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loans, low-cost land, and government

research and development subsidies


C O M M E N TA RY
don’t necessarily violate wto rules.
Such help is proper, contends Wang BY ROBERT LAWRENCE KUHN
Yong, director of Beijing University’s
Center for International Political Econ-
omy. For 20 years, China has given
many breaks to lure multinationals,
which now dominate markets for cars,
cell phones, and other goods. “Keep in
A Problem of Perception
mind that the growth we’ve seen has Why China and the U.S. aren’t on the same page
been mainly driven by foreign-invested
companies,” Yang says, “while domestic
companies have suffered a lot.” Besides,
subsidies that could be deemed unfair

C
trade practices, such as free loans to hinese president bused students from college campuses
steel or paper mills that export, are dif- Hu Jintao arrives in across Beijing to the U.S. Embassy to
ficult to document due to weak govern- protest, American politicians assumed
ment and company disclosure. Seattle next week for that Chinese leaders orchestrated the
Aggrieved companies can always file his first state visit to the demonstrations to whip up nationalistic
antidumping suits in the U.S. against U.S. During meetings fervor. (To lawyers, the evidence was prima
with the likes of William H. Gates facie.) In truth, the Chinese leaders—the
OLYMPIC MASCOT III, Yale University students, and engineers—worried that if protesting stu-
dents were allowed to march through the
Beijing is finally President George W. Bush, city, their ranks would swell with workers
determined to
stop forgeries there will be plenty of talking. Given and ordinary citizens, creating an even
the huge geopolitical and economic larger, less manageable problem. So bus-
stakes riding on that dialogue, it’s appro- ing them contained, rather than exacer-
priate to ask: Why do China and America bated, the volatile situation.
have such difficulty communicating? Another dichotomy: More than 90%
Sure, the two nations are half a world of Chinese, including professionals often
apart, geographically, historically, and critical of their government, saw the
politically. But the cause of their at times bombing as deliberate. But most Ameri-
specific Chinese cacophonous discourse could lie in cans believed the bombing had been, as
manufacturers that something less obvious: the strikingly U.S. officials claimed, an accident due to
export at below-market different academic training the use of “old maps.”
prices. The U.S. slaps punitive duties on
Chinese imports in dozens of cases each
of their political leaders.
The majority of Ameri- Hint: China’s Why such disparity? The
Chinese have an idealized
year. But the litigation is time-consum-
ing and expensive, especially for small
can senators and congress-
men were schooled as
leaders are picture of the U.S. as so
technologically advanced
U.S. companies. “We’ve considered a
dumping suit, but a lot of our members
lawyers. But each of Chi-
na’s senior leaders—all
trained that it would have been im-
possible for it to make such
don’t have the money and time,” says nine members of the Polit- engineers. a stupid mistake. Ameri-
Purchasing Manager Zachary J. Mottl of
Lyons (Ill.)-based Atlas Tool & Die
buro’s Standing Commit-
tee—was trained as an en- America’s cans, on the other hand, are
quite used to their govern-
Works. Mottl is a director of a U.S. asso-
ciation of small manufacturers: Its
gineer: President Hu in
hydropower, Premier Wen
are lawyers ment’s stupid mistakes.
More worrisome, most
membership has dropped from 1,600 to Jiabao in geological struc- Americans perceive China
1,200 in six years as many succumbed to ture, for instance. Perhaps as an economic predator
super-cheap Chinese imports. “By the the difficulties between China and the concerned solely about its own welfare.
time they get a remedy, they already U.S. lie less with dissimilar languages, Beijing does not deny its policies benefit
would be bankrupt.” cultures, and histories, and more with its own people, as any legitimate govern-
What can be done to achieve radical the divergent ways of thinking between ment’s would. But it asserts that in a glob-
change? “You will not litigate a country lawyers and engineers. al economy, China’s stability and devel-
into changing its more important prin- This is no small difference. Engineers opment are essential for world peace and
ciples on how to run its economy,” says strive for “better,” while lawyers prepare prosperity. Disturb the former, it warns,
a U.S. trade official. Washington can for the worst. Failing to appreciate the and you disrupt the latter. Given that con-
bring Beijing to the bargaining table implications of these different approach- sequence, it’s time the lawyers and engi-
with wto threats, but progress will be es (and the relating styles they engender) neers began communicating better.
slow. China the heavyweight will set the can lead to missed signals.
rules for some time to come. ❚❚ Such miscommunication occurred Robert Lawrence Kuhn, author of The
–With Dexter Roberts in Beijing, when a U.S. plane accidentally bombed the Man Who Changed China: The Life
Nanette Byrnes in New York, Chinese embassy in Belgrade, Yugoslavia and Legacy of Jiang Zemin, is a Senior
and Michael Arndt in Chicago in 1999. When the Chinese government Advisor at Citigroup Investment Banking

April 24, 2006 | BusinessWeek | 33


ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

CNBC “On The Money” – December 28, 2005


Robert Lawrence Kuhn: Investment Banker, Advisor to China,
Author, “The Man Who Changed China”

DYLAN RATIGAN (host): We turn to China. It is now one of the top six economies
in the world, but it is poised to take over the number four slot, worldwide, after the 2005
numbers come in.

Robert Lawrence Kuhn, Senior Advisor at Citigroup Investment Banking, focuses on


China for them. He is also the author of a book by the name of The Man Who Changed
China: the Life and Legacy of Jiang Zemin. It is the best-selling book of the year in
China. And, in a sentence, this Dr. Kuhn is very well-informed on China, and we
welcome him to the program.

ROBERT LAWRENCE KUHN: Thanks.

RATIGAN: I have a market and mathematical conundrum. There has been lots of talk
about the sensational Asian market performance. Japan’s fantastic. South Korea, record
highs. India continues to go gangbusters. You ask people, “Why South Korea? Why
Japan?” Well, they say, it’s because they’re so close to China. It’s the proximity to
China. But you look at the Chinese stock market, and it’s not doing anything.

KUHN: China is a complexity. It is the most important country for the United States.
The bilateral relationship between the U.S. and China is vital for the peace and
prosperity of the 21st century. Trade is a problem and a major issue – we’ve got to get it
right. On the one hand, we have a huge trade imbalance, and on the other hand, as you
say, the Chinese stock market has been depressed in the last several years. That’s the
conundrum of China, which is why it’s so important to get our relationship right.

China has a huge manufacturing base and they need manufacturing to drive jobs in
order to keep their economy growing at a sufficiently high level – eight, nine percent a
year – which is necessary because of all the problems China has with unemployment.

The Chinese under-consume and over-save, whereas Americans over-consume and


under-save. This creates a huge flow of capital that goes from America to China [the
trade imbalance]. When the Chinese get our money for their products, they send it back
here as a loan [China buys U.S. Treasury securities with their surpluses]. We use their
money, borrowed money, which enables us to have a high rate of consumption, even
while we maintain a low rate of savings. But this cannot continue forever, and China
has some endemic problems with their system.

RATIGAN: What are the problems?

KUHN: The transition from a planned economy. For decades, China had one of the
worst economies in the world until the period of reform that began in 1978, and it is
only since the early to mid 1990s that China’s economy really began to burgeon.

RATIGAN: They’re buying too much of “x” and they don’t have enough of “y”? Is
that what you mean?

KUHN: In the past, China’s economy was managed by bureaucrat “planners” sitting in
Beijing and deciding who should make what, say, how many shoes a factory should
produce. And even when the factories manufactured what they had been instructed to

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make, nobody wanted to buy those products! That’s the problem of a planned
economy. The transition from a planned economy to a market economy is exceedingly
complex, especially in a country with 1.3 billion people. And all the complexities of the
system make it difficult for anyone, especially investors, to understand what is really
going on. Chinese enterprises are not used to being open and accountable. And if
they’re not open, they can’t do proper accounting and cannot report actual numbers in
which investors can have confidence. If they can’t do proper accounting, the stock
market depresses their prices. It’s a natural reaction. This transition will take time.

RATIGAN: Another riddle for you. Recently both Governor Schwarzenegger and
then President Bush made trips to China, and there was a lot of clamoring in the U.S.,
such as from people at Harley-Davidson, that our leaders should tell China to buy more
American products, such as Harley-Davidson motorcycles for their police force. And
they should buy American for their medical needs. It is unclear to me what leverage an
American leader -- whether the president, governor or CEO -- has with Chinese officials
to persuade them that they should buy American products.

KUHN: There are two issues here. First is the quality of the American product itself
versus those of other countries. American products may or may not be the best in
terms of quality and price. And second is a recognition by China that they must be
responsive to America.

RATIGAN: Why? Why must they be responsive?

KUHN: Chinese leaders understand that China’s relationship with America is critical
for its current existence because of the demands of their still-fragile economy and for
the stability of the world [because of America’s geopolitical position and leadership].
So they want to get it right with America.

RATIGAN: So what does China get? In other words, the more accommodating and
responsive China is to U.S. demands, what do they receive in exchange for that
accommodation?

KUHN: Stability. China needs their factories to be able to sell products to America to
keep their economy growing at the rate it must maintain, considering the social dangers
of unemployment of rural citizens who become migrant workers, of those laid-off from
archaic state-owned enterprises and of young people entering the workforce. China is
addicted to growth. They must have growth. But at the same time, they have multiple
interests, so they need to balance them.

America may be most important, but China also needs to deal with Europe and the
developing world [the Chinese call for a “multi-polar” world]. They need energy from
Africa and the Middle East. They have a complex foreign policy, and America is
critical to it. China does not want American politicians or the American public to
become so upset with the trade imbalance that we apply mutually destructive tariffs or
react in a way that will hurt both our countries and citizens. So, therefore, they have to
make some accommodations, such as on trade and buying American products.

RATIGAN: I could go on all night with this but they’re not going to let me. It’s a
pleasure to have you with me. Thank you very much for coming out.

KUHN: Thanks, Dylan.


ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

CNBC “Squawk Box” – September 13, 2005


Robert Lawrence Kuhn: Investment Banker, Advisor to China,
Author, “The Man Who Changed China”

MARK HAINES (HOST):


Better late than never—President Bush is meeting with Chinese President Hu Jintao today
in New York, one week later than planned. The meeting was delayed, of course, because of
the Hurricane Katrina disaster. It’s expected to be a brief meeting, but the two world
leaders still have plenty to talk about. Joining us with his thoughts on the issues shaping
today’s meeting and possible outcomes, an economic advisor to the Chinese government,
an investment banker, and author of the best selling book in China this year, The Man Who
Changed China: The Life and Legacy of Jiang Zemin, Doctor Robert Kuhn joins us from
Burbank, California. Doctor, good morning, good to see you.

ROBERT KUHN:
Good morning, Mark. Good to see you again.

HAINES:
What do you think these two will talk about in whatever time they have?

KUHN:
President Hu Jintao has an agenda that has four points. Number One: Relations with
America are critical for China's continued development. Number Two: China is not a threat
to anyone; there is no China threat. China’s rise will be peaceful and imperils no one.
Number Three: With all the hype, China is still a developing country needing twenty,
maybe fifty, years to become even a mid-level developed country. And Number Four: Even
though China is not a democracy [by Western standards], the Chinese government cares for
its people and will be instituting political reform, human rights reform, but over a long
period of time and in a controlled manner. That’s President’s Hu's agenda.

HAINES:
Let’s talk about number two. Aren’t they spending, in fact, a lot of money on military
buildup?

KUHN:
Sure, and that is something that we should be concerned about.

HAINES:
How come they say, then, that they’re not a threat if they’re spending all this money on
beefing up their military?

KUHN:
China’s issues are twofold. First is that it seeks, like any other country, to protect what it
determines to be its national interests. And second, the most critical issue that we face is
Taiwan. It’s fascinating. You can talk to vast numbers of Chinese people who criticize the
government, but there’s a [widespread] nationalistic sense over Taiwan. That’s the one
sensitive issue.

HAINES:
And they fear an invasion from Taiwan?

KUHN:
Well, they feel that Taiwan is the last vestige of a hundred and fifty years of foreign
oppression.

HAINES:
So they’re preparing to take it by force?

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KUHN:
China’s policy is that the only way to prevent Taiwan from declaring independence is to
leave the threat of force ambiguous. And, if they didn’t do that, then it would be a natural
way for Taiwan to declare independence. So China believes that keeping the military
option open is the best way to prevent any military action [from happening]. Our role is to
manage that process in the same way that we’ve been doing it for many years—keeping
America’s role strong, but ambiguous about response—this is the traditional approach—
and allow economic integration, which is occurring [to bring about ultimate resolution].
The Taiwanese are investing enormously in mainland China and the relationships between
the old Kuomintang Party and the Communist Party, which were mortal enemies for
decades, are suddenly very conversant, and we should encourage that process.

JOE KERNEN (Co-Host):


It’s interesting you said Taiwan is a critical issue but not North Korea. Are we happy with
China’s cooperation with that situation?

KUHN:
North Korea is a fascinating situation because there really is internal controversy and
dispute in China about their reaction. China doesn’t want North Korea to have nuclear
weapons. That’s a disaster for China. But it has problems if it allows the North Korean
government to be undermined. Their worry is a short-term problem of hundreds of
thousands of refugees pouring over the border. So China is in a bind over North Korea,
frankly. We should encourage China and put pressure on China to continue to support our
position, which most senior leadership people in China know is the correct view.

KERNEN:
Do you think that President Bush will hear some unhappiness with what finally happened
with CNOOC and Unocal?

KUHN:
I am not sure that will come up in a brief meeting. The Chinese government has gone out
of its way to have its media downplay the nationalism that was starting to erupt. I believe
that [the CNOOC affair] was an unfortunate incident. I think that American interests are
served by having Chinese companies invest in America. That integrates our economies
closer together, which is good for the standard of living of everyone.

HAINES:
No one’s arguing that. The issue with CNOOC was…

KUHN:
If China comes here and invests, we have their assets.

HAINES:
The issue with CNOOC was that it was oil. No one argued about when they want to buy a
washing machine company or IBM’s computer stuff. The issue was oil. And I’m getting
tired seeing this misrepresented in the mass media, people saying that America’s against
having Chinese buy American companies. That wasn’t it.

KUHN:
Well, I think it’s a combination. I think the strategic issue of oil is right. But if you look at
oil, it’s fungible in the world. It’s a world pricing. It’s debatable on both sides. I think it’s
an emotional issue that will pass.

HAINES:
All right. Robert, thank you very much for your views, we appreciate it. Robert Kuhn,
author The Man Who Changed China: The Life and Legacy of Jiang Zemin.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

CNBC “On The Money” -- May 9, 2006


Robert Lawrence Kuhn, Ph.D.,

RATIGAN:
Now we look at China's future. Robert Lawrence Kuhn is senior advisor to Citigroup
Investment Banking. He's also the author of "The Man Who Changed China: The Life
and Legacy of Jiang Zemin." The book was the top seller in China in 2005. Robert, what
will happen if China fails to solve some of its manufacturing inefficiencies?

Dr. ROBERT LAWRENCE KUHN:


China's historic transformation was founded on it being the low-cost producer. That
made certain sectors of society rich, which caused economic imbalances between
sectors. President Hu Jintao wants to create a “Harmonious Society,” and to do that, you
have to rebalance society.

When you rebalance society, salaries go up, and as a result China is no longer the low-
cost producer. So China must innovate in order to maintain its growth. If China doesn't
maintain its growth, its society will be in trouble, and if China is in trouble, the rest of us
are too.

RATIGAN:
So, if we are to accept that China at some point will no longer be the low-cost provider,
what then becomes their competitive advantage?

KUHN:
They have to create it, and innovation is the key. President Hu is now focusing on
innovation; universities are focusing on it. China must move up the value curve,
producing higher value, higher margin goods, just like Japan did and South Korea did.
They have to do this.

RATIGAN:
At the same time, will we see China emerge as the consumer market that has been so
lusted for by American businesses for decades?

KUHN:
It has to happen. The key for China is that Chinese consumers have to save less and
spend more -- just like American consumers have to do exactly the reverse: save more
and spend less. This will get a big part of our trade problem solved. And the Chinese
government is concerned about this: they're encouraging people to spend more.

How? By providing social services so people don't have to save in fear of having to pay
hospital bills or to support their old-age retirement. So there are plans afoot. The
domestic market is developing. There are problems, but that domestic market is real.

RATIGAN:
What's the health of the Chinese banking system? It has been long believed that the
Chinese government was hiding all sorts of bad loans or encouraging the Chinese banks
to do that. Today the Wall Street Journal is reporting we could see an IPO here from the
Bank of China.

