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How does a socialist economy with a ruling communist party establish that most feared of capitalist institutions -- the stock market?
First, understand the rules. Next, judge the risks. Third, gain experience. Finally, bring all that home to build the foundation for a functioning capital market. Gao Xiqing was one of a handful of Chinese citizens sent to the United States at the beginning of the reform and opening period to understand the law and rules around economics and commerce. After hands-on experience in New York and Hong Kong, as well as time inside the bureaucracy in Beijing, Gao became the natural choice as the first president of the China Investment Corporation, the country's colossal new sovereign wealth fund (now with $1 trillion under management). It has been a remarkable journey for a kid who broke rocks for the railroad and made guns in hinterland Shanxi Province during the tumultuous years of the Cultural Revolution three decades earlier.
James Green: Welcome to the U.S.-China Dialogue Podcast from Georgetown University. This podcast series explores diplomacy and dialogue between China and the United States during the four decades since normalization of relations in 1979. We'll hear from former ambassadors, cabinet secretaries, and White House advisors -- who will share how they shaped the course of the most complex relationship in international diplomacy today.
James Green: I'm your host, James Green.
James Green: Today on the podcast, we talk with Gao Xiqing.
James Green: When countries have a money, a lot of money, and they are looking for returns for some of that cash beyond low-yield U.S. treasuries, one option is to establish a special fund for that money. Norway, endowed with significant oil revenue from the North Sea, set up its sovereign wealth fund in 1990 to manage that wealth. Singapore and Abu Dhabi established their sovereign wealth funds even earlier.
James Green: By the mid-2000s, China's foreign trade surpluses had accumulated to such an extent that authorities to establish a professionally-managed sovereign wealth fund, called simply the China Investment Corporation. Today, the CIC has about $1 trillion dollars under management invested in projects and companies around the world. Back in 2007, when the fund launched, the Chinese leadership tapped a securities lawyer to become the CIC's first president. Gao Xiqing was a natural choice; he studied law at Duke University, had worked on Wall Street, then, upon returning to China, became a guiding force inside the Chinese government just as the country was launching its own stock markets.
James Green: The China Investment Corporation was, in some ways, the natural result of global macroeconomic and financial forces -- signaling Beijing's maturation as an international power. But, it is not without controversy. Gor- some, the CIC represents many worrying parts of the assertive Chinese economic system which threatens the United States. Senator Marco Rubio raised those concerns in a May 2018 speech on the Senate floor introducing a bill called the Fair Trade with China Enforcement Act:
Sen Rubio: The third problem we have is that China -- and I mean China both its sovereign wealth management and individuals have made a lot of money, directed by government in many cases -- has gone on a buying spree, of U.S. debt, treasuries, of stocks, even of real estate - my hometown of Miami is one of the placed being heavily invested in now, to increase their trade surplus and weaken the U.S. economy.
James Green: But before he was at the commanding heights of Chinese finance, Gao Xiqing spent his youth during the Cultural Revolution digging train tunnels and working in a factory in mountainous Shanxi Province. His life's journey offers a fascinating portrait of a China that moved from an isolated and impoverished backwater, to international and cosmopolitan powerhouse.
James Green: Gao Xiqing, thanks so much for taking time today. I really appreciate ... Great to see you again. before getting to y our time, in different parts of the Chinese government, I wanted to talk, about your schooling and, and your education. Tell us where you're from and how you ended up at Duke Law School in the mid-1980s.
Gao Xiqing: Well, I'm, from Xian. it's, a very old city in the middle of China, and, when I was growing up, the cultural revolution broke out, and then, there was no schooling for some years. And then, I ... Then I got a chance to go build a railway, a railroad, and, I thought that was a great opportunity, because the, the only option ... The other option was to go to the, the farms. My sister was already on the farms, and the life was very difficult there, not enough food, everything. So, I thought, well, go to the railroad and became a worker and got a salary. So, I thought it was a great idea. But little did I know that, life there was actually l- lot harder than working on the farms, because we never had enough to eat. Food was rationed.
Gao Xiqing: I- if you listened to the ration, itself, it's the 45 gin per month.
Gao Xiqing: And that was-
James Green: That's about 45 pounds.
Gao Xiqing: About-
James Green: Mm-hmm (affirmative).
Gao Xiqing: Yeah, that's about the, the highest in China in those days. But if you have only grain for 45 gen, and then you have no, no oil, no meat, no, you know, protein, and then, then you ... and there was ... they're hard labor now. I felt I could eat about three times that much each month. So, basically, for those three years, about every day, I felt, hungry.
James Green: And w- sorry, what years were those?
Gao Xiqing: That was in 1970. I went there, that was before ... two months before I was 17. And it went, all the way 'til, 'til about, April/May of 1973.
James Green: And was this in Shanxi province or somewhere farther away?
Gao Xiqing: In Shanxi, the southern tip of Shanxi Province, in a ... deep in the mountains there, in the mountains of Sichuan, Shanxi, and Hubei, three provinces. So, we were in the middle of that, digging tunnels, and breaking out the rocks, and doing all that sort of thing. So, I, I had an i- injury there, and, that's ... Today, I still have the certificate for third-degree disabled soldier. Now, that's a concussion on the head, and, I always, blame my, you know, tardiness and my slowness to that, accident.
