China pushes back against Paulson

The U.S. is trying to press free-market goals on the world's most populous country. But Chinese leaders have their own ideas, as Fortune's Nina Easton reports.

By Nina Easton, Fortune Washington bureau chief

Beijing (FORTUNE) -- Senior U.S. officials, led by Treasury Secretary Hank Paulson, arrived inside the Stalinist-style Great Hall of the People Thursday morning, briefed and breakfasted and eager to offer guidance to Chinese leaders on how to become a "responsible stakeholder" in the global economy.

But Vice Premier Wu Yi had other ideas. Like an impatient schoolmistress, she opened this historic gathering with a lecture. Her talk was one part history lesson (China has 5,000 years experience as a global citizen) and one part 21st century civics lesson (the goal is a "socialist harmonious society"), with no sign that her regime sees any need for major economic reform.

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U.S. Treasury Secretary Henry Paulson is greeted by Chinese Vice Premier Wu Yi before a banquet.

"We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," she began, striking a less-than-diplomatic note. "This is not conducive to the sound development of our bilateral relations."

It was a telling start to the first day of the Strategic Economic Dialogue, a forum that Paulson bills as a long-term conversation aimed at prodding Beijing to adopt more Western-style economic reforms. The U.S. priorities include policies to encourage consumer buying, piracy policing, a more flexible currency and a reduction in the trade surplus. Pollution, growing energy needs and stubborn poverty - all plaguing China's booming economy - are also high on the agenda.

Yawning divide

The two-day meeting - an unprecedented gathering in Beijing of U.S. cabinet secretaries, agency chiefs and the Federal Reserve Board chair - opened with a public relations flurry of goodwill gestures. U.S. Commerce Secretary Carlos Gutierrez announced that Home Depot (Charts) will buy a chain of 12 local hardware stores; that GE (Charts) Aviation had signed a $550 million deal with Shanghai Airlines; and that Oshkosh Truck Corp (Charts). will supply rescue equipment to a regional airport. Even China's currency - whose low value has prompted Capitol Hill Democrats to threaten to impose tariffs - gave a healthy tick upward on the opening day.

But the yawning divide in worldviews between the two nations was on vivid display, even in its visuals. Inside the Golden Hall, a high-level government meeting room with all the intimacy of a high school gym, 72 Chinese officials sat on one side and 48 American officials on the other. At the center, more than a dozen principals from each country sat across from each other, divided by banks of video screens and pots of poinsettias.

Shortly after both delegations took their seats, the media was barred from the room and had to rely on speech texts from Wu and Paulson, and interviews with U.S. delegates, to describe the proceedings. In delivering her 20-page presentation, which included slides to illustrate points on Chinese history, Ms. Wu made clear that the Chinese regime believes it has carved its own responsible global economic path, and isn't especially eager for the Americans' free-market advice.

According to the English translation of her remarks, she repeated six times that China was "sticking to" its "new path of industrialization," and three times that China was "continuing to improve" on reforms already in place. Substantial free-market change wasn't part of the equation. "By following a path of building socialism with Chinese characteristics in an independent and self-reliant manner," she said, "we have scored glorious achievements that attracted worldwide attention."

Nor does the leadership intend to slow a GDP growth rate that has averaged nearly 10 percent since 1979. "China has the potential and conditions to maintain fast economic growth for a fairly long period," she noted. American officials insisted they welcomed the candor.

And Labor Secretary Elaine Chao said the tone of the remarks, dwelling on Chinese history, reflected cultural differences. "They were trying to set the context," she told reporters later. "That's a very Eastern way of communicating." Still, the Vice Premier's speech starkly demonstrated that the two governments continue to operate in parallel universes on economic policy.

Later in the morning, after a presentation by Ma Kai, chairman of the National Development and Reform Commission, celebrating China's industrial planning, U.S. Trade Representative Susan Schwab gave a spirited rebuttal, arguing that, historically, government intervention in markets has led to "less stability, not more; less development, not more." "I put on my old academic cap and talked about different development paths," said Schwab, a former university dean who once negotiated with China on behalf of Motorola (Charts).

Veiled barbs

The Chinese, on the other hand, were eager to point out their own concerns about American policy. Ms. Wu's remarks included veiled barbs at the U.S., noting that China had ratified the Kyoto Protocol on global warming and was "fully harnessing world peace" in its global economic development. The United States did not ratify Kyoto, and remains bogged down in an unpopular war in Iraq.

The Chinese also complained about U.S. national security policies that limit sensitive high-tech trade and acquisitions of American firms, according to Gutierrez. The American delegation, he said, was forced to "clarify" a perception that U.S. policy was moving toward protectionism.

Gutierrez praised the first day of the session for being "an honest, solid dialogue." But, like other U.S. officials, he wanted reform to move forward faster than the Chinese appeared willing to go. "We've got to move as quickly as possible," he said. "You're talking about a lot of business, and a lot of jobs, on both sides."

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