KUHN:
Let's look at what the major Chinese banks were – they were in essence subsidizing
funnels into which the government poured money in order to subsidize state-owned
enterprises, which were really moribund. That purpose began to change several years
ago. The government took out the bad loans [putting them into special-purpose
companies that hold and sell off bad loans]; they recapitalized the major banks with tens
of billions of dollars.

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They also brought into those major banks some foreign financial institutions to help
change the bank’s management style and structure and to create a credit culture in those
banks (as opposed to what they were as “subsidizing funnels’). This transformation is in
process, it is working, and the banks, because they are so strong, are very good plays on
the entire Chinese economy.

RATIGAN:
Interesting stuff. We'll keep track of that if they offer it here in the US market. Robert,
have a good night.
CNBC “High Net Worth” – May 21, 2006
Robert Lawrence Kuhn, Ph.D.
Melissa Lee, Host:
Joining me now, with some insight on investing in China, is Robert Lawrence Kuhn,
Senior Advisor, Citigroup Investment Banking, as well as the author of The Man
Who Changed China: The Life and Legacy of Jiang Zemin, the best-selling book in
China in 2005. Robert, welcome.

Robert Lawrence Kuhn:


It’s a pleasure to be here.

Lee:
I have to ask you, your book was the best seller in China last year; how much of it
was censored? It’s a pretty sizable book.

Kuhn:
Some of the material, such as explaining common things about China, is not
relevant to the Chinese market. There is probably about 10 to 15 percent taken out
for political reasons. What is more interesting is what was left in. Much of what I
wrote, for example about international affairs, reflects how Americans think,
understandings that much of the Chinese public had not before read. Indeed, my
Chinese publisher put in a disclaimer: “Although the author has considerable
understanding of China' s national situation, history and traditional culture, he is still
a Westerner and certain of his viewpoints and opinions bear a definite distance from
those of our own. Hopefully the reader will understand and take care.”

Lee:
Let’s talk about investing in China for "high net worth" individuals. What is the best
way? Viewers just heard my piece about the record year for private equity in China
last year. Is that still the best way to invest?

Kuhn:
A “record year” is good news and bad news. If you have a great deal of money
going into China, you have to be nervous that too much hot money will chase too
few good deals. The Chinese stock market, as we all know, has not performed well
over the last few years – due to some structural uncertainties, such as overhangs of
government-owned shares, and to issues of transparency and confidence in
numbers.

So, right now, indeed, private equity, for those who can tolerate the risk and long
lock-up period [illiquidity], is a good entry vehicle. But private investors have to be
careful, since liquidity is generally only attained through public offerings, which in
China is an uncertain process. You really have to know what you’re doing. There
are many problems that can arise, so as a private investor you must invest with
experienced partners. For corporations making strategic investments, it’s very
different.

Lee:
And certainly China has seen past booms in investment. What have you seen that
makes you think that perhaps the growth now is a bit different? What’s changed
politically? What’s changed economically?

Kuhn:
First of all, you have political stability in the country. The great contribution of former
president Jiang Zemin was that China became a more normal country. Now, under
President Hu Jintao, there is recognition that China must build what he calls a
“Harmonious Society” by utilizing a theory of “Scientific Development Perspective.”

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restrictions cited above can result in potential liability, including responsibility for costs associated with any damage claims that may occur.
This means that society must be rebalanced, rectifying the current imbalances
between rich and poor [urban and rural, coastal and inland] by elevating incomes of
everyone. The Scientific Development Perspective also deals with environmental
pollution, energy constraints, sustainable development. All of these issues have to
be solved simultaneously. This will create a more stable society, which is what
investors require. The kind of growth that we will be seeing in the future in China will
be a more secure growth, rather than the great oscillations of the past.

Lee:
In talking to a lot of investors who are in China now, one of the “investable” themes
that they mention is the burgeoning middle class. You just mentioned that there is a
tremendous gap between the upper level income and the lower level income. How
has that changed? Are we actually seeing signs that this middle class is actually
growing, and is this an “investable” theme?

Kuhn:
The middle class is critical. A good surrogate for the middle class is the number of
cell phones. Today there are over 400 million cell phones. By the Olympics, in
2008, there will be 500 million. People with cell phones are going to have other
kinds of buying interests; this is the class of people that will fuel continuing
economic growth.

Over time, China wants to bring the whole of the country up to what they call a
“modestly well-off society.” That’s leadership’s goal for the next 15 or 20 years. It’s
difficult to do. But in the process, as all people begin to make more money, China,
which used to be the low-cost producer in the world, starts to have a higher cost
basis in its vast manufacturing capacity. This means, as President Hu emphasizes,
that China must innovate. We’ll see China developing up the value curve, as did
Japan and South Korea, becoming more of an innovative nation.

Lee:
When Americans here in the United States talk about China, it’s usually in the
context of it being a rival to the United States. But what are some of the areas in
which U.S. firms are finding opportunity to invest, and how can U.S. investors
benefit from that?

Kuhn:
To talk of China as a rival (or a “threat”) is effectively a self-fulfilling prophecy. The
st
way that the 21 century will be most peaceful and most prosperous is for America
and China to work together as partners in the world. There is so much natural
interdependency. China depends on America for its growth in terms of exports, in
terms of technology. American firms have great opportunities in China in many
different industries. There are now few areas which are off limits, such as defense,
media; there are restrictions in financial services. But look at all the aspects open
to foreign investment, such as supplying the needs of a burgeoning middle class in
consumer products, in health care, in the service industries, even areas of media
are opening up. These are the new areas that will be developing rapidly. And these
are the great opportunities in China.

Lee:
Robert, thank you for your insights.

Robert:
It’s been a pleasure.

Lee:
Robert Lawrence Kuhn, Senior Advisor of Citigroup Investment Banking.
CNBC “Power Lunch” – April 19, 2006
Robert Lawrence Kuhn, Ph.D., and John Rutledge, Ph.D.

Bill Griffeth, Co-Anchor:


When President Bush hosts a luncheon for Chinese President Hu Jintao tomorrow,
obviously, it’s a meeting of two superpowers. China is the fastest-growing economy in the
world. It’s expected to surpass ours in the not-too-distant future. The question is: Should we
view that as an opportunity or as a threat?

Joining us to talk about all this are a couple of guys who should know: John Rutledge,
\ Chairman of Rutledge Capital and also president of the Mundell International University
Business School in Beijing; and Robert Lawrence Kuhn, senior advisor on China for
Citigroup Investment Banking. He’s the author of the biography of President Hu’s
predecessor. The book is called The Man Who Changed China: The Life and Legacy of
Jiang Zemin.

Good to see you both. Thanks for joining us today.

Griffeth:
John, you and I have known each other almost 25 years, and in that entire time, we have
always paid lip service to the day when this would come, when we would talk about China
as the emerging economic superpower. It’s upon us now, isn’t it?

Rutledge:
Absolutely, Bill. China has made huge changes. It’s a place that most Americans don’t
really understand. We still think of it as Mao with his Little Red Book. It’s not. It’s quite
capitalist. They’re selling off public companies, and the young kids are studying English.

They’re going to grow at a high rate for a long time. The only way to do it, though, without
fighting people, is to do it without using oil, which means there’s a big push into IT that’s
just starting, and that’s the next competitive situation with China, not manufacturing.

Griffeth:
And, Robert, isn’t it rather interesting and significant, that President Hu’s main part of his
agenda during his tour here—not only in the United States, but also in Canada and
Mexico—is meeting with business leaders, not politicians?

Kuhn:
President Hu has a very clear agenda of presenting China to the world as a responsible
country, taking its appropriate role as a great nation among all the great nations of the world.
He has several objectives.

First, he wants to maintain stability; China needs stability to maintain its vital domestic
development. Second, it’s energy. Third, he’s concerned about Taiwan—Taiwan is an
important issue and we have to address it. And, perhaps fourth, there’s a dignity to the state
visit: President Hu is representing the reemergence of China, after perhaps five hundred
years, as this great and responsible nation.

Griffeth:
There are so many things we could talk about, so let me narrow it down to a few sticking
points right now, especially as it pertains to trade, which will be on the agenda for the
luncheon that President Hu will have with President Bush on Thursday. How hard should
the U.S. push China on the revaluation of its currency and allow it to flow, John? They took
the baby step last year, but how hard should the U.S. push beyond that?

Rutledge:
I think it’s a terrible mistake for the U.S. to try and force China to change its currency. It’s
completely motivated by politics in South Carolina and New York and other places. The

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Renminbi fixed to the dollar is simply a way of tying the Chinese inflation rate to our Fed.
That’s why they have stable prices. Stable prices are important to the Chinese government
because it stabilizes social and political unrest in China.

Griffeth:
But, in the meantime, we’re losing jobs over here because of the cheaper goods that we’re
importing from them.

Rutledge:
No, not at all. It’s not the Renminbi that’s doing that; it’s the fact that China and the U.S.
have vastly different supplies of resources. We’ve got a lot of capital; they’ve got a lot of
people. People are cheap there; capital is cheap here. Physical capital is trying to get out of
the U.S. into China, and people, the other direction. But, today they come in over the fiber
optic cable. Immigration is obsolete, technically, because you can pump in all the people
you want over a phone line to do service work today.

Griffeth:
Robert, do you agree on that issue?

Kuhn:
Yes. If we force China to artificially increase the value of the yuan, other countries will fill
in that gap. American jobs won’t be protected; American consumers will wind up paying
higher prices for slightly inferior goods; and nobody will benefit from that.

Griffeth:
Would that necessarily be an artificial raising of their currency? Isn’t it artificially low now?

Kuhn:
It’s a natural balance. Some American pressure actually is good, but we shouldn’t only focus
on the revaluation of the currency. I think that’s a piece of it. Protecting intellectual property
rights is also a piece. And so is encouraging China to continue to open their markets to
American companies.

If we go back to 1980, there were 23 American companies that had invested about $120
million in China. Today, it’s about 49,000 American companies that have invested about
$51 billion. So, there’s great progress and great interconnections. We need to encourage
more of that.

Rutledge:
Chinese currency is not convertible. That means if you have it in your pocket, you cannot
sell it for dollars. Convertibility is the issue, not the value of the currency, because there’s
no way to trade that currency in the markets. Today there’s a huge amount of wealth that’s
built up inside China from the growth that we were talking about. That wealth is in the
pockets of a small number of people who cannot get it out. If you convert this currency, and
make it an open market, those people are going to move their buckets of money out of
China. You are more likely to see the yuan go down than up, initially. It’s an unconvertible
currency. Historically, most countries in the world have had fixed exchange rates.
Convertibility is the issue.

Kuhn:
The key to the problem is to get Chinese consumers to spend more and save less; and
American consumers to save more and spend less. That’s the problem.

Griffeth:
Good to see you both. Thanks for joining us today very much.

John Rutledge of Rutledge Capital and Robert Lawrence Kuhn, the author of The Man Who
Changed China: The Life and Legacy of Jiang Zemin.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
The Bloomberg Big Picture – October 13, 2006
Interview: Robert Lawrence Kuhn, Ph.D.
Cathleen Campion, Host:
The U.S. economy is the largest in the world, of course, but it’s regularly affected by
decisions made in Beijing. The U.S. trade deficit with China hit another record last
month. American business purchases from China whenever it can. The U.S.
government contends that China competes unfairly by keeping its currency value
artificially low and ignores widely accepted copyright practices. These are all ongoing
issues. Robert Lawrence Kuhn has looked at them for years. An investment banker
and Senior Advisor at Citigroup, he is an advisor to the Chinese government. Robert,
good to have you back with us.

Robert Lawrence Kuhn, Investment Banker, Senior Advisor to Chinese Government, Citigroup:
Kathleen, it’s good to talk to you.

Campion:
American producers argue they cannot compete with Chinese imports, partly because labor is so
cheap in China. Now, China’s moving, for its own reasons, to empower labor unions. Why do they want
to do that?

Kuhn:
I think it’s a very good sign. The motivation is clear – to help its workers -- and it’s fascinating, because
if you view it from a historical perspective, a Communist country that is theoretically being governed by
the workers would not need labor unions. However, the China has changed. The whole economy is
moving to a market economy, and so now there has emerged a very large disparity in Chinese society
between rural and urban, between workers and owners, between Eastern and Western; and these
social differences have converted China from being the most egalitarian country in the world –
everybody was equally poor 30 years ago – to a country that is galloping in its growth, but has suffered
this tremendous difference in society between workers and owners and managers. So, labor unions is
a natural evolution.

In fact, I have been preaching this gospel in China for many years, that labor unions are something that
they should adapt, not as contradicting the Communist regime, but rather as a self-organizing
mechanism that is an integral part of a complex, modern society and helps develop a dynamic balance
between economic efficiencies for companies and fairness and equity for workers. So I look upon labor
unions very positively for Chinese workers and for beginning to alleviate some of the problems of
disparities in Chinese society.

Campion:
So it’s a domestic policy. Let’s see if we can sort out some of the impact abroad. The 62 Wal-Mart
stores in China have unions now. It’s sort of an ironic move, given Wal-Mart’s resistance to labor
organizing here.

Kuhn:
It certainly is.

Campion:
Is that purely a “when in Rome” move on the part of the retailer?

Kuhn:
I would think so. One needs to do whatever one can to adapt to customs and circumstances in each
country. And these labor unions, while different in China than they are here, are still under the authority
of the Communist government. But China is developing new centers of power, and this is increasing
slowly. Pluralism in Chinese society is something everyone should applaud.

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Campion:
”Slowly” does seem to be an operative word. You’ve cautioned us about this before, Robert, that
Chinese culture and economy and everything else moves at a Chinese pace.

Kuhn:
Well, it’s the way they think, and for good reason. No country has suffered as much as China has. The
confusion and turmoil has been caused both by foreign oppression and, even more so, by internal
policies. The Cultural Revolution is still fresh on the minds of many of the leaders; they remember
vividly what can happen to China when instability grows rampant, no matter what its cause. Stability is
the highest good in China.

And therefore, every new policy, every aspect, is tried slowly. It’s experimented with in isolated areas,
and if and when it works, it’s then expanded. But everything is done slowly and carefully. It’s difficult,
but that’s the only way they can operate.

Campion:
Americans buy rafts of Chinese products, and American business is pushing into China with
enthusiasm. Now, China is encouraging labor unions. It’s an effort to close the gap between the
“haves” and the “have-nots” in their powerhouse economy. Robert, since Wal-Mart buys so much of the
product itself here in China, and since its success is based on very low prices, do labor unions in China
ultimately undo the Wal-Mart model?

Kuhn:
Labor unions don’t undo it, but they will certainly begin to change the dynamic. Labor unions will
increase workers’ wages which will because producers’ prices to rise, which will then stimulate China to
move up the value chain. President Hu Jintao is calling for creativity and innovation throughout
Chinese society. The process is a normal one in the world: Japan went through it in the 50s and 60s,
then South Korea. China’s just following the same general trajectory of development; but of course,
with a much larger population. They will still be able to fuel an economy with cheap manufacturing for a
long time. But the move up the value chain is an inevitable process, and we should encourage it. As
China must increase the wages of its vast population, it will have to shift to goods of higher added
value. Instead of relying entirely on cheap manufacturing, it will produce more innovative products,
more branded products, and this will increases the output and the efficiency of China, which will benefit
both China and the world. Hopefully in the future, other areas of the world will become the low-cost
producer, perhaps countries in Africa, which we should all encourage, and then they will join the global
economy. So it’s a long, natural process that companies must adapt to. It’s a dynamic world, and that’s
all good.

Campion:
So the cost of land goes up, energy, now the cost of labor—all normal evolution?

Kuhn:
Absolutely, in a good way. And, you know, China has to adapt to it, and it’s hard.

Campion:
All right, let’s look at the other pieces of the puzzle. Competition in China’s $841 billion retail market
intensified after the government dropped some restrictions on foreign retailers to meet its World Trade
Organization pledges. Now the U.S. is threatening to file complaints with the WTO because China is
showing signs of backtracking on some of its pledges to allow foreign investment and cut subsidies,
and so forth. Does China have the right to favor domestic producers of steel, for example? That’s a big
bone of contention.

Kuhn:
Well, sure, and I think there will be targeted areas like steel or auto parts or financial services. Media’s
always controversial. It’s a dynamic balance. I think every country tries to protect its own industries and
its own interests as much as possible, yet major economies must consider their relations between
countries in a global economy.
Campion:
Including the U.S.?

Kuhn:
Sure, and China is no exception, in fact, probably, more so than most. And it is up to other countries,
such as the U.S., to properly encourage China to continue to progress in a proper way. As long as
each country appreciates the interests of the others as it protects its own, this dynamic tension will
accrue to everyone’s good. Everybody should reach for the right goal. It is good for the U.S. to properly
pressure China without doing it vituperatively, and without doing it in a way that would undermine
everyone’s interests. But to keep the proper pressure on in, shall I say, a good-spirited way, to
encourage China to play by the rules is ultimately the right way to go.