Gao Xiqing: So-
James Green: And at that time, what was the equipment you guys were using?
Gao Xiqing: Well, we, we had, spades. We had hammer. We ha- you know, we had those things. But for some time, we had some sort of equipment. The, the, the ... I think they imported some, some sort of, equipment. But then we decided that it was too slow, 'cause machine was slower than man, and they, they said, no, we ... Everyone wants to do, do good for the revolution, so we'll throw away the machine. We still did our w- with our hand. So, most of the time was all th- ... Everything was by hand.
James Green: Wow.
Gao Xiqing: Yeah.
James Green: have you been ba- did you guys finish the tunnel, or did you make progress in the tunnel?
Gao Xiqing: No, we basically finished everything. By the time we came back in 1973, the, the, the railway was about to complete. So, we, about, half a year after we came back, the whole, railway was completed.
James Green: Wow
Gao Xiqing: Not, not ... That's Shouchu line from Chongqing to Xiangfan, which is about 890 kilometers of railway, with probably just a few miles of railway tracks laid on flat land. The rest of it's bridges and tunnels. It's just deep, deeply in the mountains.
James Green: And have you ridden on that line?
Gao Xiqing: No. Hm, wow, that's very interesting. Yeah, I went back there about, I think, three or four years ago ... we ... just to look at that place, but, we, we drove from Xian. As-- today, on the superhighway, it's only about, you know, less than three hours drive there, but at that time, when we got there, we, we, we had a whole bunch of kids with us, you know, on ... sitting on open trucks ... took us two days to get there.
James Green: To drive?
Gao Xiqing: Yeah.
James Green: Wow. Wow, and so, you came back to Xian in 1973, and then-
Gao Xiqing: And became a bench worker in the artillery factory, making machine guns, and our machine guns were all sent to the Vietnamese, and later, of course, we found them, using that against us. (Laughs) So, very interesting -- Life. Jokes now.
James Green: Right. and so, then, you went to college here, in China?
Gao Xiqing: In Beijing. Then, in 1974, late 1974, they, they ... I got a chance to go to college in Beijing. And at that time, was no national exams, because they, they say exams are bad for the proletariat. So, we're all proletariat. So, they ... We don't have any free election, sort of free. They ... We were recommended by the workers, 'cause my workshop was the largest in the factory. We had 44 workshops in that factory. Mine was the largest, because we, we were mechanics. We fixed machines for every other place, so we know more people in the factory.
Gao Xiqing: So, I got more votes. So, they sent me. And so, um-
James Green: Fascinating.
Gao Xiqing: I went there for three and a half years, and at that time, it was called Beijing Institute for Foreign Trade.
Gao Xiqing: Today, it's the University of the International Business Economics.
James Green: Right. Which, at that time, was it affiliated with the Ministry of Commerce?
Gao Xiqing: Yes.
Gao Xiqing: At that time, was called Ministry of Foreign Trade. Yes.
James Green: and so, then, you graduated and started working?
Gao Xiqing: Well, I was ... In 1978, generally '78, we, we, I graduated. And at that time, everyone was assigned a job, you know-
Gao Xiqing: Not allowed here to f- freely choose your job. So, they, they said, well, you came from a military industry, so you have to go back to military industry. They sent me back to Xian, and that factory was built by the Russians, so I said, well, all the materials were in Russian. I said, I studied English. What's the use of this. They said, well, we'll find a place for you to use the English. So, they sent me to a research institute- ... It's a computer research institute, which uses English, and I, I was sent to the information, office, where they ... we ... I, I have to translate all these materials that they ... I don't know ... stole from, the west, so we could, translate that.
Gao Xiqing: I was, there only for half a year, because in March of '78, the central committee decided that we need to restore graduate studies, so that was the first year for a graduate school to open. So, I, I took the exam. I got number one in the national-
James Green: Wow.
Gao Xiqing: Exam, so I got in.
James Green: Wow. So, then, you ... How did you end up in Duke as the place to go to law, law school?
Gao Xiqing: Well, after three years of, studies, of law at, at the institute, they ... At the time, the rule says ... The national rule is that if you have studied in the university or, you know, or, or a graduate school, you have to serve for the country for at least two or three years before you can go anywhere. And so, I thought I was ... You know, I ... They, they decided to, to have me teach in a school. And then, within a few months, they said, oh, you need to go to U.S. I, I didn't know why. Later, I found out, it's because by, by 1980 ... That was in early 1982, you know, late 1981, all of a sudden, law becomes a important subject, you know, at, c- because, you know, before that, nobody really, you know, cared about the law, and they-
James Green: Yeah, I was going to ask w- sorry, when you were studying law, how many lawyers would you estimate were in China, in the early 1980s.
Gao Xiqing: None. None, none. My ... This is, my teacher, Mr. Shen Daming who died a few years ago, at 96, he, he, he has a doctorate in law from, from, you know, France, and a very substantial legalist, and taught for many years. But after the revolution, he served as the legal, legal advisor for the minister of foreign trade, the government foreign trade in 1951 up until 1954. And then, all the legal professions were banned.
Gao Xiqing: He always joked with me. He said, you know, you know the oldest profession for human society? I said I know. He said, we're the second oldest.
