the Middle East and in Africa. And so you hear about the Malacca dilemma. The oil goes through the Malacca Straits. That's one of the reasons why the Blue Water Navy being able to protect that. I think they're increasingly concerned with the US being less dependent on the Middle East, pulling back all the instability they got there. So what this is doing, causing them to do, is looking for these overland routes. The pipelines across Myanmar, Central Asia, Russia, natural gas, because you get natural gas, it's not only cleaner, which is very important to them, but you get it from more stable parts of the world, Australia and so on. So I think the key to oil, what they're trying to do, and they're working very hard to clean up their air and to meet their climate change objectives. They want carbon emissions, and they're by far the leading emitter of carbon. They want that to peak, the target is 2030. And by then, they would get 20% of their energy from non-carbon sources. And so that is a big driver. And when you look at oil, it really come down, I think to what's gonna happen with their auto transportation, that's totally it. They've got more, they're the biggest auto market in the world, they've got more miles of highways than we do in the US. And 10% of the households in China have cars, 60% in the US have cars, 30% in Japan, 50% in Europe. So they've been building these cities that don't work for cars. They've also been building high-speed rails. So the two things that are gonna drive oil are gonna be whether high-speed rails went out or autos. And then with autos, what the mix is? How many are gonna be electric cars or hybrids as opposed to the other? But oil is very, very important to China but all this thing about the territorial disputes, I don't think are about oil. Conservation is obviously a passion of yours. Where does that come from? And is this the primary focus of the Paulson Institute or how much you work there? Well, the primary focus of the Paulson Institute is US-China relations, number one. And we focus on economic issues, cross-investment and environmental issues and where the two come together. Urbanization, sustainable urbanization, air quality and climate change, we do that. We have conservation. We're working with the Chinese government on setting up national parks because Wendy and I've worked there for years but I've been interested in conservation since the time I was a little kid. I've been interested in the outdoors and then when we were, right after we were married, Wendy was the one that frankly got me involved in conservation. I think I was a GS-11 or something at the Pentagon and she was a school teacher and we had 11 or $12,000 of income between us and she came home one day and said, great news, I've become a lifetime member of the Nature Conservancy and it only was $1,000 or something and I about had heart failure. And then she got me involved with the Nature Conservancy which I ended up chairing. She had chaired a number of the Illinois chapter and the New York chapter but much more relevant today. If you understand what's happening in to the global ecosystem, it's frightening because we've been living as if we believe that natural resources are free goods and that they're inexhaustible. I think we're close to a tipping point in a number of areas and so this gets us to China. China, half of all new buildings in the world go up in China so 40% of carbon emissions come from those buildings so Paul's Institute is focused on energy efficient buildings but if you take a look at half of the steel, half of the cement is produced in China. If you look at, you know, I believe a huge number, it doesn't roll off of the fish that are consumed or China, you look at where so much is so much that is going on around the world whether it's Africa or Latin America is China. The two big, I think two big economic events of the next 25 years are gonna be the next 300 million people going to the city in China and that's gonna drive global economic and environmental outcomes and Chinese companies being outstanding global companies because they're increasingly making investments. What are their environmental practices going to be? What are their governance, their training? And so the leadership cares much more about these things and so the Paul's Institute works on conservation, wetlands, preservation in China because these coastal wetlands are being destroyed but also working with them on their practices outside of China, like for instance, sustainable soy and that kind of thing. So again, the reason I spent time in China is because it's such a big country that touches so much of the world and if we don't work with them, how are we going to even have a hope of solving the climate change issue or dealing with some of these issues with our global ecosystem or providing cyber security and there's just a whole range of those, conservation just happens to be one that's particularly close to my heart. Well thanks, I have many more questions but I think if you don't mind, we'll turn it over to students and other guests here. Good. Yes, please. Jeff Izzo, Department of State. Thank you very much, Mr. Secretary, for your insightful remarks. My question has to do with China's rebalancing, moving away from export led growth to more towards internal consumption will as you know, requires less investment which will mean less GDP growth. At the same time, they have to have a certain minimum of GDP growth for social stability, employment generation. In your opinion, is there a sweet spot there where more or less satisfy both aims and if not, what are the policy responses for the Chinese government? Well