Campion:
The other issue that you referenced is media, that the U.S. is consistently unhappy about China’s
turning a blind eye to piracy or copyright, intellectual property, all of the ways of talking about that. Do
you get the sense that this is an idea whose time has finally come in China?

Kuhn:
It has, but for an unusual reason. First, though, I wouldn’t say that China has turned a blind eye to it. It
is just very difficult to stop in a society where they have enough trouble collecting their taxes, much less
stopping garage duplications of CDs in villages in Guangdong. But to certain industries, it is
meaningful.

But overall, in terms of the U.S. trade balance, it’s fairly modest, even if it were all paid. However,
symbolically, protecting IP rights is extremely important. I agree with putting proper pressure on China.
China knows it must respond with increasing responsibility. But the real pressure on China is not going
to be because of U.S. or external pressure, but by the pressure of China’s own media industry, their
own book publishers and CD manufacturers that are legitimate. These are the people whose revenues
are affected 100 percent, and they are furious about pirating.

When my book was published in China, the biography of former President Jiang Zemin, my China
publisher stationed people to look for counterfeit copies. They intercepted a railroad car that had
thousands of copies. So they’re the ones putting pressure on their own government because it’s their
livelihood. This is an alignment of interests through which everyone will cooperate.

Campion:
Thank you, Robert. We’ve got to leave it. Robert Lawrence Kuhn, who advises the Chinese
government and is Senior Advisor at Citigroup.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg on the Economy – September 27, 2006
Interview: Robert Lawrence Kuhn, Ph.D.

Tom Keene, Host:


It’s Bloomberg On the Economy. Hello everybody, I’m Tom Keene, today from our
news bureau in Hong Kong. First, Robert Lawrence Kuhn: he’s an advisor to the
Chinese government, Senior Advisor to Citigroup, and the author of The Man Who
Changed China: The Life and Legacy of Jiang Zemin, the best-selling book of
2005 in China, We talk about the future of this nation. Dr. Kuhn, welcome back to
the program.

Dr. Robert Lawrence Kuhn: Hi, Tom. Good to talk.

Keene:
We’ve been over in China now for two weeks. I head to Beijing this afternoon, Dr. Kuhn, I want to take
a political angle here. We’ve seen U.S. Treasury Secretary Paulson meet with President Hu Jintao.
How significant was it that a financial official, a cabinet officer, would meet with the head of the Chinese
government?

Kuhn:
It’s both symbolic and substantive -- a testimony to President Hu Jintao’s appreciation of the
importance of financial markets and to Mr. Paulson’s deep understanding of China. In his previous
position as head of Goldman Sachs, Paulson has been to China something more than 70 times, so
he’s very sensitive to these subjects. Obviously, in his role as Treasury Secretary, he works for the
administration and he deals with Congress, but his primary expertise is financial markets, so he is very
well qualified. The fact that President Hu spent time with him -- according to reports, they dismissed all
of their advisors and handlers so that they could spend some serious time together alone (with just
translators present) -- is very good indication of the seriousness with which President Hu views
financial markets. Everything in China is interrelated, so whether we’re dealing with issues of
geopolitics or human rights, it all blends together. It is a recognition on the part of the senior leadership
of China that progress is being made and a commitment that progress will continue to be made.
Because a senior leader of China, much less the president, will not meet so publicly with another
official if there are storm clouds on the horizon. The future is looking pretty good.

Keene:
On the matter of the trade imbalance, Senator Schumer and Senator Graham are impatient, and I think
the same can be said not only for the American people but also for the American mind. And the
Chinese work on a different clock. From you knowledge of President Hu, is he Hu entrenched like Mao
Zedong, Deng Xiaoping, and Jiang Zemin, or is he still the new kid on the block in terms of Chinese
leadership?

Kuhn:
This is an important question for understanding China’s remarkable transformation. We’ve had
progression. If we go back to the days of Mao, he was a virtual dictator, and at times, especially in his
later years, an exceedingly unpleasant and disruptive one. Deng Xiaoping was exiled several times,
kept coming back, had a clear vision of reform, was a great innovator, very brave, and made significant
breakthroughs in transforming China. When Jiang Zemin was appointed (surprisingly everyone), he
was politically weak, and it took him a long time to consolidate his position. It was perhaps eight years,
from 1989 until arguably 1997, before Jiang was really able to govern without serious political battles,
where he could make the kinds of decisions that he ultimately did and lead China through a great
transition.

President Hu Jintao is actually ahead of schedule. Still in his first term, he has put forth innovative and

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sophisticated political theories that are empowering and action-oriented in China but, paradoxically, are
underappreciated in the West. President Hu’s overarching vision is summarized by several slogans—
“Harmonious Society” and “Scientific Development Perspective” domestically, and “Peaceful
Development” leading to a “Harmonious World” internationally. Harmonious Society stresses social
and political reform and seeks fairness and equity across China’s diverse populations and geographies;
Scientific Development Perspective stresses integrated sets of solutions to arrays of economic, social
and environmental problems, and seeks the rectification of economic imbalances and the
institutionalization of sustainable development; Peaceful Development conveys that no matter how
strong China will become, it will remain a bulwark of stability in the world and it will never threaten its
neighbors. If we look closely at President Hu’s domestic philosophy, he envisions this “Harmonious
Society” built through the mechanism of this “Scientific Development Perspective,” which although
sounding rather general, is really is a powerful organizing principle for integrating and optimizing all the
complex aspects of what society must worry about -- from social stability and environmental pollution to
energy conservation and sustainable development, along with the requirement of continued economic
growth, which, while it must always be the core of China’s policy, is no longer its sole driver. China’s
remarkable development is no longer a simple story.

President Hu has quite rapidly – within just a couple of years of his assumption of all the positions of
th
leadership – established his political philosophy as China’s vision for the future. The 17 Party
Congress, which begins a little over a year from now, will be the time when one can see President Hu
making some personnel changes to get his people into the kinds of operational positions so that in his
second term (2007 – 2012) he can effectuate his policies more efficiently.

Keene:
I had the privilege of meeting with the Hong Kong chief executive, Donald Tsang, and it made me
wonder about the dependence or independence of Hong Kong and Shanghai. Is Shanghai run
separately from Beijing? Obviously, Hong Kong is much more separate. But these cities, are they
politically and economically free-standing?

Kuhn:
That question get us into the nitty-gritty of China. Theoretically, of course, all provinces and major cities
report to Beijing. The four major cities – Beijing, Shanghai, Tianjin and Chongqing – report directly to
the central government. They are not part of a provincial system. And all the provinces, the special
economic zones, the major cities, report to the central government. Hong Kong is different, of course,
having its “Basic Law,” negotiated prior to when it was repatriated to China in 1997, which gives
significant independence as captured by the clever phrase, “One Country, Two Systems.”

Now, that said, some cities and provinces have greater independence, a greater strength. Certainly,
Shanghai’s growth has been one of the giant engines that has driven China’s dramatic growth, and has
been the spearhead for the provinces around Shanghai – particularly Jiangsu and Zhejiang. If you take
the GDP of just Shanghai and those two provinces together, you’re getting close to a quarter of the
entire GDP of all China.

The development of Shanghai has been a very effective mechanism for boosting China’s economy, just
like Guangdong province (bordering Hong Kong) was in the early days of reform in the 1980s and
1990s. It was in the middle 1990s and thereafter that Shanghai dramatically rose to prominence. The
issue of Shanghai’s so-called “independence” arises because there is a natural tension between
policies of the central government in Beijing that seek to modulate the economy to avoid overheating
and have more balanced growth, and people in the provinces and major cities who want to keep their
area moving forward and growing rapidly. So it’s a dynamic tension, not a bad one, which occurs
between the desires of the regions and the desires of the central authorities. Such a tension, at its best,
is hopefully a process that finds a harmonious solution, to use their favorite word.

Keene:
Dr. Kuhn, you emphasized to me this linkage of politics to economics. I want to turn to the debate about
Taiwan. Has Taiwan fallen off the international radar? Or do we underestimate these tensions between
Beijing and Taipei?
Kuhn:
One must view both sides of the Taiwan Strait to understand the problem. Certainly, the rhetoric, and
then the crisis, which boiled intensely in 1995 and 1996, and then did so again in 1999, seems to have
abated in recent years. But Taiwan is the one China-related issue that people should not ignore. It can
raise its head at any moment. It is the single most important international issue in China, enveloping
common people, intellectuals and leaders. So, what may seem off-center to us, or something that’s
trivial, is very much core in the Chinese sense of national pride. And in terms of China’s historic
recrudescence, it’s a major factor. But, happily, both sides of the Taiwan Strait currently seem to desire
to maintain the status quo. And the status quo is good for everyone: Let time go on, let the economics
work, let both sides prosper, let them begin to have more of direct dealings, like direct flights during the
Chinese New Year. And over time, as long as both sides continue their economic development, the
problem should ameliorate. But, never forget, Taiwan is the one, single issue that has the potential for
being explosive, and we need to be sensitive to it.

Keene:
That was just brilliantly said. I appreciate that. How is a person from Taiwan – a business man or
woman from Taiwan – treated when they walk into a business meeting in Shanghai?

Kuhn:
Today, probably just the way anyone else is. In the past, when the mainland was economically weak,
the relationship between mainlanders and people from Taiwan and from Hong Kong, was one of
unequal power. And so the mainlanders – and this is a generalization – probably were made to feel a
little bit inferior, because of the expertise, the greater financial resources, greater management skills
and experience, of those people from Taiwan and Hong Kong. That simple situation is no more, having
changed dramatically in recent times. China has now accumulated, what, a trillion dollars in foreign
reserves? It has been China’s double-digit growth rate for almost three decades now that has brought
the mainland the status of an equal party. To the degree your question is about Shanghai in specific, I
don’t think the Shanghaiese, at this point, feel inferior to anyone, certainly not those in Taiwan or Hong
Kong, or anywhere else – London or New York – for that matter. Power relationships have shifted to
much more of an equal one. And I think that’s good for China and for the world.

Keene:
Where is Hong Kong going to be 10 years down from now? Where will Hong Kong be, politically and
economically, a decade down the road?

Kuhn:
All the trends we’re talking about– the emergence of Shanghai, and in the future, Tianjin in the north –
will bring about greater balance among regions. President Hu Jintao is putting a great deal of emphasis
on creating a more balanced country on many fronts, and this would mean that the unique and singular
importance of Hong Kong may be diminished. And as relationships hopefully continue to warm
between China and Taiwan, then Hong Kong will become less important as an intermediary between
the two. That said, the Chinese leadership under President Hu feel an overriding sense of duty and
pride to make sure that Hong Kong maintains its place as one of the world’s leading cities. It will not be
on their watch that Hong Kong looses its import and status, and as China continues its 10+ percent
growth, Hong Kong cannot help but benefit. So you have opposing trends, and I suspect that if you look
10 years down the road, Hong Kong will have about an equal place as it does today, but the whole
economy of the region will be vastly increased. So while relatively to other cities Hong Kong will not be
as important as it is today, on an absolute basis, it will probably be better.

Keene:
Let’s go from the political to the economic. The trade surplus just grows and grows – you mentioned
earlier, $1 trillion sitting in the bank. Is $1 trillion a lot of money to a country as big as China?

Kuhn:
It’s a huge amount of money, especially because it continues to grow. And it is a situation where the
world’s economy has adapted to it, and there’s a nice circular flow between Americans buying Chinese
goods and China investing that money right back in U.S. treasuries. So, U.S. consumers benefit from
goods of lower-price and higher quality, and from interest at lower rates because the U.S. deficit is
funded. That said, such a situation cannot continue forever; everybody knows this. The renmimbi is
appreciating slightly, everybody wants it to appreciate more. Some call for dramatic moves, a sudden
discontinuity; some in Washington call for tariffs that would, at 27.5 percent, supposedly compensate.
This is brinksmanship threatening mutual debilitation – and is ridiculous. The effect of such a move
would throw both economies off-kilter. I don’t think anybody’s really serious about doing that. It’s used
as a threat. But everybody knows we have to have an organized plan, a gradual mechanism for the
transitioning of China into the world economy in a more balanced way. It’s coming along. We eventually
need full convertibility of the renmimbi. This will happen. China wants to manage the process; they still
have huge problems with social stability amidst massive transformations, especially the need to
migrate upwards of 300 million farmers into some sort of urban industrial environment over the next
decade or so.

Keene:
300 million!

Kuhn:
Yes. A huge number of people. This could be the greatest planned migration in the history of the world.

Keene:
Do you bring the business and the investment to the people, or do you bring the people to the urban
and coastal areas?

Kuhn:
These people are in the rural areas, which are all over China, though more concentrated in the western
and northeastern regions. All mechanisms need to be recruited for such a massive transformation.
China must get investment out there into the rural and inland areas and China needs to have a planned
migration to cities. One key is the creation of new businesses. You can’t create the needed jobs
unless you have the energy and vitality of small and medium-sized businesses flourishing, which will be
a new growth requirement for China. Such huge numbers of new jobs cannot be generated by existing
large companies. China needs to work towards financing small- and medium-sized enterprises. This is
something that is of great concern to the policy-makers. It’s an integrated, vastly complicated equation
that must be solved with multiple unknowns. It is critical for the world that China emerge, both
economically and politically, as a source of great stability – not only for itself, but for everyone else as
well.

Keene:
Dr. Kuhn, thank you so much for coming on the program.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg
June 6, 2006

Interview: Robert Lawrence Kuhn, Ph.D.


Kathleen Campion (Host):
China and India have a growing need for crude and rather than compete and drive the
price up, they’re throwing in together, readying a joint $2 billion bid for a Canadian
company. The major asset of that company is an oil field in Kazakhstan.

Robert Lawrence Kuhn is with us. He’s senior advisor for Citigroup Investment Banking
and the author of The Man Who Changed China: The Life and Legacy of Jiang Zemin,
the best-selling book in China in 2005. Dr. Kuhn is a frequent visitor to China. As a
matter of fact, he’ll be there later this month. Robert, good to have you with us again.

Robert Lawrence Kuhn, Ph.D., China Expert:


Hi Kathleen.

Campion:
Now we’re saying that, together, China and India consume 11 percent of the world’s oil. If this deal
happens, it would be their second joint bid for an oil field. Culturally, do they make good partners?

Dr. Kuhn:
First of all, China and India are the way of the future, and we better get used to it. The two countries
together have about 37 percent of the world’s population, even if they now use 11 percent of the world’s
energy consumption, as their GDP growth rates increase at 9 to 10 percent, compounding for a decade,
and then perhaps a second decade, their percent of worldwide energy consumption is going to grow
substantially and begin to approach their percentage of world population. The rise of China and India is
an enormous transformation in the way the world is structured economically. We need not fear the rise of
China and India but we must learn to adapt to it and profit from it.

In terms of the relationships between China and India, cooperation is a necessity not a pleasantry. They
have had their problems in the past: India and China fought a border war in the early 1960s. But today,
such disputations are largely history. Some rocky pieces of unmarked territory in inaccessible mountains
are not going to separate these two countries, when each is completely dependant upon energy and
peaceful development for its future.

Campion:
Now Robert, in the simplest terms, bidding together certainly makes sense. As the two fastest growing
major economies, they would certainly drive bidding higher by competing. I’m wondering, though, when
you look at it with a world view, by combining, whom do they freeze out?

Dr. Kuhn:
In a limited sense, by eliminating one competitor, you do keep the price of the one deal down, but from a
broader perspective the effect on world prices is small and transitory. Oil is a fungible resource with huge
supply and demand flows in world markets. So such joint bids are not going to dramatically affect overall
prices, although they might reduce the price on this particular bid.

But we should look to the broader implications of what such striving and competing for worldwide energy
resources mean. My message is that America really needs to look at alternative fuels in a very serious
way. And not just agreeing to talk about it, but as a matter of national security and as a national
emergency.

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Campion:
I want to come back to that in just a second. One follow-up question on this particular deal. I’m thinking
that often the Russians, and the Russian companies, think of Kazakhstan as sort of their purview [since
Kazakhstan was part of the old Soviet Union]. I wonder whether China and India getting together to bid
on Kazakhstani fields makes the Russians feel frozen out?