Gao Xiqing: And so, that's why, in 1953, '54, we were the second to be banned, you know, after prostitution.
James Green: After prostitution.
Gao Xiqing: So, he, he, he was sent to the university to teach French language for all those years-
James Green: Wow.
Gao Xiqing: ... up until 1978.
Gao Xiqing: And then, they found him, and they said, okay, now you, you need to teach law, and he said, oh, well, I need someone. They, they need, one student, but he said, I, I don't expect anyone with any pre-knowledge, but I need someone who his English is good enough, 'cause I ... My English was, was, d- at that time, comparatively, was good enough, because I scored number one, so he said that he wanted me. I said, no. first when he talked to me, I said no, I don't want to study law. They said, oh, law is important. I said, I don't, I don't think it's important. My father was in jail for five years. He got in without any trial, got out without any explanation.
Gao Xiqing: I said, where's law? And then, this is the school, the, the president of the school, and he said, you know, times are different now. The party really stresses on the law. I said, well, let someone else study it.
James Green: What did you want to study?
Gao Xiqing: Macroeconomics.I, I applied. I got in on that subject.
Gao Xiqing: At that time, was not called macroeconomics. It was called the critique of bourgeois economical theory. So, so I studied that for a few months. I only had about thirty books. By the end of a few month, I finished all the books, and then, they came back to me again. At first, they, you know, because I refused the ... They chose number two, was a, a lady went there. And then, when my book finished, I became interested in what she was studying. I asked her, and she told me, and I thought it was interesting, so I went to their class. I listened to the, to the lectures, and, you know, well, this is interesting. So, in a month, then they came back and said, no, uh ... The ministry said we need another law student. The one is not enough. So, they came to me again. This time, I said okay, I'll try that. That's how I got in.
James Green: Fascinating. And so, then, they came to you and said you need to go to the U.S.?
Gao Xiqing: Yeah, that ... and that, that time, they, the reason ... Later, I found out, the reason why it was, because by that time, every ministry, the supreme court, people's congress, everyone wanted me. They said, 'cause they ... people were still, you know ... There were, there were still prejudices about, that ... the lady, they don't want. They said, well, we want a man, and they ... There's only t- there were only two law students, so everyone wanted me to go, and the school got nervous and said, well, the ... We want him to teach. They said, no, no, no, no, no, we, we really need the person. So, fine, and also, the state council, legal department ... Everyone wanted me. So, they said, okay, just go. Go to the States, so that they won't get you.
Gao Xiqing: That's how we, I, all said the ... by that time the, Graham and James, this law firm, had a exchange. They wanted, the school to take one of their lawyers to teach in a school. In fact, it was not really for teacher, because they needed someone to work on the first joint venture hotel, Jianguo hotel.
James Green: Mm-hmm (affirmative), sure.
Gao Xiqing: But at that time, China would not allow any foreign lawyer to be in China in a capacity for lawyer.
Gao Xiqing: So, they said, well, I'm a professor. And they actually work for, for- You know, this person, kind of, chairing on that, uh-
Gao Xiqing: Project. So, they sent me there for a year as an exchange. But during that year, of course, during the first few month, I already found out that my, my knowledge of English and law were both totally inadequate to deal with American lawyers. So, I said, oh my god, I need to study more. So, I talked to the lawyers. They, they all told me ... They said no, no, i- if you want to study law, study, start from the JD, not the LLM. I do- I had no idea what they were for.
Gao Xiqing: They said, you, you need to have the basic thing, because, common law is so difficult that, you know, studying for one year, or even go as JD for a few years is not enough. You have to start from scratch. So, so I told the school ... I said, I wanted to study here. They said, no, come back. If you want to get your, doctor's degree, your, your, your paper for the Master's degree was ... substantial enough. We'll expand it, and we'll give you a doctor. I said, no, no, it's not the degree I want. I really want to study American law. So, so, at that time, they ... the school finally said, well, we don't have money. y- if you can get a scholarship, you can go. And I tried, then Duke offered me a full scholarship.
James Green: And so, at that time, Duke was ... I mean, it has quite a international reputation and quite a good domestic reputation in the U.S. But at that time, my sense is it was still a bit of a small, southern school, kind of-
Gao Xiqing: Right.
James Green: ... cloistered. How was it, as a Chinese student, to show up there and start going to class? How were you seen, and how did you, kind of, see your classmates?
Gao Xiqing: Well, the, the first class ... and, and I, I, I drove from, Los Angeles to Duke.
James Green: Wow.
Gao Xiqing: And I had a huge detour. I went up to San Francisco, and then to the, you know, the Grand Teton, the, you know, the, the, the Yellowstone, badlands. Took me 18 days to get there. So, I, I, th- I arrived there only one day before the class started, and I had absolutely no idea about American law schools, so I didn't have a sense to go to a bulletin to look at, you know, what was required or ... So I went in the class, first class in the morning was property. I went in. I look around, and I said everyone else had, had a huge casebook and a yellow pad there. I said, how come I don't have it, and they said, oh, you need to buy it in a bookstore. I said, oh, but how do I ... how do you know you need to buy it? And they said, just look at a bulletin board. So, for the first class, I had nothing, 'cause in China, every first class is, you know, you know, what you need to do. We give you the books. We give you the, you know, everything.
