Former U.S. Treasury Secretary Hank Paulson joined “Bloomberg <GO>” this morning to discuss the Chinese economy, corporate taxes, and the 2016 Presidential race.

On China, Paulson said it is “an economy in transition and it’s got some very serious challenges, short term, intermediate, and long.” He added: “the solution to all of them, rebuilding confidence and dealing with the debt and new drivers of growth are speeding up the reforms, and the reforms that they need to put in place to really scale back the state owned enterprises, these oligopolies, put them on a level playing field and let the private sector do what they need to do.  And it’s a matter of political will.”

On Trump and 2016, Paulson said: “I don’t think we’re going to see a President Trump…I’m seeing things today that I never expected to see from either party and things that are very disappointing and disturbing to me, the level of the discourse… I’m not going to make a prediction on who our president’s going to be.  But I will stick my neck way out and say, I don’t think it’s going to be Donald Trump.”

Hank Paulson

Hank Paulson: I don’t think we’ll see a President Trump

Where Is the Chinese Economy At Right Now

Paulson Weighs in on Corporate Taxes

David Westin:  This week, U.S. Treasury Secretary, Jack Lew stunned investors with a harsh crackdown on cross-border mergers designed to avoid U.S. taxes.  A treasury secretary shocking the street is not unprecedented.  With us to talk about inversions, but really first about China, is former U.S. Treasury Secretary, Hank Paulson, also former Goldman Sachs chairman and CEO, and most important for this purpose, author of “Dealing With China”.  Hank Paulson, welcome to BLOOMBERG <GO>.  Great to have you here.

Hank Paulson:  Very good to be here.

David Westin:  OK, so let’s start with China, please, because this is what your book is about.  You’ve spent a lot of time in China in different capacities, and you have a prescription for what we should be doing going forward, but before you do that, give us a snapshot of where the Chinese economy is, in your view, right now.

Hank Paulson:  Well, it’s an economy in transition and it’s got some very serious challenges, short term, intermediate, and long.  Short term, currency, which is moderating a bit, the challenge here, but overcapacity and confidence.  Intermediate, you’ve got this debt which is a very big issue, and of course, looking a little bit further, they need a new growth model very much, new drivers of growth.  And as I look at it, the good news is, the solution to all of them, rebuilding confidence and dealing with the debt and new drivers of growth are speeding up the reforms, and the reforms that they need to put in place to really scale back the state owned enterprises, these oligopolies, put them on a level playing field and let the private sector do what they need to do.  And it’s a matter of political will.

Now, as I look at China, the market responds to volatility anywhere, but when you get a country as big as China and with the scale of their problems, it magnifies that volatility, and again, as I look at the country, I think the biggest problems are a few years in the future.  They can be mitigated if, as I said, if they speed up their reforms, but I think what we’re going to be looking at for a number of years, because it’s very, very hard to reboot a $10, $20 economy, is you’re going to see continual bouts of volatility as you see the struggle between state planning and state capitalism and markets, and the leader there, Xi Jinping, has said, in the economy, I want the markers to be decisive.  That’s a lot easier said than done when you’re talking about rebooting an $11 trillion economy.

David Westin:  So there’s a lot there to unpack.  I want to make sure we talk about reforms, but first, let’s go to the short term you started with — yuan.  In the short term, do you expect that to continue to depreciate against the dollar as they try to liberalize their currency?

Hank Paulson:  So first of all, the interesting thing, it’s interesting the way you framed the question, because in Washington, people are accusing the Chinese of trying to drive down the currency, and they’ve been spending a lot of money to try to prop up the currency.  I think that they’re ultimately, what they’re doing is moving toward a currency that is more market determined.  I think right now in the short term, they understand how important stability is, because at a time when you’ve got speculative pressures to the downside, confidence to the downside, and really an understanding of the economy and what the leaders are doing at a low, this is a good time to have a stable renminbi.  And so, but I think over time, you’re going to see a market drive renminbi, and frankly, I don’t want to opine what I think the value is at a time when there’s, again, so little understanding in the markets about what’s actually going on in China and what they’re doing to deal with it.

Stephanie Ruhle:  OK, then care to opine?  Does the U.S. have a China policy?  If so, what is it, or what should it be?

John Micklethwait:  Can I join to that?  I was in China ten days ago.  You see the Chinese leadership, there are three people they talk about they know in America.  They know you, they know Henry Kissinger, they know Bob Zoellick.  Why aren’t there more people in America who have that sort of relationship with the Chinese leadership?

Hank Paulson:  Well, I would say this.  In China, the biggest ties between our two countries have been the economic ties because we’ve had really quite a robust economic relationship for some time, and this is a very troubled relationship right now in the sense that they’re under stress and a lot of people in the U.S. are rethinking, what is the value of having a good relationship with China?  What is the real value of that?  And as I look at it, this is a time when never has that relationship been more important, because despite the differences, and we could spend a lot of time talking about the differences, we have many issues where we have a common interest and it is just so essential that we keep this relationship on an even keel, because it’s in our interest, it’s in the United States of America’s interest to get some things done where we have these complementary —

John Micklethwait:  Would a President Trump be a useful ingredient to that long term stability?

Hank Paulson:  Listen, you know the answer to that as well as I do, and I don’t think we’re going to see a President Trump.

Stephanie Ruhle:  You don’t think we will?  What do you think we will have here?

Hank Paulson:  I don’t — listen, I shouldn’t even have made that comment, because I’m

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