Dr. Kuhn:
Every time you have these large cross-border deals, you have political implications. Russia yearns to
play a larger role in the world; they still smarting from their humiliating downgrade from superpower
status. But they still have nuclear weapons, large armed forces, and their economy is beginning to come
along. Russia is looking to see how they can play the Great Game, too. Every country is out for itself.
But, you know, that’s the capitalist system. For optimizing efficiencies in allocating world resources,
that’s the way it should be. Capitalism is what America has proselytized and perfected in the world, and
now, other countries are starting to get good at it -- and, in the long term, that is good for everyone.

Campion:
Yes, and we did actually welcome Russia and China into that world.

Let’s talk about the green question that you raised a moment ago. We know that India and China have an
urgent demand for electricity. The conventional wisdom here is that both have large reserves of coal and
will build more coal plants. Is that what you expect them to do?

Dr. Kuhn:
Yes, but they had better do it in an energy efficient manner that minimizes pollution. For China, coal
provides roughly two-thirds of their total energy requirements -- by comparison, coal provides about 25
percent of America’s energy. Coal technology is an area in which, I believe, America and China should
cooperate to find ways of burning coal efficiently and with greatly reduced pollution. Pollution is estimated
to burden China’s GDP by about 10 percent, reducing productivity and standards of living. In today’s
range, that’s about $200 billion a year, which is an enormous amount that, potentially, could get even
worse.

It’s a multi-faceted question, which is why Chinese President Hu Jintao has implemented his over-arching
philosophy of “Scientific Development Perspect” in building a “Harmonious Society,” which means that
China has to integrate issues of controlling pollution and conserving energy along with rebalancing
income disparity and promoting peaceful international cooperation. All of these policies must be
integrated into economic development. China can no longer only pursue economic development for its
own sake.

Campion:
Now you’ve told us before that President Hu of China has said he’s very concerned about pollution. Is it
your understanding, though, that with so much to do, such a difficult economy to manage, so many
people, so much poverty, that he would actually spend the limited money to address environmental
concerns at this point in China’s evolution?

Dr. Kuhn:
China doesn’t have a choice; reducing pollution is a necessity not an option, it is required not elective
surgery. It must be central to China’s future. President Hu and the Chinese leadership are committed to
make life good for their citizens, and pollution is making their lives bad. If you look at the major cities of
China, they are some of the most polluted in the world. This is obviously affecting people. You see
pollution-related diseases on the rise. You see the economic consequences of pollution increasing. So
controlling pollution is not just some slogan or platitude to President Hu and the Chinese leadership but it
is what has become absolutely essential to do. President Hu recognizes this.

Now making progress on solving the pollution problem is something else, of course, because there are
indeed all these other competing needs. Income disparity between different segments of the nation,
urban-rural, coastal-inland, is probably China’s deepest social problem. But pollution has come to the
front burner and the issue and all its ramifications are certainly being discussed at the highest level of the
Chinese central government. President Hu takes pollution very seriously.
Campion:
As you know, the U.S. has developed efficient clean coal technologies. Is it likely that China and India
would purchase these?

Dr. Kuhn:
All three countries should work together to find new and better ways to burn coal. American technologies
are probably the best in the world. But they have not approached the efficiency frontier that is potentially
attainable – far from it. My strongest prescription is that America and China should work together on
alternative energy and energy efficiencies. Certainly China will be in the market for purchasing these
kinds of technologies, and more desirably, I suspect, for jointly developing them. Energy is a prime
opportunity for future cooperation.

Campion:
Here’s a “bigger picture” question about these two growing economies. Each has, in some ways, leap-
frogged over more traditional steps. In China, they went to cell phones, all but skipping landlines. That
sort of leap-frogging is what I’m thinking about. Would you expect China and/or India to leap-frog over
some of the traditional energy growth steps?

Dr. Kuhn:
One would hope for that to be the case. Unfortunately, to leapfrog in energy is harder to do than in cell
phones. Cell phones in China make for a wonderful story. There’s about 420 million now – more than
landlines – and it’ll be 500 million by the 2008 Beijing Olympics. Cell phones have changed the
dynamics of Chinese society. The story in energy won’t be so spectacular, though its importance is
paramount. Cell phones can be manufactured rapidly and made small and efficient. But commercial-
scale coal gasification plants are billion dollar investments, and sometimes what seems efficient when
tested on a minor scale, in a test bed, suddenly becomes inefficient when scaled up to a major facility.
Sometimes you don’t even know why.

So there’s a real danger of allocating huge resources on technologies that are not yet proven on a large
scale. You have to be very careful. It will take longer, but it is essential. Surely we are all still not paying
as much attention to alternative energy as we should.

Campion:
In terms of the international picture, we’re all aware that China and India are looking far and wide for new
opportunities for crude fields. We’re hearing that China may be looking at drilling off shore in Cuban
waters.

Dr. Kuhn:
There is a strong relationship between China and Cuba on several levels (they are subtle reasons for
this, some of which are historical). China is certainly exploring all areas they possibly can, and looking to
exploit certain countries that, at the moment, do not have best relationships with the United States. My
personal feeling is that such a strategy would be of limited value and generally short-sighted, and that the
only long-term, sustainable solution for China, as well as for America, is to look at efficient ways of using
coal and at developing alternative sources of energy including nuclear, solar, hydro, biofuels, etc. But
every country is going to do whatever it can, short-term, in an expedient way. That’s the way of the
world, but none of this will yield the ultimate solution. Technology is the world’s only hope.

Campion:
It’s always a pleasure. Robert Lawrence Kuhn, Senior Advisor to Citigroup Investment Banking and the
author of The Man Who Changed China: The Life and Legacy of Jiang Zemin..
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
“Bloomberg Big Picture”
May 8, 2006

Zhejiang Province
Interview: Robert Lawrence Kuhn, Ph.D.
Kathleen Campion (Host):
We’re talking this half hour about China. Robert Lawrence Kuhn is with us. He
advises the Chinese government. He’s senior advisor to Citigroup Investment
Banking and author of The Man Who Changed China: The Life and Legacy of Jiang
Zemin. Glad to have you with us in person.

Robert Lawrence Kuhn, Ph.D., China Expert:


A pleasure to see you, literally!

Campion:
We talked with Greg Anderson, who is a currency guy from ABN Amro. He said he thinks that the
Treasury Department will dub China a currency manipulator. I wonder what you think about that.

Kuhn:
I don’t think it helps anyone’s interests to use pejorative terms. I do think the Chinese government
has been responsible in allowing the yuan to appreciate gradually, consistent with maintaining
stability in China’s economy and good relations with other countries. China has national pride and
will do things in its own independent way; it will not succumb to heavy-handed pressure. Pressure
can be helpful, but it needs to be constructive, gentle, and perhaps subtle.

Campion:
And what do you think the Chinese government response would be to that pejorative?

Kuhn:
It wouldn’t be dramatically problematic, but it would elicit nationalistic passions, the feeling that
America is trying to “contain” China, which would not be helpful. America and China should be
partners in building peace and prosperity in the 21st century. That’s the key.

Campion:
We have a great deal to talk about. One of these things is the relationship between the State of New
Jersey and a Chinese province, Zhejiang. You’ll be doing some speaking on that subject. It seems,
on the face of it, an odd relationship. New Jersey has a foreign policy? A trade policy? There is a
large business delegation supporting Zhejiang Week in New Jersey.

Kuhn:
New Jersey is the “sister state” of Zhejiang, which is one of China’s thirty provinces. It’s a fascinating
province in that it is a focal point of China’s experiment to develop private business – it is one of the
cradles of private business in China.

Zhejiang has 47 million people – modest in size for a Chinese province -- but its gross domestic
product – on a per capita basis – is number one in China. The reason for Zhejiang’ success is that
70 percent of the province’s economic power comes from private companies.

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reproduced, transmitted, retransmitted, publicly displayed, distributed, sold, licensed or commercially exploited in any manner. Failure to observe the
restrictions cited above can result in potential liability, including responsibility for costs associated with any damage claims that may occur.
Campion:
What kind of industries does Zhejiang have?

Kuhn:
It’s light industry: textiles, clothing, agriculture [fisheries]. Also chemicals, electronics. It’s not the
industrial steel and cement factories that were part of China’s initial industrial revolution. But those
older enterprises – those massive state-owned enterprises – are not as economically efficient in the
modern world of market economies. So Zhejiang, led by Party Secretary Xi Jinping, has had a
remarkable resurgence, and it becomes a test bed, a microcosm, for all of China.

Americans have a problem understanding China because they envision China as one huge
homogeneous mass – to us it all looks the same. In fact, China is heterogeneous, very different, very
diverse, from region to region. For example, Zhejiang is entrepreneurial, while other provinces that
rely on heavy industries of the past have more problems.

Campion:
Are the large privately-owned companies in China owned by wealthy individuals or foreign investors?

Kuhn:
Of the 500 largest privately-owned companies in China, 118 are located in Zhejiang, which is the
largest number in any province. All are owned and controlled by Chinese, though many are now
public companies and many have joint ventures with foreign companies.

Campion:
Western investors, of course, have been desperate for some time to participate in the booming
Chinese economy. At the same time, they’re uncertain about the statistics – like those on growth or
per capita income or returns on investment – because there is no public regulator that seems to be
outside official circles. How do you counter those concerns for an outside investor?

Kuhn:
Well, they’re legitimate concerns. But as we all know risk and reward are related -- and in China there
are tremendous reward opportunities. It is fair to say that the legal systems, the regulatory systems,
are developing. There have been problems, but the country’s leadership knows full well that
maintaining economic growth requires sustaining investor confidence, which can only be solidly built
on a stable legal and regulatory foundation -- and China’s leaders are very focused on bringing this
about. So it’s improving.

In Zhejiang province, which is a great example, Secretary Xi Jinping has pioneered openness in
government, more so than in many other provinces. In fact, just recently, Zhejiang eliminated
China’s long-established residency requirement [i.e,, hukou] so that people from rural areas can
move into urban areas without having to go through formal procedures. In China, this is a very big
deal. Secretary Xi has pioneered many such new initiatives that will continue to bring about the
transparency of government.

Campion:
You’re talking about this wonderful experiment in Zhejiang. It must be sanctioned by China’s central
government. You cite amazing sustained growth, better than 13 percent over 20 years. Why wouldn’t
China’s government lift restrictions on all provinces and allow them to prosper similarly?

Kuhn:
The approach in China is always experiment carefully and assess the results before allowing
widespread adoption. And when a new policy or process proves itself to work, it then expands. But it
still expands gradually, because stability of the country is the most important criterion by which
China’s leaders judge everything. Economic growth is exceedingly important, as is improving the
standards of living of all the Chinese people, but maintaining the stability of Chinese society comes
above all – since stability is a prerequisite for all good things.

So, indeed, this ability to do private business, this spirit of entrepreneurship, exemplified in Zhejiang
[called the “Zhejiang Model”] has expanded over a great deal of the country. It turns out, though, that
Zhejiang has particularly prospered for two major reasons. First, the province didn’t have the
embedded base of massive (and now archaic) state-owned companies from the past planned
economy, and second the Zhejiang people have an entrepreneurial energy and intensity – this is a
combination that gives Zhejiang competitive advantage. Growth in Zhejiang has been tremendous --
you can see it – and it is not just economic but it is also the cultural richness of the province, the new
roads, the enhanced school systems.

Zhejiang now provides its children with 15 years of universal schooling – all its children get a
complete education: three years of preschool through 12 years of high school. Zhejiang is the first
province in China to do this. All of the social and cultural elements of a civilized society are being
built as well. And it is spreading over all of China.

Campion:
Western investors have been beating on China’s door for some time, even though they are often
confronted with evidence of official corruption. Do investors see evidence that China is making
progress on that front?

Kuhn:
They do, but corruption certainly is a problem, as are economic imbalances between rural and city,
east and west; environmental issues; and energy constraints. China does have its slew of problems,
no question about it, and corruption is definitely one of them. The government is very concerned
about it, but change will take time -- investors need to factor that into their analysis.

Campion:
I was intrigued when you told me that piracy issues are now becoming an issue for Chinese
companies. How is that?

Kuhn:
This is a significant change in China. When foreign companies put pressure on China to eliminate
counterfeit products, it’s important for these foreign companies but it generally affects only a small
percentage of their worldwide revenues. But now branded Chinese companies have emerged, such
as in software, in clothing – so that when their branded products are pirated, they’re losing 100
percent of their revenues! Branded Chinese companies are a new pressure group in China to
pressure federal and local governments to crack down on piracy.

We have this combination of factors that are coming together to require the Chinese government to
respond more strongly to piracy, and Zhejiang province, for one, is definitely listening, because not
only do they want to follow the law and protect foreign companies but also they have developed
some very good local brands that they want to protect. The Zhejiang government has taken an
aggressive stance against piracy. Piracy has become an increasingly important issue for
government at all levels in China. And that’s good news for everyone.

Campion:
Very interesting to see the evolution. Now everybody wants to sell into China. The big banks, the big
retailers, manufacturers, media companies – these are the industries we always hear about. How will
that be done, big picture? Will a few of each be allowed in and then we’ll see?

Kuhn:
It’s largely no longer a question of “allowed,” it’s a question of the market making its own decisions.
And that’s the very best possible way. There are some continuing restrictions, of course, obviously in
defense industries, also in financial institutions, media.

But, broadly, there are few restrictions. The only real restriction in many industries is the marketplace
– the relevance and quality of your products, the strength of your commitment, with whom you
partner, how you negotiate. It’s quite free. And there’s even competition between provinces, just like
we have in the U.S. between states -- when companies want to build a new plant, provinces or
municipalities will compete for it with tax dollars, grants, and the like. Just like in the U.S., when
different states compete to be the home of a large new manufacturing facility. Local Chinese
governments are learning how to compete.

Campion:
There’s too much to talk with you about! China has been very frank on the subject of pollution; they’re
concerned that double-digit growth is not an unalloyed positive.

We’ve been following a story that the U.S. now has some really nice clean technologies – I’m thinking
of clean coal – that we’ve been forced to develop. Is selling that sort of technology to China a deal
worth doing?

Kuhn:
I can’t think of anything more important for America and China to cooperate on than clean energy.
Clean coal is indeed the best example. Coal contributes a quarter of our energy needs, but about
two-thirds of China’s. It’s vital that China develop clean technologies for coal.

I absolutely subscribe to the idea that energy technologies should be a key area in which America
and China work together. We can sell current technologies to China, and we develop new
technologies with China.

Campion:
China’s government has also been frank about the gap between rich and poor – something that’s
true here as well. It may be more stark in China because of their recent, remarkable growth. How
might relations with the U.S. ameliorate this problem?

Kuhn:
Imbalances between rich and poor, usually characterized as between urban and rural areas (or
coastal and inland areas) is the singularly most volatile issue facing contemporary China. China’s
senior leaders are acutely concerned about this bifurcation of society. China went from the most
egalitarian society, 30 years ago, where everyone was equal – equally poor of course, but equal – to
a country which has one of the greatest gaps between rich and poor in the world. The ratio between
urban and rural income is like 3.3 to 1.0, a very large disparity. China must make progress in
rectifying these imbalances, a policy that leads to broad areas of economic opportunity for those with
vision and insight. Media is a good example, since media can reach the whole country instantly,
elevating quality of living, rebalancing educational levels (which will eventually translate into
rebalancing economic power) and even providing reasonably equal entertainment options. America
and China should work together on helping China rectify its economic imbalances, because this is
China’s biggest problem.

Campion:
Always a pleasure to talk with you: Robert Lawrence Kuhn, who advises the Chinese government.
He’s senior advisor to Citigroup Investment Banking. And he wrote The Man Who Changed China:
The Life and Legacy of Jiang Zemin, the best-selling book of 2005 in China.
Bloomberg Studios

Dr. Robert Lawrence Kuhn speaking about Zhejiang Province with Kathleen Campion, Bloomberg

Dr. Robert Lawrence Kuhn with Mr. Ye Tong, Zhejiang Province Information Office, at Bloomberg
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
“Bloomberg Big Picture”
April 17, 2006

Interview: Robert Lawrence Kuhn, Ph.D.


Kathleen Campion (Host):
We are happy to welcome back Robert Kuhn, author and advisor to the Chinese
government, who has a great deal of credibility watching and commenting on China.

Robert, what do you think President Bush will get from President Hu?

Robert Lawrence Kuhn, Ph.D., China Expert:


Hi, Kathleen. It’s good to be back. It’s an important time in the U.S.-China relationship,
st
which is critical for both the peace and the prosperity of the 21 century. Both President
Hu and President Bush each have clear items on his agenda. President Bush wants
recognition that there is a serious problem in our trade balances and there must be a solution, primarily a
revaluation of the Chinese currency [renminbi Yuan].