Gao Xiqing: So ... But for the first class, I understood zero.
James Green: The property class?
Gao Xiqing: Right. And the, the professor was a, southern gentleman.
James Green: Gentleman?
Gao Xiqing: A retired Marine Corps. general. And he, you know, his, his accent, already, I, I just couldn't understand. Then, the, you know, everything else, it's ... That's just totally foreign to me. I got so discouraged, and then, after class, I went up to him. I said, can I tape record your class. He said, fine, if you want to. So, I mean, I went to the store. At that time, I was on scholarship, but you know, I didn't have, really, very much money, but I said, I, I had to, had to invest $100 to buy recorder. I did that only for about two weeks, before I gave up, because you know, those classes, for every hour of the recording, you need about two, three hours to, to listen to it.
Gao Xiqing: And then, you know, those ... I had about two, three hours' sleep every day. So, after a few weeks, I said, oh my god, you know, forget it.
James Green: So once you got the language issues, were the conceptual issues of property just, kind of, different from what you had studied in law here?
Gao Xiqing: Oh, totally different, totally. It's so far. You know, American property law is so different even from the European continental law, even from the English property law. It's so arcane and so complicated, and with all these ancient French, Latin, written, and it, and it's ... That was really bad. So ...
James Green: But you survived, and you-
Gao Xiqing: Yeah, I survived.
James Green: ... You finished.
Gao Xiqing: Finally.
James Green: and then, how did you end up at Mudge Rose, Nixon's old law firm?
Gao Xiqing: Yeah, that was, I, I really ... I, I thank Mr. Nixon a lot, but of course, not just Mr. Nixon, because at that time, the law school dean was Paul Carrington. He, he called them. He wanted us to ... He wanted them to take a Chinese student there, and they had a ... They, they said, okay, we, we, you know, because of Richard Nixon, they said, okay, we're going to take him.
Gao Xiqing: So, in today, for 1L first year law students, very difficult to get a summer job, but they just, you know ... They just, okay, we can ... So, first year, I, I work there. Second year summer, I went to ... I, I thought I needed to go to a different place, so I, I went to, Coudert Brothers, Coudert ... You know, today, it's no longer there.
James Green: Sure. Yeah, it was huge firm.
Gao Xiqing: And Coudert, at the time, was a very important international firm, and, I ... 'cause I wanted, I, I wanted to, to come back to this part of the world. In those days, there were, there were no phones, nothing. So, finally, they, they, they said they ... They can send me to their Hong Kong office. I was elated. So, I went to Hong Kong, for that ... those three months.
James Green: For Coudert, with Coudert?
Gao Xiqing: For, yeah, for Coudert. And third year, and, I, you know, I went back to Mudge Rose, because they, they had ... They say no strings attached. Because for every other law firm, which, you know, wanted to have me, and they all said, well, you need to work at le- for us, at least, for five years. And they asked me. I said, well, I, I can only work for one year before I go back. They said, no one year, no way, because for the first two, three years, you are exploiting us. After that, we can start exploit you. So.....
James Green: So, then you came back, to China in 1988. Did you have a specific job that you were slotted for when you came back?
Gao Xiqing: Yes, I, 'cause for the whole time, I was still affiliated to the, to the, UIBE-
James Green: Yeah, I see.
Gao Xiqing: Univers- university.
Gao Xiqing: They always ... they, they re- they retain a, pl- a place for me. That's also why I worked in Mudge Rose only for two years, because if I work longer, then, they would ... I would be regarded as a defector.
Gao Xiqing: And I wouldn't do that. So, at first, I decided to work only for one year. So, a few months, about two, three months before the first year finished, I told the partners that, okay, bye, I, I'm going back. And they said, no, no, no, one year's not enough. You have to work there longer. I said, no, I can't, because I, I, I don't want to be regarded as a defector. And then, they said, well, maybe we should write them. This is more important for you guys, for your country, not for us. they were basically saying I'm useless for them, but for China, would be very useful.
Gao Xiqing: So, I said, but they won't understand it. And this, this guy was hurt, because he's very famous, you know, Washington lawyer. He, he ... I said, if you write them a letter, they ... you know, they don't un- they, they, they... And in there, he said, what about Mr. Nixon, if he writes letter. I said, oh, that may, you know, get some, attention. He immediately picked up his phone, called Mr. Nixon, and Mr. Nixon gracefully wrote a very long letter for me-
James Green: Wow.
Gao Xiqing: ... sent to a minister of, foreign trade, Mr. Li Lanqing.
Gao Xiqing: Senior vice premier, and said, said, well, this is important for you guys. This guy's smart. This guy's ... He said, he's as good an American lawyer. You know, he said all the nice things, and then he said ... well, I suggest that you allow him to, to work here for five years before he goes back. And then, he, of course, he hesitated for a while after, about a month or two. They sent back ... They said, okay, thank you so much, Mister Nixon. We can have him to work for another year. So, that's how I worked for two years.
James Green: Wow. And Mudge Rose's idea was one year, you just wouldn't even learn enough about the legal practice to really-
Gao Xiqing: Right.
James Green: ... be able to come back and teach?
