Henry Paulson made improving relations with China one of the central priorities of his tenure as U.S. Treasury Secretary. But after leaving office, he seems to have been caught up in a rearguard action to protect his reputation in a country he has spent years visiting.
For the last month or so, Mr. Paulson has been repeatedly attacked by name in Chinese state media for reportedly claiming that the global financial crisis was China’s fault. This week, China’s official Xinhua news agency said Mr. Paulson had sent it a statement clarifying his views.
‘In assessing the financial market crisis, I have repeatedly and consistently targeted the vast majority of my criticism at problems in the United States, particularly our flawed and outdated regulatory structure,’ Xinhua quoted Mr. Paulson as saying. ‘Whenever I have commented on global imbalances, it has been against that backdrop and I have gone out of my way to say that no single country is to blame for the imbalances.’
The origin of the exchange seems to be a January article in the Financial Times that paraphrased Mr. Paulson as saying that ‘in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters ─ at a time of low inflation and booming trade and capital flows ─ put downward pressure on yields and risk spreads everywhere.’
Those comments were widely interpreted as casting blame for the outbreak of the crisis on China. That was, to put it mildly, not well received. A commentator for the Xinhua news agency in January wrote that those ‘remarks made headlines but cannot change the facts. It is widely accepted that the U.S. low interest rate policy, which encouraged excessive spending and caused the sub-prime crisis, was at the root of the problem.’
‘When a morally upright person is mired in difficulties, he or she will engage in introspection rather than shift responsibility,’ the Xinhua commentator wrote. ‘It is not time to play a blame game.’
To be fair, it doesn’t seem that Mr. Paulson ever actually put the blame for the crisis squarely on China’s shoulders. His clarification to Xinhua does not differ much from remarks he made while in office, when he highlighted both failures in the U.S. as well as global factors.
For instance, in a speech in Washington on Nov. 12, Mr. Paulson said, ‘We in the U.S. are well aware and humbled by our own failings and recognize our special responsibility to the global economy. The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions.’
It is now widely accepted that ‘global imbalances’ – economists’ shorthand for the combination of large current-account surpluses in Asia and the Middle East and large current-account deficits in the U.S., U.K. and some European nations – played some role in setting the stage for the financial crisis. But by their nature, these capital flows among nations are hard to ascribe to one country alone.
In the Nov. 12 speech, Mr. Paulson said: ‘Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.’
Mr. Paulson was really making the suggestion, on the face of it fairly reasonable, that a global crisis probably had global origins. And the enormous increase in the size and openness of China’s economy means it has clearly influenced the shape of the global economy. But drawing attention to China’s role in the lead-up to the crisis seems not very welcome there.