President Hu recognizes the problem but has a more nuanced solution, including increasing Chinese
domestic consumption, buying more American products, allowing capital outflows, and the like.
Revaluating the Yuan upward, as American politicians recommend, is a simplistic solution that just won’t
work.

Campion:
Is there a real danger, in your view, that we’re headed into a protectionism mode, governed by special
interest groups and outmoded mercantilist thinking?

Kuhn:
Protectionist policies, based on insular, short-term thinking, will not do anyone any good. America’s policy
should concentrate on what will work, and that is getting China to increase its domestic consumption so
that they don’t have to rely so much on exports, or even on direct investments, to fuel their economy. We
should also exert continuing pressure on China to enforce intellectual property rights so that American
companies can recover revenues that are currently being lost in China. Many Chinese companies in the
content creation business, particularly entertainment and software companies, want to do the same.

American policy should also encourage China to continue to open its markets. While some American
politicians would have us believe that Chinese markets are closed to American companies, the reality is
that great progress has been made. If you look at data, in 1980 there were 23 American companies that
had invested $120 million in China. By the end of 2005, 49,000 American companies had invested $51
billion! So we are making progress, and we must continue making more progress. Furthermore, a
significant amount of China’s exports are being produced by foreign-funded ventures.

Revaluation of the Yuan plugs into a complicated equation. If we force China to revaluate, Chinese goods
become more expensive priced, which would mean that other countries, such as Mexico or those of
South East Asia, would start supplying similar products to replace the China-made products. The results
would be that American consumers would have products that cost more and probably be of lower quality.

America and China need to work all issues associated with the trade imbalances in parallel. We have to
devise policies that are consistent with China’s. China has enormous domestic problems: economic
imbalances between different areas and sectors of the population [e.g., urban-rural], energy constraints,
environmental pollution, structural issues in financial institutions and state-owned enterprises.

Campion:
The New York Times reports that President Hu told President Bush just this in a moment of candor not
too long ago.
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reproduced, transmitted, retransmitted, publicly displayed, distributed, sold, licensed or commercially exploited in any manner. Failure to observe the
restrictions cited above can result in potential liability, including responsibility for costs associated with any damage claims that may occur.
Kuhn:
I know for a fact that China’s complex domestic problems concern President Hu and China’s senior
leaders very much. President Hu’s overarching policy is to create what he calls a “harmonious society”
(which calls for fairness and equity across China’s diverse populations and geographies and embeds
careful social, legal and political reforms), and to use what he calls a “scientific development perspective”
(which integrates optimized sets of solutions to arrays of economic, social and environmental problems),
thus seeking to rectify economic imbalances, increase energy conservation, reduce pollution, achieve
sustainable development, and prioritize science and technology. The overarching objective is to elevate
the standards of living for all Chinese citizens. These broad social issues of building Chinese society are
President Hu’s primary concerns, and therefore it is essential to maintain the stability of Chinese society
so that China’s economic development can benefit the Chinese people and, and consequently, also
benefit the entire world. China’s problems are, in a very real way, the world’s problems, and in a positive
sense, China’s opportunities are also the world’s opportunities.

Campion:
You sound not unlike a New York Times piece today that takes the diplomatic issues, human rights
issues and economic issues, and argues that they’re so tightly intertwined with one another that it’s
almost like saying you can’t fix one problem unless you fix all of the problems. Is there a mechanism in
place to do that, Robert?

Kuhn:
The mechanism, as I just mentioned, is President Hu’s vision of a “scientific development perspective,”
which seeks to optimize solutions to all of these complex, interconnected issues together in a
simultaneous equation, as opposed to simply maximizing economic growth, which was the dominant
policy for several prior decades—a policy that made sense during those times since all China was at
such a poor level. Nothing could be accomplished unless economic growth came first.

But now that China has elevated itself economically, these collateral problems have emerged. Although
economic growth continues to be China’s primary objective, it can no longer be its only objective—society
is too complex for that now.

Campion:
We’re trying to get a little traction on what is going to happen as a result of the visit of the Chinese
president to the United States this week.

Is the problem here, Robert, really what you’ve described as this piecemeal approach of American policy
to what needs to be done in China—“Let’s fix the Yuan,” “Let’s fix the trade imbalance,” “Let’s fix the
piracy issues”? Is this how our government approaches it?

Kuhn:
All of these issues that the American government raises are legitimate issues. We just have to learn to
present them in an integrated plan that is consistent with the domestic concerns of President Hu and his
administration. There are people in Washington who do appreciate this.

We also need to mention Taiwan, because although Taiwan is not a primary issue in America, it certainly
is in China. In the minds of Chinese leaders, the jump towards independence of the current leadership in
Taiwan is very worrying. No Chinese leader can allow Taiwanese independence from the mainland and
maintain national credibility. Taiwanese independence, in any form, is a bright red line in the sand for the
Chinese. We need to be appreciative both of the human rights aspects of this volatile issue and also of
its extreme sensitivity on both sides of the straits. America and China need to work together to be sure
that Taiwanese independence does not suddenly or stealthily come around and bite us in the back.

Campion:
Where exactly does the interest of the U.S. lie in terms of Taiwan?

Kuhn:
I think the interest on all sides lies in maintaining the status quo and allowing economic growth, and all of
the corollary developments in social and political reform that come along with economic growth, to
continue the trajectory that it has been on for a period of time, and not allow sudden lurches in any
direction to occur.

This status quo conforms with every one of the carefully scripted Sino-American declarations. Everybody
subscribes to “One China,” but agrees, tacitly, to maintain the status quo exactly the way it is. Everybody
benefits from the status quo.

Campion:
Let’s take it from macro to micro. We were talking a little bit earlier about President Hu’s visit to Microsoft
and Boeing. I’m wondering what you think about the proposition that corporate capitalists, like these two
companies, are much more likely to solve their specific problems one-to-one with the Chinese
government, or even with Chinese industry, than they are likely to have the U.S. government solve it for
them?

Kuhn:
Individual, company-specific solutions are usually the best solutions to most economic problems. Rather
than trying to induce some grand theory, allow each individual company to deal on its own level and
devise its own solution. Microsoft just succeeded in getting the major Chinese computer manufacturers
to install Microsoft’s operating systems all on their computers. This is tremendous progress on the
intellectual property rights battlefront.

Campion:
But would you go so far as to say the piracy problem, at least as far as Microsoft is concerned, is solved?

Kuhn:
I wouldn’t say it’s solved by any means. But I would say it’s a very positive step in the right direction. And,
there are many Chinese companies that are aggressively pressuring their own government to crack down
harder in protecting intellectual property. When my book, The Man Who Changed China: The Life and
Legacy of Jiang Zemin, was published in China, there were a great many pirated versions of it printed
and distributed. My Chinese publishing company assigned many people to scout for these bogus books.
They found a train car with 250,000 bogus books, stopped it and destroyed the copies. Piracy hurts
Chinese businesses too.

Campion:
Wow! So it still comes down to enforcement. The rules are on the books, but it’s enforcement that’s
needed?

Kuhn:
The rules need to get better and the enforcement needs to get stronger. We do need to keep the
pressure on, but we also need to be appreciative of progress the Chinese government has made and to
recognize the difficulty that they face. But we’re moving in the right direction.

Campion:
Let’s come back to the sensibilities of this visit. With President Bush weakened in the polls, and facing
this get-tough attitude in Congress, it is in his interest to look tough to voters back home. Is it reasonable
to think that President Bush can look to President Hu for any help here?

Kuhn:
I think so; I think President Hu will give help. I think he will reach out to American policymakers, students
at Yale University, business leaders—beginning in Seattle with Microsoft and Boeing—and present China
as a great power and a responsible nation that is concerned about the integrated nature of the world. And
this is reality. China is absolutely integrated into the world economy: they’re accounting for a higher
percentage of the growth of the world economy than is any other country. President Hu will be very
astute. He’s very smart, very savvy. He seeks to have his visit be recognized as symbolizing China’s re-
emergence—dignified, distinguished, statesman-like, participatory, and responsible.

Campion:
I’m afraid we do have to leave it there. Robert Kuhn, it’s always interesting. Thanks so much.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg Big Picture
February 17, 2006

Interview: Robert Lawrence Kuhn, Ph.D.


Kathleen Campion (Host):
This is the Bloomberg “Big Picture.” Our guest is Robert Kuhn. He serves as advisor to
the Chinese government and Senior Advisor to Citigroup Investment Banking. His book,
The Man Who Changed China, was the best-selling book in China in 2005. We’re
talking about a number of China-related issues: the trade relationship with the U.S. and
reports that the U.S. Treasury is considering labeling China a “currency manipulator.”

Dr. Kuhn, you have long argued that the U.S. gets nowhere by trying to force China to
do anything or punish China for having done something. This has been the position that
[former Chairman] Greenspan has taken as well, that China will eventually see a
market-driven currency is in their own interest. Is that how you see it?

Robert Lawrence Kuhn, Ph.D., China Expert:


That’s absolutely right; however, constructive pressure, if properly nuanced, can be helpful. Currency
exchange rates, intellectual property rights, the need to open markets, are all real issues, but more
progress would be made working behind the scenes. Modulated, quiet pressure would help China to do
what is truly in its own best interests. As I’ve said, let’s look at the context. China was a planned
economy that stagnated for decades. It made fledgling, volatile, politically contentious efforts to reform in
the 1980s, some of which turned traumatic and led to Tiananmen Square. It was only in the early 1990s
that China’s economy really began to take off.

Remember that China had to devalue its currency in the early ‘90s, but then they resisted pressure
during the Asian crisis [1997-1998] to devalue it further, which would have destabilized all Southeast
Asia. China acted responsibly during that period. Now China is addicted to growth. They need growth to
maintain employment, because there are tens of millions of migrant workers from rural areas, laid-off
workers from old state-owned enterprises, and legions of young people entering the work force. There
are only three fundamental ways that an economy can grow: consumption by its people; investments by
business entities (largely foreign) or by the government (primarily infrastructure); and exports. China’s
growth has been driven by the latter two. They need more consumption; the Chinese people need to
spend more and enjoy the fruits of their labors. The government is trying. China is trying to develop the
economy by increasing consumption, which will relieve pressures on exports. There is great pressure to
keep China growing because of social necessities: China needs economic growth of 8 or 9 percent per
year because of the transformation of the economy, the need for jobs, the closing of moribund state-
owned enterprises, and the migration into the cities of farmers who don’t have work in rural areas.

China is desperately trying to maintain its social stability. For this they need growth. And they know from
where it must come. The government is trying to raise consumption, to encourage spending, but until
Chinese citizens purchase more goods and services, the country still is highly dependent on exports. So,
American pressure is correct, but it needs to appreciate context and be nuanced.

Campion:
As you point out, one reason the Chinese like to hold on to so much foreign currency is so that they can
help to protect their exports. Is another reason that they sit on so much foreign currency an attempt to
prevent a repeat of what happened in 1997, when the lack of ample reserves allowed speculators to
attack various currencies?

Kuhn:
Good point; well said. Stability has long been the overriding mission of Chinese leadership, and indeed
stability is necessary [but not sufficient] for economic growth and social change. President Hu Jintao has
an overarching philosophy of creating what he calls “a harmonious society.” This can be achieved, Hu

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envisions, by means of a “scientific development perspective,” an integration of social and cultural goals,
which, along with economic goals, can deal with what is the most problematic and invidious aspect of
Chinese society today—imbalance. There are dramatic differences between eastern coastal regions and
western inland regions, between urban and rural incomes, imbalances that are getting worse, driven by
this need for growth. Optimum growth comes most efficiently from areas that are the most developed,
and while such growth increases the vibrancy of the economy overall, it exacerbates the imbalances in
society, which leads to social unrest. So considering this complex socio-economic equation, American
interests are best served by being sensitive to China’s domestic conundrums even while pushing for
currency adjustments, protection of intellectual property, and further opening of markets.

American trade imbalances with China are unsustainable. China knows that. It’s impossible to go on this
way forever. W e need to work together to find ways to alleviate the problem. The primary salutary
mechanism, in my opinion, is helping China to increase domestic consumption; this will be a natural way
for China to maintain social stability and allow its export income to diminish. And increasing Chinese
consumer consumption will also enable American exports to rise. This should be our focus.

Campion:
This week we heard Pascal Lamy, a leader at the WTO, lash out against what he sees as a rising
protectionist sentiment in the U.S. Congress, specifically increasing Congressional opposition to free
trade. We know that we have two senators—Senator Schumer (New York) and Lindsay Graham (South
Carolina)—who are proposing tariffs on Chinese goods as both punishment for what they see as an
unequal playing field and as a way to improve the balance of trade. How are such tariffs going to play in
world markets? And with the Chinese?

Kuhn:
It would be like shooting yourself in the foot. If your foot trips, you don’t shoot it; you find out why your
foot tripped and try not to do it again. Tariffs would be counterproductive in two ways. First, it is insulting
to the Chinese, and therefore would create anti-American feelings, not necessarily among Chinese
leaders, but primarily among common people and students. Such antagonisms would not be in our own
interests, politically or economically.

Second, what would tariffs accomplish? Granted, they would help certain workers in certain American
industries, but they would lower the standards of living for all Americans because so much of what we
buy is made in China. [Other countries in Asia and the Americas would fill in for China, mitigating benefits
for American workers while still raising prices for American consumers.] It’s a complicated set of
simultaneous equations. Politicians speak to their own audiences. It may sound superficially good to
orate that we’re going to “punish China” and make life more difficult for them. But what tariffs would really
do is make life more difficult for everyone.

America needs China to be a responsible nation, a bulwark of stability in international affairs from East
Asia to the Middle East. We have many problem areas around the world. We need China to be on our
side in securing the new world order. That’s the way our future is best designed. And threats of tariffs are
not the way to bring such harmony of interests about.

Campion:
Let me argue, as you do, that lifting millions of Chinese out of poverty, making them productive
consumers, will ultimately benefit the U.S. and everyone else engaged in the world economy. Whether
that’s a rosy scenario or not, can you put a time frame on it? Americans, as you know, are impatient.

Kuhn:
This is a long process. Let’s take the Chinese view. Their goal is to have what they call a well-off social
level (in Chinese, the word means “modestly well-off”) by the year 2020—they’ve pointed to a country like
Portugal as exemplifying this kind of mid-lower development. We’re dealing with an order of magnitude
of 15 years, but achieving this transformational goal requires unabated continuation of current levels of
growth. You need 8, 8.5 percent growth. Last year China hit 9.9 percent, which was red hot. [2006 is
forecast at 9.2 – 9.3 percent.] But the bigger the economy, the more difficult it is to maintain high growth.

Campion:
It’s always enlightening to hear what you’re thinking about. Robert Lawrence Kuhn, advisor to China.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg on the Economy
January 11, 2006

Interview: Robert Lawrence Kuhn, Ph.D.


Tom Keene, Anchor:
It’s Bloomberg on the Economy. I’m Tom Keene, today in London. In this hour, Robert
Kuhn. He is senior advisor to Citigroup Investment Banking and also author of a very
influential book, The Man Who Changed China: The Life and Legacy of Jiang Zemin.
Dr. Kuhn, welcome to “Bloomberg on the Economy.”

Robert Kuhn:
Glad to be here.

Keene:
Let’s talk about Shanghai. What makes Shanghai different from Beijing and Hong Kong?

Kuhn:
Shanghai is what has been called one of the two “Dragonheads” of China. The first is the Pearl River
Delta in Guangdong Province, near Hong Kong, where reform began in the 1980s. During this period,
th
Shanghai, which early in the 20 century had been the Great City of Asia, the Paris of the East, was
languishing. Shanghai began to expand in the 1990s, so that today the Yangtze River Delta, with its core
in Shanghai and with two of China’s most economically powerful provinces, Jiangsu and Zhejiang,
located contiguously, has become one of the most economically vibrant areas of the world. If you
consider their collective economic strength, you’re talking about 30% of the GDP of China. Furthermore,
Shanghai has recently become the number one port in the world. It is an enormously powerful economic
city. But more than that, Shanghai is truly an international city, with its historic intermixing of European
and Chinese cultures. Shanghai is really quite unique.

Keene:
Dr. Kuhn, give us an update right now on the domestic politics of China. We see toxic events, chemical
spills, some unrest, social tensions. Does the government have control of the domestic economy and
national politics?

Kuhn:
The short answer is yes. Although we hear much about mine disasters and pollution—all of which are
terrible--China’s biggest problem is “imbalances.” There are great disparities in economics and in
people’s standards of living between coastal and inland provinces; between urban and rural populations;
between the “haves” and the “have-nots.” Some people have benefited enormously from reform and
have become wealthy, whereas many people are still impoverished or have grown poorer. These less-
fortunate Chinese may be unemployed farmers or workers who have been laid off from state-owned
enterprises. Often they are forced to become migrant workers. This “floating population” of around 200
million people has come off the farms, where they have minimal income, and into the cities where they
must live under difficult conditions to make money for their families back home.