Gao Xiqing: 'Cause we have a two-year program, six months each, for four different departments to rotate. For two years, I rotated the four departments, which is, was really helpful for me.
James Green: So corporate, or, uh-
Gao Xiqing: Yeah.
James Green: ... transactions?
Gao Xiqing: Ta- tax, debt and all that. So, so that was, very useful.
James Green: So can you talk a little bit about ... moving from there to the China securities regulatory commission ... how you ended up there, and then what, what, what you were supposed to be doing?
Gao Xiqing: When, when, when I was in, in the U.S., something drastic happen. Now, see, in 1987, October 1987, it was the, probably, the, the biggest financial crisis after the 1930s. So, at the time, you know, to me, of course, it's something interesting, but I never thought that was ... that had anything to do with China. But then, the Chinese government got really interested. They, they asked me to, to go there, to give them a talk, and to the embassy. They said we want to know what impact that will have on China. I said, I don't think there'll be any impact on China.
Gao Xiqing: You know, '87, we had very little interaction. But then, that, you know ... they, they were interested. All these people, and the, and the Chinese media people there, you know, that time, People's Daily, Red Flag, Peking Review, you know, all this old guard. And then, they all wanted us to talk with ... There are only a kind of handful of Chinese people working on Wall Street, myself as a lawyer, Mister Wang Boming, as the economist at the New York Stock Exchange, and, there were a few at Goldman Sachs, just a few of us.
Gao Xiqing: So, so we decided, well, maybe we should have a bigger lecture for all these Chinese people interested. And then, in Columbia, in ... That was in November of 1987. We had a big conference, had about 2-300 people all very vastly interested. And so, then we, we, then, the, of course, the idea came here to [inaudible] and say, oh, maybe we should suggest to the Chinese government for stock market. And that ... 'cause that time, we heard that China start discuss it, but at that-
Gao Xiqing: But, but some in isolated cities or places tha- that already, stock, companies each year, but all, you know, all forms. They all ... you know, they, they called themselves gupiao you know, which is the, you know shares/stocks, but you actually look at the thing, it's actually bonds.
Gao Xiqing: It's guaranteed dividend to you-
James Green: Interesting, mm-hmm (affirmative).
Gao Xiqing: ... at certain percentage point.
Gao Xiqing: So, we thought-
James Green: And did it give you ownership rights, or not really?
Gao Xiqing: No, really, not really. So, you can, you can see that, that, that thing was, you know, heating up, and people are really interested, but they had not ... They did not have enough knowledge, to do it. So, so, the few of us got together, and we said, well, maybe we should make suggestion to the central government, set up the, the Chinese stock market.
Gao Xiqing: So, we, we, we had a, bunch of people, including some American lawyers, you know, one lady from Mudge Rose, one from White and Case, and, one guy, Jim Shapiro from New York Stock Exchange, and all these people, we, we discussed.
Gao Xiqing: And then we, we turn out by the second year ... By 1988, around May, we came up with, what, today, is known as the White Paper. we ... and then, then in August, I went back to China, after a big tour of Europe, stopping at every stock exchange. I went to all the stock exchanges in Europe, you know, just I ... Some of them, I could know some people, I have the introduct- some, no, I just went up there saying, oh, I'm sorry. So, I want to, I want to visit your stock exchange. I want to start a Chinese one.
Gao Xiqing: So, they were, they were vastly interested. So, we ... I got a lot of materials, lugged them back to Beijing in, you know, early September, and they, immediately, we got a lot of interest in China. We ... By that time, there were already some people in China who are, you know, doing that, so we got together immediately. Now, that includes Mister Wang Qishan, Mr. Zhou Xiaochuan, Mr. Zhang Xiaobin -- all these people. They were, they were at the, you know, forefront of the reform, and they already did a lot in, you know, in financial area-... in other places, so we got together. We really, you know, felt that it was a, a great idea to work together.
James Green: At that time, the idea for a Chinese equity market was for state ownership to become more public, or was it for listing new firms, or was it kind of a blended idea?
Gao Xiqing: Well, we ... ou- our idea is this, because when we first started, especially when we came back, and we started talking to the leadership, to people, you can imagine, you know, the sort of, the sort of, surprise, sometimes the, even the sorts of ... didn't they ... did they, they, the -- the anger that we could arouse.
Gao Xiqing: You know, I, I remember very vividly a few people. I won't name them, because you would know. But this person said ... You know, they slap on the, on the, on table, said don't try to do capitalism in my hand. You know, they, they, they really ... Some people are like ... but other people ...
James Green: So, for them, a stock market equals capitalism, which was evil?
Gao Xiqing: Yeah, yeah. They, they say that's, that's the worst part of capitalism.
Gao Xiqing: But, but more people than not said, well, it's ... that's interesting. Let's talk about it. So, we, you know, we ... Eventually, we got more and more pe- and then, that's how we invented all these, sort of, sort of, beating about the bush sort of way to, to persuade them. We, we weren't going to tell them straight, you know, this is what we want to do. We just say, well, you know, we have this, we call it gonju lun which means, uh-
James Green: Tool?
Gao Xiqing: ... the theory- the theory of the tools. I ... We say, you know, in, in a, in our revolutionary wars, there, there were machine guns. The machine guns are, you know, the wh-, the, the white army can use them. The red army can use them too. So, stock market it's just a machine gun, okay? We, we, we, we can't use a machine gun, right?