I can tell you've studied this a lot and it's going to be a messy process because growth has slowed way down so they're talking about the new normal and being 7% and I think that's very optimistic because what's happening right now, let me get to this, right now, if they keep investing to drive the economy in infrastructure with government debt, build up excesses, when this reckoning comes due, it'll be much greater and it'll spill over into the underlying economy and do great damage. So the question is where are they gonna get the growth? You know, because consumption's been growing pretty rapidly in China, it's just there's a percentage of the total it has. And how do they open up the competition in the service sector? And to me it's pretty clear when you look at the numbers that 70% of the employment is in the private sector but yet there's still big portions that are controlled by these state-owned enterprises, the national ones or even the ones at the local government level. And they get all kinds of special subsidies and benefits, not just regulatory approval but energy, land, sponsorship. And they are very inefficient. And so the key is gonna be how do you scale those back and so that the private sector can get in and compete and create jobs in areas like telecommunications, energy, finance. So that's the battle that's going on right now and the reforms that are going the slowest are going on in terms of scaling the state-owned enterprises back. The reason I like the bilateral investment treaty between the US and China is the Chinese reformers, when they're dealing with those that are opposing reform and liberalization and opening up, it helps if they're negotiating something if they've got some objective. You know, Zhu Ranjie in the days I talk about in early days he wanted to get in the WTO. So he was able to, he knew it was good for China but he was able to use that. So a bilateral investment treaty could be a hammer or a lever for the reformers to open up to foreign companies to come in and compete and do things which I think will help them. But in terms of the sweet spot, it's gonna be hard. It's gonna be bumpy to find a sweet spot. I think they'll ultimately, because they're really driven to find reform and they're also fighting a demographics battle. Will they get rich before they get old? But I tell you, the one thing that I really admire about the Chinese is when you talk to their political leaders there, it's not like talking to political leaders here where when you say there's a problem, boy they understand it, they're all over and they're trying to find solutions. And here you'll say, well, I think this problem exists and people are demagoguing it or talking about, but you know, or not owning up to the problem. So they understand it and they're working on it. And I think they will ultimately work their way through it but it's gonna be challenging. Over here, yes sir. Yes, Mr. Secretary, in terms of having mutual trust with China in the world community, there's a little package of things having to do with what we call the law that's troublesome. Yeah, Lee Kuan, you pointed out that China has to learn that when you sign contracts, they're forever. And then Evan Osnos quoted Xi Jinping last month in the New Yorker is saying, well, if the Communist Party goes up against the law, if I had to, I'd close all the law schools. So that's domestic law in China. And obviously you have a lot of complaints about them breaking maritime law. And last but not least, number four on the package is, they hack and they intrude and they steal and that is theft and some people say that they're at war with us in the cyber community. So those are four, a package of four legal points. How if they continue to be so bullying and disregarding of law, are they supposed to accomplish what we all would like? Yeah, I think that is a huge, huge challenge. I say in the book, the reason I went to China so much early on, relationships matter everywhere, but this is a country ruled by men more than law, okay? So you start there, number one. Number two, I found that in doing business, and I'm gonna get back to your more important issues, I found in doing business, that unlike some other areas of the world where people spoke the same language and smiled at you and then cheated, I found that when we cut deals with them, that they stuck to it and a handshake and so I found that and I think a lot of other business people have found that out. But so in terms of the law, one of the issues, it is a lawless society and one of the things that Xi Jinping is attempting to do, so there's two things that are doing that are just mind-boggling if you're not there. It is, first of all, corruption and that this anti-corruption campaign has already punished 270,000 people and 70 of the minister rank and so they've got a legal system that is really underdeveloped and we all say, I say and you say, how can a legal system work if the 90 million members of the Communist Party don't come under the legal system? That's not the rule of law as we know it, but there's still a lot of room to improve what they've got and they're working to set up federal courts, district courts, I know the guy I've worked with who's the head of their Supreme Court and they're now just like in property law, they're training judges that used to be party hacks, retired PLA officers and intellectual property, getting trained, they're training environmental lawyers and so they are and I think what people are gonna find like and I won't say this when we're dealing with international maritime law. I've realized very quickly I'm not a lawyer and it's way over