These are some of the social problems, but the government is sensitive to them. China’s leaders
recognize these problems and are trying to deal with them.

Keene:
China has a booming economy—9, 10 percent—I don’t even know if I believe that number. John Ryding
at Bear Stearns thought it was higher. What portion of 9.8 percent is along that Coast Region?

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Kuhn:
A good deal of China’s growth is indeed being generated by the dynamic coastal regions, a fact of life that
can exacerbate China’s imbalances. The recently revised data shows that the economy has actually been
growing faster than earlier statistics indicated, at the astounding rate of over 10 percent. President Hu
Jintao and Premier Wen Jaibao’s policies to cool the economy, to enable a soft landing, are working,
though it still remains sizzling hot, even after the restraints on too-rapid growth have been in effect for
over two years.

President Hu has made a significant policy decision to emphasize the strategy to “Revitalize the
Northeast.” It’s focused in the old Manchurian areas in North China, beginning in the city of Tianjin and
running north through Liaoning, Jilin and Heilongjiang provinces. In the 1950s, in the first flourishing of
the state following the founding of New China in 1949, this whole area was China’s industrial base.
These massive, state-owned factories, which composed China’s early industry, have in the new market
economy fallen into disrepair and disgrace. But now President Hu’s government is focusing on this area,
and also the central provinces, which have vast populations but are economically underperforming. The
Chinese leadership has targeted these heretofore lagging regions, the Northeast and the Central, as
centers of growth, and the government is putting into place favorable policies to facilitate their growth and
thus help rebalance society.

Keene:
Kenneth Rogoff of Harvard University is concerned about the money flows into developing nations. Is
there a concern about too much investment by the Western world into China, too much money coming in
for them to withstand the shock?

Kuhn:
When you have such massive flows of capital, there’s always opportunity for untoward things to happen.
Of concern in China is that a great deal of the growth—the capital that is spent in China—is being spent
on capital assets. Now infrastructure is really needed. The roads, the railways, the bridges are extremely
important for China. But there are also many high-priced real estate projects, and when growth is fueled
by such a high percentage of capital investment, it is warning sign that the system can be fragile. China
needs to fuel more of its growth through domestic consumption—its people need to spend more!

Herein lies part of the cause of America’s gigantic trade deficit with China, which can be [over]simplified in
this way: In China, the people save too much and spend too little, whereas in America, the people spend
too much and save too little. And Americans buy Chinese products because they are less expensive than
similar products, a process that increases the American standard of living but also increases the
American trade deficit, which the Chinese then finance. We send them our cash for their products, and
then they send this cash, which is now their cash, right back here to purchase U.S. government debt,
which helps finance our country’s deficit.

When you have so much cash coming into a country, the danger is that the cash will be spent on
inefficient projects: people get so excited about China’s growth that they put their money into anything. In
Shanghai, which is a fabulous city, the housing market, the real estate market, has become overheated
and now is settling back; people are concerned about this retreat. Well, it’s simple economics: in such a
frothy situation, too much cash is chasing too little good property.

Keene:
That brings to mind Chairman Greenspan’s comments on our own imbalances. One of the things that
we’ve heard so much about is the burgeoning state of China’s defensive, and maybe offensive, military
forces. With your big-picture view of China, do they need such defense? Do they need to grow their
military defense budget?

Kuhn:
You have to look at it from both domestic and foreign perspectives. From China’s own perspective, they
need powerful, modern armed forces to safeguard their national sovereignty, which in their view includes
an ultimate reunification with Taiwan—and Americans should recognize that this desire is felt emotionally
by the vast majority of the Chinese people in China, who view Taiwan as the last vestige of foreign efforts
to fragment China. Even Chinese citizens who reject Communism, or who are very critical of the
government, when you mention nationalistic issues like Taiwan, you see unity from people who would
ordinarily be disagreeing on other issues. Maintaining China’s integrity is something that is very important
to the Chinese soul; China is committed to protect itself against any sort of effort, as they would look at it,
to divide their country. For instance, the separatist threats against Tibet and Muslim separatists seeking
independence in the western region of Xinjiang Province is taken very seriously. So there are a number
of sensitive issues that, to China, necessitate a strong military.

And then there’s the question of national pride, which in China is essential to appreciate. This was a
country that, during Europe’s Dark Ages, probably consumed about a third of the world’s GNP, which is
what America had at its peak. China is a country that invented many of the inventions that drove modern
civilization [such as paper and printing, compass, wheelbarrow, gunpowder, rockets]. And then China fell
into centuries of poverty and humiliation and their once-proud country came to be dominated by foreign
powers, which reached its nadir of oppression with the Japanese invasion and occupation in the 1930s.

Now that China is resurging, it insists of having a very strong military. This is non-negotiable. And they
are focusing on high-tech weapons and information warfare, while cutting back their ground forces. The
Chinese leadership sees science and technology as critical for their future, driving their economy as well
as enhancing their military. President Hu Jintao recently gave a speech about the importance of high
technology in which he acknowledged that China is still not up to world-class standards in state-of-the-art
research. And President Hu wants to bring China to the highest level of technology, both for the economy
and for military defense, and if you understand China, also for the sake of Chinese civilization.

Keene:
Dr. Kuhn, at the Royal Academy of Arts in London, there’s this magisterial exhibition of three emperors
going back hundreds of years. Is there a historical heritage in China that links to the country’s amazing
economic growth?

Kuhn:
China’s remarkable resurgence since Deng Xiaoping began his reforms in late 1978 has been called the
greatest sustained economic success story in the history of the world. And at its roots is this sense of
Chinese culture and historic pride, the strength of the family, the intense focus on education, the ambition
and energy of the people. These are what really drive China and will continue to drive China.

By the way, one of the concerns of the government is that Chinese civilization be protected against the
onslaught of foreign and Western cultures, which, because of their power through film, television and the
internet, may put Chinese culture into a secondary position.

Keene:
When we talk about the economics of China, we have to talk about the adjacent nations. A colleague of
mine just returned from Vietnam. He says it’s simple: they’re riding on the coattails of China. Is that true
of all the Asian nations?

Kuhn:
You have to look at each nation separately. Certainly China has become the centerpiece of Asia.
Everybody recognizes that. It used to be Japan. Asian peoples didn’t like a dominant Japan, of course,
because of obvious historical reasons. Now there’s no escaping China, which is using its economic clout
to increase its diplomatic influence. China is once again truly the “Middle Kingdom,” which is the name of
China in Chinese. It is certainly operating that way in Asia.

However, we should recognize that there are historic rivalries as well. The Vietnamese and Chinese have
had a long history of friendship but also a long history of conflict punctuated by armed skirmishes along
their border. So today the Vietnamese have their own desire to be independent; they want to create their
own nation and not be dominated by others. But they recognize that the reality of the world is that China
is the center.

Keene:
Different economists have come up with 10-year, 20-year, 30-year forecasts that bring China, Brazil, and
other large countries to economic leadership. Do you buy an extrapolation of 9 and 10 percent year after
year growth?

Kuhn:
Extrapolation is always dangerous. It is easy to project that the future will emulate the past because
nobody can criticize you for basing your forecasts on history. The problem is that it is almost always
wrong. There are always exogenous forces that come up and reshuffle the deck. In predicting what will
happen in the real world, we always have to be sensitive to unexpected events.

Having given that qualification, it is indeed remarkable that China has sustained since the late 1970s—for
almost 30 years—this 10-percent per year growth rate. It is truly an astounding story. And then if one
extrapolates forward, one does have China becoming the world’s largest economy—not per capita but on
an absolute basis—sometime before the middle of the 21st century. (The time has actually been rolled
back a few years, from about 2050 to about 2040—some say as soon as 2030. This is because China
recently reevaluated its GDP upward when their first exhausted economic census concluded that the
economy has been growing faster than anyone realized—the census found the service economy, such as
restaurants, which trades in cash, was much higher than heretofore thought.)

Chinese leaders do point out, with pains, that even though China may now be the sixth largest economy
in the world (and soon to become the fourth), that on a per capita basis, it is still far down the list at
around number 100. And it will be a very long time before, on a per capita basis, China is able to elevate
itself to the level of the developed nations of the world. So although China has made great progress, it
still has a very long way to go.

Keene:
The last time I was in Hong Kong what I noticed was the pollution. Is pollution going to get in the way of
this economic dynamism?

Kuhn:
I’m impressed with President Hu Jintao’s commitment to a clean environment. By training and early
profession, he was a water conservation engineer and so he is technically expert as well as socially
conscious. In fact, all of China’s senior leaders have been trained as engineers, and they take the issue
of pollution very seriously, treating it as an engineering problem as well as a political and social issue.
China is putting enormous emphasis on solving the pollution problem.

However, there’s a tension here, because on the other side of pollution you have energy, which is needed
to fuel economic growth. China must have economic growth; it has no choice: this remains the top
priority. If you don’t have growth in the economy, you can’t sustain employment (especially with too many
rural farmers and millions of workers laid off from defunct state-owned enterprises). If you can’t sustain
employment, you’re going to have social disintegration. So if you must have increasing employment, you
must have economic growth, and if you must have economic growth, you must have increased energy
consumption. China is two-thirds dependent upon coal, and coal is the most polluting of energy sources.
New technologies for burning coal more efficiently and more cleanly is a priority.

Keene:
So that’s the heart of it.

Kuhn:
That’s the reality of it—this natural tension between growth and pollution. China is trying to work both
ends, but it’s difficult.
Keene:
Absolutely fascinating. When I think of China, I think of the dialogue with Washington. You are such a
student of China—what are your thoughts when you see the response of Washington to China? Is it a
simplistic response?

Kuhn:
Politicians in any country have a domestic constituency whom they need to satisfy and respond to.
Sometimes this generates inflammatory rhetoric. I understand that and don’t take it too seriously. At the
same time, the leadership of the executive branch who are responsible for China policy in Washington, in
general, really do get it. Some in the Congress, especially those who represent districts that have been
hurt by employment, where businesses have closed and jobs have been lost, have attacked China. I
understand that they need to protect their constituents, and naturally these politicians have a
predisposition to be very negative about China. What they don’t recognize is that thwarting China’s
access to American markets would probably have little impact, since if Chinese exports to America were
restricted, other countries, say Mexico or Vietnam, would produce goods to take their place. The prices
would be a little higher, and perhaps the quality a little lower, so that much of the result would a slightly
depressed standard of living for Americans. As the American domestic society is tightly integrated into
the global economy, these are the broad trends that are going to dominate from now on.

Keene:
We saw the last of the Gang of Four pass on this week [the “Gang of Four” instigated and perpetuated
the “Cultural Revolution,” China’s most chaotic and regressive period that lasted from 1966-1976]. It is
the end of the era? What’s the next era for the Chinese economy?

Kuhn:
China is becoming, socially and even politically, what I would call a normal country. It’s not there yet, but
it is on the right road. It is already a responsible country in terms of its statecraft, a country that is central
to virtually every important issue in international affairs. The leadership of China is philosophically united;
although they like any other group of strong leaders have internal disagreements in terms of shades of
policy, such as the speed of certain reforms, they share common thinking in terms of their vision, in their
sense of pride in what China has accomplished, and for seeking optimum solutions to the host of serious,
systemic problems with which they currently must deal [e.g., income disparity, fragile financial systems,
unsustainable development, unemployment, migrant workers, corruption, energy constraints,
environmental pollution, family and moral values].

We’ve spoken about pollution and the social imbalances. These are all critical issues. China’s
leadership, led by President Hu, very much look to science and technology for solutions. China is
committed to science and technology—all of the sciences, from basic research to applied research—to
revitalize their society.

Keene:
What do you say to conservatives in the United States who say we shouldn’t really be interacting with a
Communist government?

Kuhn:
Those people are living in the 1950s, because when a person calls China “a Communist government,” it
is baffling to everyone who knows China. Anybody who has any sort of awareness about China
recognizes that to call it “Communist,” in the way one would have properly done in Mao Zedong’s day, is
just ludicrous.

China does maintain an authoritarian government. It does not have a free press and it does not have a
one-person, one-vote democracy, as we have. China is not a democracy in the Western sense, but its
government has become much more transparent and responsive to the needs of the people. China, at its
own pace, is evolving its own system, a unique system. It’s what I (not the Chinese) would call a
“Democracy of the Elite”—the elite being the party members—because within the party, there has really
been fascinating reforms, even in terms of expressing opinions of leaders (up to a certain level) and
internal voting. President Hu Jintao is committed to increasing transparency, both within the party and
the government. This attitude is really pervading much of what is happening in China today. They’re
improving the judicial system, intellectual property rights, even the capacity to lobby and sue the
government.

Keene:
Regrettably, we’re going to have to leave it there, Dr. Kuhn. Thank you.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg Big Picture
December 30, 2005

Interview: Robert Lawrence Kuhn, Ph.D.

Kathleen Campion:
Let us talk about deals, and today’s big deal story is Citigroup raising its bid for China’s
Guangdong Development Bank to $3 billion. Basically, this is a Western money-center
bank leading an investment group of local investors to purchase a stake in one of
China’s state-owned banks. Those are the rough outlines of the deal. We’re going to
talk with Robert Kuhn. He’s a China watcher, of course, and also senior advisor to
Citigroup Investment Banking, focusing on China, and as such, he will not speak to the
specifics of the deal. But we’ve asked him to help us build the framework. Robert,
good to have you back with us.

Robert Lawrence Kuhn:


Nice to be here.

Kathleen Campion:
Can you talk to us about the important ways this effort of a Western money-center bank to buy a stake in
a Chinese state-owned bank differs from traditional domestic M&A activity?

Kuhn:
The most important point to understand is the importance of China’s finance industry in general, and of its
banking industry in particular, in the country’s economy, which is, of course, so critical to the world
economy now. For decades, the Chinese state-owned banks were really just mechanisms to funnel
money from the government to state-owned enterprises, subsidizing many of these enterprises by funding
their losses. So, these banks were not really commercial banks, and as a result they built up huge
portfolios of nonperforming loans. Worse, these banks had no culture of banking expertise, they didn’t
understand credit analysis or risk management—they didn’t do all of the things that Western banks do.

Now that China is becoming a market economy, integrating into the world economy, the finance and
banking industry is really a critical lynchpin. In fact, some have said that China’s finance and banking
industry is the weakest part of China’s economy. Therefore, what to do? There are competing interests
here. On the one hand, China recognizes that its banks need access to Western ideas, techniques,
expertise, management, technology, and capital. On the other hand, China does not want to give its
finance and banking sector wholly over to Western (or foreign) banks, so that heretofore there has been a
cap of 25 percent ownership of a Chinese bank that China would allow Western (or foreign) institutions to
buy (with any one foreign institution limited to 20 percent).

But now China has decided that maybe for some of the smaller banks—like the one we’re talking about,
Guangdong Development Bank, there are several others—the government may allow Western institutions
to take a larger stake. This entire process is very different from how traditional mergers and acquisitions
work in the West, but it is very much consistent with the needs and interests of the Chinese finance and
banking industry and its critical central role in China’s economy.

Kathleen Campion:
It’s clear why Western money-center banks want to buy into this remarkably powerful and growing
economy. It's less clear to me why China, the state, would want to sell off the property. Is it because it
would cost them so much to redeem the banks they’re selling?

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Kuhn:
That’s part of the reason, but not the major part. The primary reason why China is willing to sell
substantial stakes in some of its banks is that China recognizes that it needs Western expertise. As I’ve
said, there is a natural tension here. On the one hand, you’re right, China does not want Western
financial institutions to dominate their finance and banking sector. On the other hand, they need Western
expertise as well as capital, expertise being the most important: how to run a commercial bank, how to
manage credit facilities, how to control risk—all of the sophisticated techniques and technologies that
th
Western financial institutions have developed during the 20 Century—China desperately needs all these.
That’s the tension. They don’t want Western financial institutions to control their finance and banking
industry. Yet, at the same time, they need their capital, and more importantly, their expertise.

Kathleen Campion:
In getting back to the whole deal-making notion, if, as reported, Citigroup goes up 5 percent, that would
mean they would be paying a high premium compared to, say, Bank of America paying 1.5 times book.
Is the price really notable?