Gao Xiqing: So, we keep saying that. And eventually, more and more people accepted that. They said, okay, let's try that. And that's why we, you know, we, we, today, when people look back and said, what made those strange ideas, I said, no, look, you have to use strange ideas to persuade people. So ...
James Green: Wow. I want to get to your time at, working at the Bank of China International, as the chief executive officer, particularly, how the '97 financial crisis, affected your thinking about, kind of, equity markets. I think, for a lot of Americans, the '97 financial crisis didn't register for them. It was kind of far away and in Asia. But I think, for a lot of people in Asia, it was a very, kind of, searing event of the challenges of managing equity markets and managing currency flows. How did, from where you were sitting at that time, how did you see the financial crisis, and what lessons did you take away from it?
Gao Xiqing: Yeah, I was probably at a middle of the ... You know, we said, at the eye of the typhoon or the hurricane. And 'cause of, 'cause of when, when it hit in Septemb- oh, I think it's, I think in ... was August of, of '97, when, when we were in Hong Kong, and then, Tiger Fund, the quantum fund, all these people started attacking the -- bolstering the stock market and the currency.
Gao Xiqing: And at the time, I ... you know, I didn't know about that much. I ... the only thing I knew, that the market was really coming down, and that the central government ... Some people talked to central government, and they said that what we need is to really support that Hong Kong government.
Gao Xiqing: Then, the Hong Kong government people, they, the CEO and, and the and the financial secretary came to us and said that they needed us to help them. At the time, I have some doubt in me, because I, I said, look, Hong Kong is regarded as the freest market in the world. If you try to interfere with it, then, you know, in the short-run, that may, that may be good. But what about the long run? What, what if the people lose confidence in the o- you know, hands-off, you know, policy of the government?
Gao Xiqing: They say, well, that's, of course ... That's our principle, but now, it looks like it's really gonna get really, very bad. So, we debated, what ... and you know, even many years after that, they, when, when, Donald Tsang, and they still, they still say, well, do you still hold the same idea? They want to tease with me.
Gao Xiqing: So, I, I was in doubt. But then, I think, Mister Zhu Rongji made a glad decision. He, he ordered us, and let's just, to prop up and just say, okay, just buy it.
Gao Xiqing: So, that day, you know, when, when the market really went down, that one day, the average trading market in Hong Kong is about 100, 200, uh ... no, 10 to 20 billion [inaudible] hours each day. And the highest they got was, like, 30-something. That day - 80.
Gao Xiqing: And when I look at number, I check my, you know ... matter of fact, because we had four, four ... They, they call it this four imperial cats, they call us. This is the, the, the writers call us that. The Bank of China was one of them. And of the four imperial cats, we got 78 billion. You can imagine, you know ... Basically, we're the only one buy it, right?
Gao Xiqing: So, but today, looking back, you know, it's, it's, probably, it was something right. Yeah, you know, you ... and then, you can say ... You know, people can always debate, but the thing is, once you prop it up, and then, the more important thing is not what you did at the time, but what you did later.
Gao Xiqing: 'Cause see, in, you know, in the mainland, our market, we, that sort of thing happened several time when the government got in. But you know, today, you can see, people have almost no confidence in the government's hands-off policy, because you know, the, the government always goes in.
Gao Xiqing: But Hong Kong did that once, and then, with all those shares they bought in their hands, they immediately put it in a transparent fund. And then, they ... Then, they say, well, this thing belongs to e- everyone. Every Hong Kong person has a share of it, to make it, you know, clean.
Gao Xiqing: But here, we are still struggling with that. You know, they say, have this ... People call it this one hanging boot which is still hanging there, you know.
James Green: So, moving to your time at, China Investment Corporation, can I just ask, in 2007, how did you end up in that mix of people and, kind of, in that leadership position there?
Gao Xiqing: That's a, that's a very interesting, thing. I, I don't know if I can talk about it, but right, I'm trying to think, because at the time, I was working for the national social security fund, you know.
Gao Xiqing: After a few years, second stint of my, my, the, the work at CSRC, of course, I stepped on the toes of many people. People, basically, sum- summarized to me, and they said, well, you - that you, you antagonized six different groups of people. They, they gave me ... They actually brought me down, and [inaudible] that's about everyone in China. So ...
Gao Xiqing: So finally, they got rid of me in 2003. and then, then, they put me on ... They just said, well, we, we don't know what to give you, that we ... We want to ask you what you want to do. I said, oh, I'd been in the communist party for almost 30 years. Nobody ever asked me what I want to do. They ... You always tell me what to do. Tell me now. So, so, so, they, they were, you know, do ... I, I waited for about two months. During that two months, I learned how to snowboard.
Gao Xiqing: So, one day, when they, when, you know ... Mister Zhu's assistant called me and said, "What are you doing?" cause he could hear the background music. I said, I'm on a s- ski slopes. He said, "Well, do you want to talk to the, to the big head and, complain?" I said, "No, no, big head is for very busy. Let him be busy. I will just do my snowboarding." So finally, they, you know, I ... They, they, finally, they said, I worked together with those people on the, the establishment of the social security fund. They said, so, well, maybe you're interested in that. I said, I can do anything, so they sent me there. And I think it's a very interesting job. I learned a lot there.