and so the Chinese are coming up the curve very quickly in terms of their lawyers there and so I get lost in terms of what's an island and what's a shoal and what is what at low tide and so on but I do think that one of the challenges and they're working, this is a president that's working very hard to modernize his government because they don't have the tools they need to rule that country. He understands that the anti-corruption campaign is not gonna wipe out corruption just scaring people and he realizes it takes systemic, major systemic changes in terms of education, in terms of getting the government out of business, in terms of transparency and rules that they can't run the government without having built institutions. So he's driving reform through the party because it's the only institution that's strong enough to do that and why is it the only institution that's strong enough to do it is because of the party we don't have the other institutions so. Why would he say that he'd close the law schools if law comes up against the communist party? Is he arguing against themself? I would say that with him, you just have to, I don't defend this, I'm just gonna explain it, okay? In his view and there's a paradox going on to all of us, to Westerners. And let me start with something more basic. So he's looking to free up the economy. More flexibility, market decisive. At the same time, he's tightening up the political control, control on the media, the internet. And we look at that and say, those two don't square. That doesn't make any sense. And he looks at it and says anything that undermines the stability of the communist party, I'm opposing. And I think longer term, that just plain doesn't work. And in information age, I've run a global company and you wanna have outstanding companies, you wanna innovate, you need a free flow of ideas, you need to be connected, you need to know what's happening around the world. But right now, it works for him because the rights that the Chinese people care the most about, you know, going after corruption, property rights, dirty air, dirty water, you know, all these things effectively eliminating the one child policy. He's giving people what they need right now. And in terms of what he's done with the communist party, he's got this disciplinary committee, which is run by Wang Xishong. He's greatly restructured that. So it used to be, just like the court system, there was a disciplinary committee in each province. And so the party secretary, it was like having the party secretary, the Fox guard, the chicken coop. So he's now gone up and he's nationalized that and he's having the disciplinary apparatus deal with the party and the legal system deal with the rest of China. We don't think it works and they know we don't think it works and we don't think there's, but I would just say this, if you lived in China right now, you would see dramatic, dramatic changes. So this is a guy, he's looking to change all aspects of society, social, economic, political, and to do it all at once. It's actually mind-boggling. We'll take one question back here. Gentlemen in the, yes, black suit. And then we'll wrap it up. Secretary, you said, I think I heard you say that your core advice to the US is to try to operate from a position of strength. Yes. I just wanted to ask you if you could give us the key takeaway or how we create a perception of strength and also the one key takeaway for how we create the reality of strength. Well, I wanna start with the reality. And because I, again, I say this, we have the best military in the world bar none. And as someone who spent time in government, I was more impressed with career military officers by far than anyone else in government. I don't know anyone else that trains. We don't do any other training other than the military. But I say the strength derives from our economic strength. There's just no doubt about it. And we will not, if we do not get control of our fiscal situation, there's no, there's no where, no example in history with any country that continues to be a great power when they're let their economic strength erode. Just plain not. And our policies today, we need, we need our entitlements programs, if they're not fixed, we're just, we're not gonna have the money we need to do all the things we need to do as a nation. And I even go further and say, when it comes to the military, we just keep saying, we gotta spend, spend, spend more. We have to spend smarter. And our political system doesn't let us spend smarter. I've heard all the debates. I've worked in the Pentagon. You know, I've seen what goes on in terms of, are we really dealing with job creation or what's happening in this congressman's or district or Senator's state? Or are we, so we have to, I think we have to revive our economic competitiveness. We have to get a tax system that gives us the revenues we need and lets us be competitive. We need to fix our entitlements. We need an immigration policies and trade, you know? And that is not rocket science. And I'm a big believer that just takes making our political system work and it's compromised. I just got no use for ideologues on either side. And so how do we get our political system to work? A lot of this is gonna be about which political systems work? And so some people say to me, well, China's ahead of us because they're an authoritarian government. They can just do whatever they want. Well, guess again. I mean, there's huge issues in getting their political system to work. So I would say reality is going to come longer term from having the resources we need. And then in terms of military, you would know better than I