Kuhn:
I don’t want to comment on the specifics of any deal but I will make some general comments. As I’ve
said, when international institutions have invested in the largest Chinese banks, they were limited to 25
percent in total and 20 percent for any one institution. Now, for some of the smaller Chinese banks, well
below the big four Chinese banks in size, the Chinese government may be making an exception to their
current rule by allowing Western financial institutions to lead a group, which includes domestic Chinese
companies as well, to purchase a larger stake, indeed, perhaps more than 50 percent (or even higher), so
that the foreign institutions actually obtain full control. Legal and operational control is the difference
between what may be occurring now with some smaller banks and the earlier kinds of investments, which
were minority participations and included providing expertise and advice but in no way involved control.

Kathleen Campion:
I take your point. We have to leave it there. Robert Kuhn, China watcher and senior advisor to Citigroup
Investment Banking.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg Big Picture
September 13, 2005

Interview: Robert Lawrence Kuhn, Ph.D.


Kathleen Campion (Host):
Dr. Robert Kuhn advises China on economic policy, mergers and acquisitions, science,
and media. He’s also the vice chairman of the new Beijing Institute for Frontier Science.
And he’s Senior Advisor at Citigroup China. Bob, good to have you back with us.

Robert Lawrence Kuhn:


Kathleen, good afternoon.

Campion:
Merrill has estimated that investment banking fees in China may triple to something like
twelve billion [dollars] by 2010. Would you expect American banks to collect most of that twelve billion?

Kuhn:
I wouldn’t necessarily say most of it, but I think it’s going to be one of the major growth areas for the
American finance industry in general—commercial banking, investment banking. It is a very exciting time
and a very volatile time, and one has to be smart about serving both issuers and investors.

Campion:
Talking about the volatility, we heard Morgan Stanley’s Chief Global Economist Stephen Roach a
moment ago tell us that China needs to come up with a more sustainable growth model. He says that
Chinese officials disagreed. Can you recast that exchange a little bit?

Kuhn:
When you look at China, you see a volatile situation, but certainly the broad trajectory is heading in the
right direction. I think there are some problems as we look to the future. One, the current accounts
certainly are imbalanced, and that can’t exist forever. Secondly, what’s not often noted is that China has
[is generating] a great deal of its growth from [investments in] fixed assets. Its GNP is growing at a very
attractive rate, but much of it is pouring into infrastructure. And [while] some of that is needed and good,
of course – building roads and bridges and all the things that the country needs for distribution – but in
another sense, there is a certain artificiality to it. China is perhaps the greatest sustained economic
success story in the history of the world, but that brings with it a host of issues. China is still a developing
country. Domestic economists estimate that it’ll take probably twenty to even fifty years before China can
emerge as a truly developed country in a Western European sense, or even a lower-level Western
European sense. So we go [our image of China goes], thirty or forty years ago, from China being a kind of
sick man, economically depressed, to now, suddenly, an economic powerhouse with all sorts of hype. But
the truth is that China has a long way to go. They’ve made a great deal of progress, and it is entirely in
America’s interest to guide China on its path to responsible statecraft, and to integrate our economies for
the benefit of the standard of living of both our peoples, and of the entire world.

Campion:
We’re talking with China-watcher Dr. Robert Kuhn about many elements of the China story. It’s just all
over the place. It’s trade; it’s energy; it’s everything. And China’s president is coming to the United
Nations. Bob, China has made no secret of wanting to become more engaged with the rest of the world in
trade and in lots of other ways. Is this just another step in that direction?

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exploited in any manner. Failure to observe the restrictions cited above can result in potential liability, including responsibility for
costs associated with any damage claims that may occur.
Kuhn:
It sure is, and it’s a really important one. When President Hu Jintao is at the United Nations, he is
symbolizing China’s re-emergence as a world power, as an increasingly responsible country. And when
he meets with President Bush, he has a very specific agenda. Four points: First, China’s relationships
with America are exceedingly important for China. President Hu has a vision of a “Harmonious Society” in
China, and he cannot bring that about without good cooperation from the United States. Second, he
would like to refute this concept of a “China Threat” in that China’s rise will be peaceful and will not imperil
other countries. China has certain hot buttons like Taiwan, which need to be handled delicately. Third,
what I said before, China is not a developed country. It has a long way to go, and there are stresses and
strains, and everybody needs to appreciate that. And finally, the fourth point is that [while] we all
recognize that China is not a democracy [in the Western sense], but President Hu and his administration
would like President Bush and the world to know that the Chinese government has great concern for its
citizenry and will be making political reform, but at their pace, in their graduated way. So that’s President
Hu’s agenda, and it all leads to his concept of developing a Harmonious Society, which is critical in China
if it is to become a developed nation in the future.

Campion:
Take us inside a little bit, and I’m thinking about the trade data that came out today vis-à-vis China. The
chamber of commerce here in the United States says that China is making positive regulatory changes
that seem to indicate an opening of their markets, but at the very same time, they are adopting new
policies that undercut those changes. Does that sound likely?

Kuhn:
I think you have to look at it [industrial policy] on a microeconomic basis: look at each individual industry
and see what’s happening. Overall, the trend is absolutely inevitable and inexorable towards greater
reform. One non-economic policy that has occurred recently, which I think is very significant, is that China
has stated officially that it will no longer keep the number of deaths from natural disasters a state secret.
They had done this for decades because they didn’t want to inflame their populations with bad news. But
now they’re going to tell the truth about these disasters because they recognize that in the modern world
[such truthful information] is essential for their country to develop. So these are the kinds of trends that
are the significant ones. Now there have been some steps backward. For example, the media industry.
Whereas American and other foreign corporations were establishing joint ventures and looking for
innovative entries into the market, China has rolled back [reform], and has [instituted] more restrictive
policies. China is sensitivity about maintaining social control, and [while] we all don’t particularly like it
[these new restrictions in media], we understand [why they do it]. So each industry needs to be looked at
in its own specific aspects, but I think the overall trend is toward gradual reform and a deepening of
relationships with the outside world. And the more we encourage Chinese companies to come to the U.S.
and encourage China to open its markets [for U.S. companies to enter], the more our economies will be
tied together for everyone’s benefit.

Campion:
All right, that has to be our last word, unfortunately. Thanks very much for your thoughts today. This is Dr.
Robert Kuhn, advisor to China on all manner of things: economic policies, science, media. And he helps
us out every now and again with the look at the “China syndrome,” as we call it – the progress of China’s
relationship with the United States and the rest of the world.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg Countdown - July 21, 2005
Interview: Robert Lawrence Kuhn, Ph.D.
Kathleen Campion (Host):
Let’s welcome back Robert Kuhn. Robert is a Sinologist, an author and an investment banker. Since
1998, he’s been advising the Chinese government on economic policy, and M&A activity as well; and
his book, The Man Who Changed China: The Life and Legacy of Jiang Zemin, is the number-one
bestseller in China right now. Robert, good to have you back.

Robert Lawrence Kuhn, Ph.D., China Expert:


Hi, Kathleen. Pleasure to be here. Lots of exciting news.

Campion:
Big day, yeah. Now, one consensus forming around the decision to revalue the Yuan is that it will head
off protectionist sentiment in the US Congress. Do you think it’s got that much kick?

Kuhn:
Economically it doesn’t, but politically it does. It shows a willingness on China’s part to play its
increasing role as a responsible nation, as part of the world’s integrated global economy. And it
doesn’t mean it’s the last move. It’s the beginning. It shows good faith. It was done on China’s terms.
It always has to be done on China’s terms. They could never be seen to be kowtowing or submitting to
pressure from a foreign government. That’s a political no-no internally, just as we have our issues. So
they did it as a surprise. And this was a move they did to show good faith. Everybody recognizes
more needs to be done, but it’s a good start.

Campion:
Robert, just to pursue that point a little bit, do you mean this message of, “We did it in our own time, on
our own terms,” needs to be delivered domestically, or internationally?

Kuhn:
Well, the message needs to be delivered domestically, in terms of their own internal politics, and also
from an international perspective, it shows that China will play according to the rules. But it will still do
it to protect its own national interest. It’s not going to be a reflex reaction when Washington or London
or Tokyo says, “Jump,” and they say, “How high?”. That will not happen. From our point of view, I’ve
heard commentators say that the revaluation should have been 10 percent, and the real value of the
Yuan is 25 to 40 percent higher than it is, and this is just a token and meaningless gesture. And in fact,
it’s not meaningless. The change is a significant one. China has to manage its own economy to
prevent the perturbations, and at 25 to 40 percent, those numbers we’ve heard bandied about, would
be true in an ideal world where everyone was rational, and where China and America were the only
players, and the only issue was pure supply and demand economics. But that’s not the case.

Campion:
Would you expect a further revaluation this year?

Kuhn:
I would doubt that it would be this year, but one never knows. I would expect some gradual
evolutionary moves that will not exacerbate their domestic political sentiments. So I would look for a
series of gradual moves in the very small percentages that we’ve seen today over time. But we should
not wish for a great deal more, because stability, for everyone’s sake, is the most important thing, and
politicians in Washington need to understand that.

Campion:
As you’ve hinted, Chinese-US relations can be prickly. It appears that it was official Washington
opposition to the CNOOC bid for Unocal that may have soured CNOOC’s chances there. Would you
expect, if that’s the case, some sort of Chinese government retaliation for that slight?

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reproduced, transmitted, retransmitted, publicly displayed, distributed, sold, licensed or commercially exploited in any manner. Failure to observe the
restrictions cited above can result in potential liability, including responsibility for costs associated with any damage claims that may occur.
Kuhn:
I think there already has been some commentary by the foreign ministry in China, which I thought was
a little ill-advised, in reaction to Washington, which were not helpful. I think there is probably an
underlying nationalistic sentiment, not just in the government, but more importantly in the people, in a
lot of young people. You see that in internet chat rooms, and just in common conversation. And that’s
unhealthy. I think the senior leadership recognizes that China is part of the global economy, that it
needs to be integrated, and we have to have our policy in line with America’s best long-term interests.
And I have said that as Chinese companies begin to emerge from this vast morass of government, and
become independent entities – strong independent entities, like CNOOC and Haier, even though they
may be owned by the government – they become independent sources of power, and, therefore,
contribute to the increasing pluralism in Chinese society. And that’s a trend that bodes well in
everyone’s long-term interest. And we should be encouraging that. We should be reinforcing
behaviors that are according to the norms and practices of international markets.

Campion:
So you’re really stretching the market play into sociology, economics and politics.

Kuhn:
Well, it’s all integrated together. I don’t think you can separate one from the other. The markets move
tremendously over rumors of political events. And so everything is all tied together in today’s world.
The entire legitimacy of the Chinese government is founded on economics, on delivering an increasing
standard of living, on maintaining a high growth rate, of minimizing unemployment and migrant
workers, and income disparity. There’s a whole series of very hard issues that they have to deal with.
And this is not an isolated country from an American point of view. It’s right in our sweet spot of how
we live. Our standard of living is really dependent upon China being stable, helping us with prickly
international issues like North Korea, and also the integrated economies. If China revalues too much
too quickly, not only do they destabilize themselves, but the American standard of living goes down,
because goods will be higher priced for the vast majority of Americans. China may withdraw some of
its funds from investment in our deficit. They may do that ahead of a revaluation, if it was going to be a
big one, in which case it would cost us more money to borrow, for the government to borrow, which
would also be inflationary. So you’d have a number of inflationary pressures, so we have to be careful.

Campion:
Right. A lot of those things have been raised today, piecemeal. It’s interesting to hear you weave it all
together. Let me ask you to help us with the timing here. Our previous guest was telling us he expects
a new wave of acquisitions: Chinese companies anxious to acquire US companies for a lot of reasons.
But let me ask you this: given the reception that CNOOC – and even Haier – received, do you think that
wave is really about to break?

Kuhn:
I wouldn’t call it a wave. I’d call it an inevitable trend, and a trend that we should applaud, not hiss at.
Provided that American companies – international companies in general – have equal access to the
Chinese market. Because that brings economics into a stronger position than the pure political dances
of the past. So, provided that we have the opportunities to go into their markets, which we do – it’s
limited. Certain industries, like media, it’s zero. Other industries, it’s completely open. In other
industries – finance, for example, telecom – it’s limited to certain percentages over time. All of that
needs to move to a more open market. But as that does, we should then welcome Chinese companies
into our market. I don’t look for a wave to break. I think the previous gentleman said, “a couple of
percentage points cheaper than American companies today.” That’s right. I think some spreadsheets
that are cranking out in China will be recalculated today and see if it makes sense to make an offer for
this or that company they may be thinking about. And I think all that’s good.

Campion:
All right. We have to leave it there. As always, a pleasure. Thank you, Robert Kuhn, Sinologist,
author, and investment banker.
ROBERT MARSTON CORPORATE COMMUNICATIONS, INC.

Bloomberg Radio
Bloomberg Countdown - July 13, 2005
Interview: Robert Lawrence Kuhn, Ph.D.
Kathleen Campion (Host):
This is the Bloomberg Big Picture. We’re talking with Robert Kuhn, who is an expert on China with a
wide area of expertise. He is not only a China watcher, but also an investment banker; and he has
advised on policy levels regarding China. So Robert, should we start with the emotion in Congress?

Robert Lawrence Kuhn, Ph.D., China Expert:


Sure. I think the first thing is to look at the broad picture. What is in America’s best long-term interest?
As we look at the world, the bilateral relationships – good or bad – between the U.S. and China are
going to be the defining issue for this decade, and perhaps several decades of the twenty-first century.
And if we look at this artificial competition as a product of the archaic social competitions, or social
systems, of the nineteenth and twentieth century, that misses the point. The contention in today’s
world is between the forces of stability and modernism on the one hand, and anarchy and sectarianism
on the other; and on this battlefront, America and China should be on the same side.

Campion:
So you would argue that solidifying relationships on a commercial level, even if it’s between a
government entity and public company, is a good thing, long-term, right?

Kuhn:
We should reinforce those positive behavioral characteristics of Chinese enterprises that are emerging
from the planned economy, and the transitioning from a state-owned situation into a free-market
economy and a more pluralistic society. That should be our policy. We certainly should insist on an
equal right to buy Chinese companies; and if I can correct a misunderstanding here, American
companies and foreign companies can buy Chinese companies. There are restrictions. There are
restrictions in military industries and energy areas, and in media for sure; but in many industrial areas,
these are not only possible and happening, but continuing to increase at the WTO. So we need to
insist upon more of that and encourage those Chinese companies that are emerging from the planned
economy to enter the world market.

Campion:
CNOOC, as we all know, is battling Chevron for possession of Unocal, but at the same time, CNOOC
is remaining in talks for the Chevron and Gorgon gas venture. They – CNOOC – want to buy $32
billion worth of fuel from Chevron. Doesn’t that tell us more about the energy business than it tells us
about the actual relations between Chevron and CNOOC?

Kuhn:
I think it tells us about business in general, and we want to encourage that. And it’s perfectly fine for
good, longstanding enterprises to be competitors on the one hand, and partners on the other. That’s
all well and good. I think where we politicize the matters – where we get into trouble – is when we say
that American companies can’t buy Chinese companies. That’s not true. That’s just patently untrue.
And we bring up a whole series of issues that are really off the point. Strategic energy reserves need
to be considered, but on that basis, there are many experts that will tell us that this deal is really rather
inconsequential to that. We need to focus on understanding the transition of China, and helping China
transition from its former state-owned, very controlled state into a free-market economy, with increasing
pluralism in their society. And when companies like CNOOC and Haier, which is going after Maytag,
and Lenovo, which bought an IBM PC unit, emerge from their state-owned histories, they become
independent entities in their own right. Even though they’re still owned by the state, they’re controlled
by the state. They have shareholders, their CEOs become aggressive, they have egos; we want to
encourage that, just like American companies have CEOs with egos and ambition. Because they
become stronger, and, therefore, become a check and a balance to the Chinese government, which is
good for everyone

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reproduced, transmitted, retransmitted, publicly displayed, distributed, sold, licensed or commercially exploited in any manner. Failure to observe the
restrictions cited above can result in potential liability, including responsibility for costs associated with any damage claims that may occur.
Campion:
Robert Kuhn, a point well made. Let me ask you to follow-up on a Washington Post story today. Their
argument is that the invasion of Iraq by the United States essentially changed China’s world view on
oil. China, as you know, had cultivated Saddam Hussein’s government, and even supported lifting UN
sanctions. And if they developed some promising oil stakes in Iraq, and then the invasion wiped that
out. So China rethought its policy. Does that hold up logically for you?

Kuhn:
Well, I think oil is a critical element, and energy is, for China. China is addicted to growth. It must
maintain a very high growth rate: seven, eight, nine percent. If it doesn’t, it will have very severe social
problems. And it’s a net importer of energy, so energy is a very critical element for China. There’s no
doubt about that.

Campion:
So they would have gone elsewhere anyway?