James Green: And, and the job was what? What was the ... What was the fund set up to do, and then what were you doing there?
Gao Xiqing: The fund was set up as a reserve fund for national social security system, but it was really just a reserve fund, so ... and it's nothing to do with the, the, the, daily payment of the social security, so we ... It's just Mister Zhu Rongjing had that idea, because he knew that the system ... Chinese system ... is such that if you don't take it out of the system, there, the money, someone is going to come in and take all the money and - to mend all the holes.
Gao Xiqing: So he, he had a very, very strong language. He said, whoever touches this, I'm gonna get your head. So, so that was really .... So, I said I, I ... Every time I talked to him, I said, are you guys slow? Thank Mister Zhu for that, because, you know, he, single-handedly stopped everyone, because during that time, you know, Mister Xiang Huicheng was the minister of finance, who later became the chairman of the social security fund.
Gao Xiqing: He said, one time, they just couldn't balance the, the whole budget, and that was only, only about ten, ten billion yuan, whole. At that time, the social security fund, though, had only two, 20 billion. He said, well, we can, we can move that here, and we moved in.
Gao Xiqing: And Mister Zhu just go, you know, just really, the, very angry. He said, "No, nobody's going to touch that." So he, he was very impressed. He said okay. Never, he wanted to mention that again.
Gao Xiqing: So, so our job is to use that money and try to invest it so that we can keep the, you know, keep, catch up with the, inflation. And then, eventually, Mister Zhu said, "I'm not for me. I'm for the next, you know, 10 generations. When those people come in, and they have no money, and then, they can dig into the spaghetti jar." So he's....
Gao Xiqing: So now, you know, at a time from about 10 to 20 billion now to, way over a trillion.
James Green: Wow.
Gao Xiqing: Way over a trillion now.
James Green: And what were the vehicles that you all invested in, or how did you kind of figure out what you should be invested in.
Gao Xiqing: Well, I don't know. When I got in, it was already there for two years. During those two years, they ... people knew, at first, they were very nervous, 'cause Mister Zhu said and you have to maintain the the value. So, they did all the investing in the stock market, and the money invested in alm- almost anything. They just ... They put in the, in the, T bond.
Gao Xiqing: Only the treasury. And then, Mister Zhu told the chairman, at that time, that was Mister Liu, who was a former fina- ma- ma- fiance manager. He said, you should buy, some shares, because this ... at that time we j- they just put in Petro China and, you know, Chi- and, you, all these oil companies.
James Green: The Sinopec?
Gao Xiqing: Sinopec, right.
James Green: Right.
Gao Xiqing: He said you should talk to Mister Gao and, ask him to get you some of the, the, the original shares. I was being sold for one yuan for each piece, right? So ... and he has it, and he, he called me. He said, oh, Mister Zhu wanted me to talk to you about this. I said, he already told me, and I'm ... I have two billion shares for you here, 'cause everyone wanted it. I, I carved out two billion, I said. He said, no, no, no, it's too much. I don't want that much. Give me a few million. I said no, no, this is, this is really important. So we negotiated.
Gao Xiqing: He ... Everyone else wanted more. He wanted less. So finally, he cut it half. We gave him one, one billion-
James Green: Wow.
Gao Xiqing: ... shares. And of course, that was the single-largest investment that increased them, you know. They went up. Well, by the time I got in, there was already about three times that in the money.
James Green: Wow.
Gao Xiqing: So I said, Mister Zhu is, you know, he's a ... he, you know, he probably made some mistakes. People complained about him, but he's, he's a wise person. He's, he's ... has vision, long-term vision.
James Green: So, speaking of long-term vision, the CIC was set up as a place for China to invest its sovereign wealth. Can you just talk a little bit about what the thinking was on the Chinese side, and then, what you saw as your job, and then, what the obstacles were from people on the U.S. side and elsewhere, and h- how you kind of thought about that.
Gao Xiqing: Well, the interesting thing is this, the CIC was set up really not that much out of the free volition of our government. It was a ... At first, it was pretty much at the pressure of the United States and the Europeans. 'Cause in those days, remember that, you know, when we had meetings, and then, every time we had meeting with the, the west, and they always say, well, you guys are always sending to us, so you should buy something from us. They keep saying that, right? China, China's, foreign reserves was increasing very fast. By the time I got in, it was already over, uh ... you know, when they talk about it, it was already one trillion dollars. But by the time I got in, it was two trillion dollars, right, just within two, three years.
Gao Xiqing: So, so the State Council had many meetings co- we talk about it, and, and to some people say you should set up this thing just to, just simply to invest in there, i- i- in the, western market. That's how they finally, make it. Then, Mister Lou, who was the first Chairman, CIC, he was among those a- against this idea. He said it's not good idea. But then, then later, when they decided to have this, okay, you be a chairman. And-
James Green: And up until then, sorry, was it, SAFE that was managing these investments?
Gao Xiqing: Right. SAFE.
James Green: So, sorry Lou Jiwei said you're-
Gao Xiqing: Right.
James Green: You're gonna manage this.