the difference between projecting power and the appearance of power and the reality. But one thing I do know is that China wouldn't wanna begin to fight any war with anybody right now. When you look at their military, the first thing Xi Jinping cleaned up started was a military. And talk about corruption. You remember in the old days when the British were selling all these officers' commissions? Well, this was just rampant in China's military. But so I was saying to John, he should read the Economist article that just came out, which is really a sobering question, really questioning whether some of our long held views about what a Navy should look like and building it around these large carriers and so on was gonna work in the future. So I can't get into that. I'm, because I don't, I am practicing without a license. All I know is, all I know, and it doesn't, I don't hesitate in certain areas, but this is, we have to invest in our military. But you know what? The military, and I think we've seen it in Iraq, we've seen it in Afghanistan and so on. You know, military's got, they've got a mission, but we've got, there's gotta be a strong diplomatic approach, which was what the SED was. And there has to be strong economic leadership. And so this is part of the whole package. We're approaching the end of the time, but Secretary Paulson, you've had quite a range of leadership positions. We're here to educate and develop leaders. Most of these students are now going off to leadership positions. I just wonder if you would wanna leave them with anything in the way of your principles or a few words about what they're going off to do. Well, yeah, I, this group, you know, I just loved at Goldman Sachs or at Treasury or whatever to hire or work with former military officers because to me, in terms of leadership, I, everybody's got their own principles, but I'll just give you several that, because I not only worked with, ran a company, but I worked when I ran Goldman Sachs with all kinds of CEOs. I've advised heads of state, China, Germany, all around. And I begin by saying, I've seen leaders with wide ranges. There's no such perfect, there's no perfect leader anywhere. It just doesn't exist. And everyone's got weaknesses and they're the flip side of a strength. Hank is candid, Hank is indiscreet. Decisive Hank isn't thoughtful enough before it. And so the good leaders have the self-awareness and they surround themselves with people that let them play to their strengths and compensate for their, for their weaknesses. And if they don't do that, they get found out. At some level, you know, their weaknesses are always exposed. So that's the first thing I'd say. The second thing I would say, and I say this about, I can tell this from someone, when they're one year out of school, all the way up to senior levels, the great leaders define themselves, their job expansively. They never look at it narrowly. They just say, what's going on? And they're prepared to break class if necessary. And so that is, and they are accountable. They run to problems rather than running away. It just used to drive me nuts when someone would have a problem in their division and they'd stand up there like their spectators at the sport saying, how could this idiot have done that? You know, instead of being accountable for that. And you really learn accountability where you come from. And then the last thing I say to people all the time is it's all about working with others. The problems, I haven't, I've seen very few problems that are so complex that it takes some brilliant person to go off and solve it in their garage somewhere and then everybody's gonna say, oh, that's a great idea. We're all gonna adopt it. And so that wanted, to the extent I did well as treasury secretary, it was because when I went to Washington, unlike some CEOs that had run big industrial companies, I ran an investment bank where I was, at the same time as CEO, I was advising clients so I knew how to work with principles. And I could say to people, no matter how good your ideas are, if you can't persuade the client, it doesn't work. People said, I had all these deals with George Bush about what role I was gonna play. And he turned out to be an absolutely terrific boss. And, but I realized when I went there, none of them would mean anything if I couldn't build a relationship with him and if I couldn't, it was gonna be on me, not on him. And the reason I was able to work with Democrats and Republicans is when I called up Harry Reid the first time and he didn't even wanna talk to me, he disliked the Bush administration so much, I said, I'm thinking of you as a client. I'm secretary of the treasury, you're leading the Senate. We had him over and Wendy cooked chicken dinner for him. And we talked about baseball. But, so, how you work, and I just try to tell young people today who wanna do everything with email and not build relationships, to get anything done that's worthwhile doing. You have to motivate others, you have to care about them and you have to get them, you have to work together. And so, to me those are the, but this group I never would have ever expected to make comments because as I said, I think the best leaders in America come out of the military and I really, really believe that. They're really, really rangy people and that was my experience in Washington and hiring. Well, I guess travel schedule on five days, either side of today looks something like Chicago, China, Chicago, New York, Chicago, West Coast, Chicago, and so I just wanna thank you once again for fitting us in and follow me at work on behalf of the country. I'm honored to be here, thank you.