Kuhn:
This has certainly driven Chinese foreign policy, as far as its relationships with various countries such
as Africa, Iran and Iraq. Certainly, that’s the case. This is a complex issue. But what we need to do is
to encourage those kinds of behaviors which will lead China to transition to a stabilizing factor in the
world. China is obsessed with stability. They’ve had a horrendous history in the twentieth century on
instability caused by foreigners, and much caused by their own people and their own leaders. And the
current leadership is obsessed by stability. China has many internal problems. Income disparity is
now worse than it was before the Communist revolution. But that is a natural product of its dramatic
economic growth. China has to control this. It can control this by a growing economy – the economy is
dependent upon energy. So it’s a very complicated, multifaceted problem. But our view in America
really needs to focus on what’s in our best long-term interest. And a stable, strong China, a partner in
the world in trade, in assuring stability in international affairs, is clearly in our best interests.

Campion:
And I wonder where you think that begins, because when you look at the political argument, the
politicians seem most vexed with China about the trade imbalance, about the currency issue, about the
intellectual property issues. If not for those, some argue that CNOOC would never have been a big
deal.

Kuhn:
Well, I think that China has always been a whipping boy in the political arena, and frankly, so is
America in China. If a politician in China is soft on America, that’s a problem for him or her. So, this is
a common issue that we all have to learn how to deal with. But we need to keep our long-term
interests very clear. Every issue you mentioned is a legitimate one. They’re all interconnected, and we
need to solve them in parallel, not singularly. If we are talking about the revaluing of the Yuan, it’s a
multi-faceted problem. China cannot, by their own psychology, succumb to pressure. But if it is done
appropriately, generally, they will, on their own, revalue the Yuan, to some degree. But, we have to be
careful about that. There are many interconnected factors that could lead to a lot less desirable effect
on America. Communist China is being used to echo the 1950s, the Cold War and the Korean War,
and that’s out of touch with reality. The Chinese Communist party runs China, and it does it in a way to
control society, and to control its stable growth rate.

Campion:
We are going to have to come back with more on our answers for China with Robert Kuhn, our China
expert and investment banker.
AGENDA 2006 I 11/10/05 10:58 AM Page 24

AGENDA 2006

Mastering the Art of Doing


Business in China
Not enough CEOs know how to play the
game to their advantage. BY ROBERT L. KUHN

O
f all the challenges ket economy. Figuring out how to navi-
facing chief execu- gate this transition is obviously complex.
tives, getting China Foreign executives are usually naive.
right is one of the Few are even aware of the relevance of
most import a n t . politics, much less know how to play it.
But many CEOs When they envision the “Chinese govern-
assume they can do ment,” they see a monolith, displaying an
business in China the way they do busi- idealism that’s laughable to the Chinese.
ness in other countries. They cannot. If Foreigners are often not aware of compet-
most business is local, most business in ing interests among central, provincial
China is also political. and municipal levels of government, and
China says it is evolving into a “social-
ist market economy with Chinese charac-
teristics.” While critics consider
that a tortuous way of har-
monizing capitalistic
practice with Com-
munist ideology, it
reflects a long and
complex transi-
tion from a plan-
ned economy to
more of a mar-

Robert L.
Kuhn, author
and Citigroup
China adviser

24 www.chiefexecutive.net December 2005


AGENDA 2006 I 11/10/05 10:58 AM Page 25

on each level among diverse commissions, BEST PRACTICES


ministries, agencies, departments and
bureaus with overlapping interests of turf Kuhn on the Do’s and Don’ts
and power.
On the personal level, lack of awareness  Conduct (quietly) analyses of  Don’t neglect any level of govern-
is often worse. Foreign executives imagine those you’re dealing with. Assess polit- ment—central, provincial, local. All but
ical factions and alliances between indi- the very largest businesses depend on the
that if they have a pleasant meeting with
viduals within government agencies, support of local and provincial government,
the CEO of a state-owned company, or
partners, suppliers, customers and com- and that support (or lack of hindrance) is
surely if they are encouraged by a govern- petitors who can affect your business. often instrumental in corporate success.
ment official responsible for that industri-
al sector, then they have a high likelihood  Build relationships with key peo-  Don’t underestimate the impor-
of achieving their goals. They do not appre- ple, personal as well as professional. tance of personal relationships. China
Discern their real objectives and under- is changing, but personal relationships
ciate the disparate personal loyalties that
stand their background—education, (guanxi) continue to play a role in gener-
thread through most Chinese organiza-
hometown, family, prior jobs, relationships ating trust and assuring loyalty.
tions, or customary mechanisms of deci- and aspirations.
sion-making that usually require agreement  Don’t overestimate the importance
at multiple levels. In many organizations,  Watch retirement ages. Do not rely of personal relationships. In other
on executives or officials approaching words, don’t rely on any one person in a
someone quite low in the power structure,
mandatory retirement (the age differs by Chinese institution, government agency
someone surely unknown to the foreigners,
rank and sector). Successors are likely to or state-owned business—not even the
may maintain effective veto power. top person. People get promoted, demot-
distance themselves from predecessors’
In one case, the CEO of a Chinese state- friends and partners. ed or transferred, sometimes suddenly.
owned partner in a joint venture was, unbe-
 Cater to the most senior executive  Don’t think that if the boss agrees,
knownst to the foreign partner, locked in
or official in every meeting. Chinese the deal is done. Organizations, particu-
a long-standing political struggle with his
organizations are still built on strict hier- larly government agencies and state-owned
government boss, a personal battle that was enterprises, often have multiple lines of alle-
archies, and foreign executives must be
common gossip around the organization. giances that even CEOs cannot overrule.
sensitive to that.
When the CEO was ousted, the govern-
 Align your interests with those of  Don’t assume that all Chinese are
ment cut its support for the venture. The
your Chinese partners and managers. on the same side. Chinese people, like
foreign partner never had a clue about what
Structure and organize your business to all people, are interested in their own pri-
was obvious to everyone else. vate careers, opportunities and financial
be as self-regulating as possible (as if
there are neither legal contracts nor inter- benefits.
Using Powerful Tools
nal controls).  Don’t forget Chinese history, partic-

P
olitics, used properly, can be a
 Awareness is critical. Once politics ularly as it may affect the attitudes and sen-
powerful tool for getting deals
are understood, companies can utilize rep- sitivity of people who affect your business.
done and keeping joint ventures
on track. In structuring one very large utable advisers—professionals with long  Don’t depend on a change in law or
experience in China whose track record regulations. Politics are complicated, mired
joint venture in China, a European man-
and relationships can be independently in competing interests. Time estimates
ufacturing multinational found itself at a
assessed. Beware of charlatans claiming for government action can mean little.
standstill after protracted negotiations. It to be related to a government official.
decided to take a risk by inviting the most  Don’t assume that a contract will
senior provincial leader—the Party secre-  Seek natural allies. Identify institu- protect you. China is serious about oper-
tary—to participate in the discussions. tions and individuals who will benefit from ating according to rule of law, but it is not
your success and seek to engage them. there yet. Personal relationships and busi-
Involving the senior leader directly could
Similarly, identify any who will benefit from ness importance come first; contracts
be ill-advised because there’s typically no
your failure and seek to neutralize them. come second.
appeal of whatever decision he makes.
However, the foreign company had done

CEO Magazine December 2005 25


AGENDA 2006 I 11/10/05 10:58 AM Page 26

AGENDA 2006

its homework and knew that in the Party


secretary’s previous position (in Guang-
dong province), he had shown great
innovation.
The gamble worked. To this day, the
Party secretary speaks of this high-profile,
successful deal as a source of personal
pride.
In a case that highlights the impor-
tance of personal relationships, a Japan-
ese multinational sought entry into an
industry requiring a special license by
engaging a large state-owned conglom-
erate in a similar industry as its partner.
After months of futility, the Japanese
executives realized that although their
Chinese partner was in their same indus-
try, it was less powerful than the Chinese
partner chosen by the Japanese compa-
ny’s chief international rival. As a result
their license application was being
blocked.
After doing sensitive political analy-
sis (using politically savvy consultants),
they were introduced to a much small-
er Chinese company in a different indus-
try, but one whose executives had deep
personal relationships, going back to col-
lege, with key regulators. The Japanese
then got the license.
Obviously, foreigners cannot discern all
the politics swirling around and within
Chinese organizations, and indeed most
foreign executives do business in China
without ever appreciating it. What hap-
pens, though, is that the politically naive
never understand why their deal is delayed
or aborted—or how negotiations can be
facilitated, problems averted and issues
resolved. 

Robert Lawrence Kuhn, a senior adviser to


Citigroup China, is the author of The Man
Who Changed China: The Life and Legacy
of Jiang Zemin (Random House, 2005), the
best-selling book of the year in China.

26 www.chiefexecutive.net December 2005


UN C OMMON WISDOM

Talking to China
he irony about China, a cans focus on their huge trade
What Business

T
senior Chinese leader told imbalances with China, Chinese
me recently, is that “when fret about foreign acquisitions of
Leaders Can Learn for more than a century for- their companies. Americans envi-
eigners thought we were so sion China as a voracious econom-
from Politicians weak, we weren’t really so ic competitor and growing military
weak, and now when foreigners power; Chinese assert that more
Mistakes think we are so strong, we aren’t than half of its exports—and about
really so strong.” 85 percent of high-tech exports—
BY ROBERT LAWRENCE KUHN
PHOTO CREDIT HERE

When American and Chinese come from foreign-funded firms,


political leaders interact, divergent and that it needs a strong military
perceptions are common. Ameri- to protect its homeland. Ameri-

20 www.chiefexecutive.net March 2007


cans see China awash with cash, Most Chinese believe that Amer- Disturb the former, they warn, and
holding more than $1 trillion in ica seeks to “contain China” and you disrupt the latter.
reserves; Chinese see their vast, poor thwart its historic resurgence as a America and China should respect
rural population, 300 million of great nation. This is the real reason, each other’s thinking. Chinese
whom must be moved to urban they say, that America supports Tai- should appreciate that Americans are
areas by 2020. wan, not as a worthy democracy but genuinely troubled by China’s appar-
Divergent perceptions are danger- as an “unsinkable aircraft carrier” ent lack of democracy, human rights
ous. In 1999, during NATO’s mili- by which America can assert domi- violations, support of dangerous
tary campaign against ethnic nance over China and keep the regimes and huge trade surpluses;
cleansing in Yugoslavia, an Ameri- motherland divided. Chinese see this is why China’s continuing mili-
can aircraft accidentally bombed the America encircling them by mili- tary build-up is so worrying. Ameri-
Chinese embassy in Belgrade. tary alliances with Japan, Taiwan cans should appreciate that China’s
When the Chinese government and perhaps India; forcing open stability requires a different develop-
bused college students across Bei- their markets to control China’s mental path due to its different his-
jing to the U.S. Embassy to protest industries and exploit Chinese con- tory and culture and to its massive
violently, American politicians sumers; and by introducing West- population, and that China’s resur-
assumed that Chinese leaders ern culture to erode China’s gence as a great nation and responsi-
orchestrated the demonstrations. In independence and sovereignty. ble power is good for the world.
truth, the Chinese leaders worried Most Americans believe that Chi- To understand China today one
that if protesting students marched na is a determined, monolithic com- must understand President Hu Jin-
through the city to the U.S. Embassy petitor whose intentions appear tao’s overarching vision, summarized
their ranks would swell with work- threatening. They view China as act- by three slogans: “Harmonious Soci-
ers and common citizens. So the ing solely in its own interests, even to ety” and “Scientific Development
Chinese leaders determined that the detriment of the international Perspective” domestically and
busing the students would be the order—such as by selling weapons to “Peaceful Development” internation-
best way to contain, and not exacer- Iran and sustaining North Korea’s ally. Harmonious Society calls for
bate, the volatile situation—precise- intransigence. Americans see China fairness and equity across China’s
ly the opposite of what American as an economic predator that keeps diverse populations and geographies
politicians assumed. its currency artificially low to boost and embeds careful social, legal and
To no small degree, the peace and exports; as a repressed society that political reforms. Scientific Develop-
prosperity of the 21st century tramples human rights to maintain ment Perspective applies optimized
depends on the bilateral relations Communist Party control; and as a sets of solutions to arrays of econom-
between China and America. Good looming military force that harbors ic, social and environmental prob-
communications are vital for politi- expansionist ambitions. lems seeking to rectify economic
cal leaders, and it is no less so for The Chinese government does imbalances, increase energy conser-
business leaders. Let’s explore both. not deny that its policies benefit its vation, reduce pollution, achieve sus-
own people—any legitimate gov- tainable development and prioritize
Political Communications ernment, they say, should. With 1.4 innovation. Peaceful Development

E
ffective political communi- billion people, the Chinese obses- conveys that no matter how strong
cations require honesty and sion with stability has been seared China becomes, it will never threat-
clarity. The place to start is into the collective consciousness by en its neighbors.
for each side to explain how it truly a catastrophic political legacy of
feels about the other side. Being frank roiling mass movements that deci- Styles of Communication

C
is often uncomfortable, but if both mated a generation and, nearly, the hinese and Americans, by
sides are sincerely interested in reach- country. They see China’s stability tradition and culture,
ing agreement, it is often the opti- and development as essential for express subtle differences in
mum approach. world stability and development. styles of communication. A senior

CEO Magazine March 2007 21


UNCOMMON WISDOM

Chinese official contrasted four deprecating banter or smile in seri- the recitation of these principles
general ways of thinking that cause ous situations. As such, Chinese may be repeated more than you
political misperceptions and which leaders may appear more rigid, think necessary; do not move too
affect all instances of Chinese- inflexible, impersonal, doctrinaire aggressively to nail down specifics.
American communications, com- and unapproachable than they real-  Recognize that as China
mercial as well as political. ly are. The dour countenances of adopts elements of democracy, col-
 Chinese are more indirect and many Chinese officials may well be lective decision-making in many
cyclical, whereas Americans are more the residual conditioned response to large Chinese enterprises has
become more common. Senior
management is now less able to dic-
Americans see China awash with cash, tate decisions than their American
counterparts. Chinese business
holding more then $1 trillion in reserves; leaders must engage their own mid-
Chinese see their vast, poor rural popula- dle management in sometimes-
laborious internal discussions and
tion, 300 million of whom must be moved negotiations before finalizing an
to urban areas by 2020. important transaction. This means
that foreign business people must
work with many managers in the
direct and linear. Thus, Americans a past system of fear-driven gover- hierarchy, even those down the line
may see Chinese as evasive and nance where a single mistake could in the chain of command.
deceitful, whereas Chinese may see cost an official his job, if not his free-  Respect the formality of meet-
Americans as rude and arrogant. dom. Under President Hu, there is ings; maintain professional decorum.
 Chinese use more abstract more tolerance: mistakes don’t end Business success in China is
forms and general terms, focusing careers, risks can be taken. determined by multiple factors and
on principles and theories, whereas difficult enough under ideal condi-
Americans use more concrete forms Business Communications tions. Don’t manufacture addition-

L
and specific terms, focusing on prac- et’s consider each of these al stumbling blocks with poor
tice and precedents. Thus, Americans contrasting styles of commu- communications. Although politi-
may see Chinese as programmed and nication, and construct gen- cal leaders often seem genetically
robotic, whereas Chinese may see eral principles that American predisposed to have divergent per-
Americans as pompous. (For exam- businesspeople can apply when ceptions, business leaders should
ple, the American media tends to dealing with executives of Chinese rise above such instincts and avoid
mock China’s political slogans— companies, particularly those of such errors. 
when it considers them at all—as state-owned enterprises. (At private
empty jargon, rather than consider Chinese companies, especially Robert Lawrence Kuhn, senior advi-
the insight into political priorities high-tech firms, there is more sim- sor at Citigroup and senior partner of
they offer.) ilarity with Western ways and these IMG China, has worked with the Chi-
 Chinese stress the collective principles are less applicable.) nese government for 18 years on eco-
more than they do the individual,  Be patient in negotiations. Do nomic policy and business issues. He
believing that the needs of human not assume the Chinese side is is co-editor-in-chief of China’s Bank-
society exceed in importance the being deliberately opaque. If you ing and Financial Markets: The Inter-
ideals of human rights; Americans must press for answers or resolu- nal Report of the Chinese Government
prefer the reverse. tion, do so with sensitivity and and author of The Man Who Changed
 When dealing with weighty respect. China: The Life and Legacy of Jiang
matters, Chinese are not given to  Learn to appreciate the pur- Zemin, the best-selling book of the
humor, nor do they engage in self- pose of general principles and why year in China in 2005.

22 www.chiefexecutive.net March 2007