Gao Xiqing: Right. Right. The ... but they gave him money. You know, too, we, we got only very small part from the Safe, right. Safe was still, there. And then, then Lou Jiwei later told me that, Mister Wen, who was the premier said, okay, find someone to, manage this thing, and I want someone who's, who has been in a system, loyal to us, and worked for ... on Wall Street. So Lou, he said, well, there, there's only one person.
Gao Xiqing: Mister Wen said, that's right. So, he called me. He said, "Are you interested?" I said, "Does that matter if I'm interested?"
Gao Xiqing: I, like, you know, you know, we, we ... our interest never plays any role there. He said, "Oh, just, you know, come to me and talk." So, I went to ... He was the in- the [fiduciary] at the time was, as the deputy general secretary of the state council. So, I went there. We talked for, for a few days, and, then I found, you know ... At first, I said, I'm, I'm just pessimistic about it. I said, you know, this system ... I know this system better now. It's not gonna work. It's gonna be very bureaucratic and all that. And he, he said, no, we are gonna try to, at least during our, the two of us, we are going to try to make it work.
Gao Xiqing: So we talked about a lot of principles. And later, you know, that, at least, during our time, we basically, more or less, have stuck to those, principles.
James Green: And you had mentioned dealing with Americans and Europeans. How did you think you, personally, were seen and, and the CIC was seen when it was stood up and when it started to be more active on, on the global markets?
Gao Xiqing: Well, when we first ... when ... As soon as we announced our inception all of a sudden, every western press was talking about it and said this is dangerous. Right, they said, my god, these people are gonna come up and buy us out. You know, and then, then, of course, I got a lot of people come in to talk to me, and, they said, are you guys ... They must have some sinister, you know, motives back there. So I had to ... I, I did a lot of talking to people. I'd try to explain to people this is not how it is, your idea. We're buying you because you wanted us to buy you, right? So, so th- so we did all of that.
Gao Xiqing: And eventually, since we, we, we really reach out to try to talk to people, so that calmed down a lot of these anxieties. And, and also as soon as we set up, it was in less th- than a year, the st- stock market came down, and, the, the financial, you know, crisis, all that. So they, we were viewed as sort of a, almost a savior in some places. Quite a few of these major companies were saved by us, and they were, they, they were ... even feel grateful every today. Well ...
James Green: Gao Xiqing, just had an incredible personal history. Thank you for sharing with me today. before we go, is there any kind of last bit of wisdom? You've been in both systems for, for a long time. You've seen incredible amounts of change on this side and in the U.S. side. Anything to kind of share on, kind of, lessons learn and, and life, kind of, in-inside the Chinese system, but dealing with the United States?
Gao Xiqing: Well, I think the most important thing ... You know, for us, the most important thing is that we ... I, I constantly tell our people, our leadership included, that we have to keep a open mind, and we have to, to be willing to, to learn their culture, to study their thing, instead of constantly, you know, talking about our dogma. You know, we, we were, you know ... I said were, we were brainwashed for too long. The, they, they have their brainwashing machines, but their brainwashing machine's a lot more effective than ours, 'cause the ... you know, 'cause tha- that's my experience. When I was in the U.S., I said, are you guys, you know, when you look at CNN, or you know, today, Fox News, you guys believe in it. And people, you know, how many people believing what our, you know, CCTV tries to tell us?
Gao Xiqing: So, so we need to, we need to learn that. we need to, to have patience, to talk about it. We have to, have to be willing to communicate with people. You know, some people just got, got out of something -- oh, we can say "no" now. How's that, you know, don't say no. You know, 'cause I always use, my parental, you know, experiences. In fact that, you know, I've had three sons, and I have bad, bad experience with every one of them, you know, because, you know, you know sons, when they get to b- become teenagers. Then, they, they just, you know, they have their ideas.
Gao Xiqing: I said, never, never believe that you're smarter than your son. You know, they are, they are smart. You know, even I, when I thought of myself, I ... When I was a teenager, I thought I was smarter than the, you know, my parents, everyone else. So you just have to learn, you know, how they do things.
Gao Xiqing: Today, I have lot better relation, because whatever they ... book they read, I read. They, the, the video games they use, I try to learn that video game, even though I'm so bad. I see what they, they, they appreciate you're, you know, you're trying to communicate. You can't just stop communicating, and the same is true on the U.S. side.
Gao Xiqing: In the U.S. side, Americans are, you know, Americans are too, on the average, much more straightforward and transparent, but a little bit, little bit, how do I call it, you know, much simpler in, in trying to deal with people, but you have to have patterns. And you know, the Chinese culture's such that, we have a few thousand years of this. People try to hide what they want to say, so try to talk a little b- ... you, if you ask me yes or no, they say, if they say no, and you ask them again. Ask them a s- again, three times, then maybe they change their mind, right?
James Green: Right.
Gao Xiqing: Do, we sh- we need to talk. We, we can't just, just throw up our hands and say okay, I want to fight with you, right.
James Green: Wow, thanks so much, for your insights and for taking time today. Look forward to keeping in touch.
James Green: Yes, yes, thank you.
James Green: Gao Xiqing -- speaking with me from Beijing. You’ve been listening to the U.S.-China Dialogue Podcast from Georgetown University. I’m your host, James Green.