Former Treasury Secretary Henry Paulson Jr. spoke with FOX News’ James Rosen on Monday about his history with China and new book, “Dealing with China: An Insider Unmasks the New Economic Superpower.

FOX NEWS’ JAMES ROSEN: Mr. Secretary, thanks so much for sitting down with us.

FORMER TREASURY SECRETARY HENRY PAULSON JR.: James, it's great to be here.

ROSEN: You are the author of a new book, “Dealing with China: An Insider Unmasks the New Economic Superpower [Twelve, 2015]. How far back do your dealings with the Chinese go?

PAULSON: Till [sic] 1992, when I made my first trip there, and I made it as an investment banker.

ROSEN: And how have you seen China's economy change over that time?

PAULSON: Oh, just dramatically. Of course, when I, you know, first showed up, the economic reforms that Deng Xiaoping had unleashed had been underway for some time. But what – I tell the story in the first part of this book, about working with the Chinese leaders on some of the landmark transactions. And I think we tend to forget how important those transactions were: the first IPO of China Mobile, or their first bank deal, or their first oil deal, PetroChina, and how much the Chinese needed the money, number one; but number two, how important they were in terms of being a lever that helped drive reform and open the country more up to competition and economic development.

ROSEN: This liberalizing of China’s economy over the decades has not been accompanied, quite obviously, by a political liberalization, correct?

PAULSON: Correct.

ROSEN: Was that foreseen, that it would accompany it?

PAULSON: I would say the following. I think one point I would make: It has been accompanied by an improvement of the living conditions for the Chinese people. So that, that has clearly happened, because the conditions are much better today than they were many years ago. But in terms of the – of the political liberalization, you’re dead spot-on: that the – that [as] a matter of fact, Xi Jinping, their current president, has actually been tougher on some of the human liberties issues, and clearly with the media and the Internet and the political system. And so – and to Americans, this seems like a real paradox: Here’s a guy who is trying to, on the one hand, liberalize the economy, open up to more competition; and on the other hand, he’s being tougher when it comes to the political system, tightening up on the Internet and the media. Now, to him, this doesn’t seem like a paradox because he looks at the Chinese Communist Party as the – as the institution that is the strong institution. He sees that as symbolic with Chinese – with stability. And he’s using that as a lever to drive reform. Now, I – I believe that this is ultimately self-defeating and counter-productive. Because I don’t understand how a [sic] Internet – in today’s Internet world, in today’s world where you need to be connected and we have an information economy, how you can run a successful global business – I’ve been a CEO, and I’ve – you need to know what’s going on everywhere in the world. You need to know what’s going on politically; you need to know what’s going on economically. I don’t think you can do that if you’re not connected.

ROSEN: On the basis of censored information.

PAULSON:  Oh, yeah.

ROSEN: The question I was asking you was: In private, do Chinese leaders aver to – or even pay lip service to – the idea that they are committed to political liberalization, albeit over time?

PAULSON: Xi Jinping, who’s the current president, has been really quite straightforward about the fact that they have a different system, that they don’t aspire to develop into a Western-style, multi-party democracy. They don’t welcome Western values. So they’ve been pretty clear on that. Now, he has also staked out a very important agenda domestically, which deals with the issues that are of most concern to the Chinese public. What are they? Corruption, strong anti-corruption campaign; air quality, very dirty air and water, so a big emphasis on pollution; food safety; property rights; big income disparities; and you know, so these are all very important agenda [items] for him. He’s effectively ended the one-child policy, done away with forced labor camps. So they have a very different system than we have, no doubt about it. But some of the issues he’s, he’s undertaking are monumental challenges. And it’s really not only in the Chinese people’s interests but in America’s interests that he have success in dealing with some of these issues. You know, for instance, the environmental issues, which will have a big impact on us if he’s, if he’s unsuccessful. They’re responsible for a very big portion of global growth: 15 percent. So if they were to have serious economic problems, all of our problems would have easier to, to – would be much more difficult to deal with.

ROSEN: Nonetheless, China remains a Stalinist system, correct?

PAULSON: They remain, obviously, a Communist Party. And I would say Lenin would be – I wouldn’t use Stalin.

ROSEN: Okay.

PAULSON: This is again a country and – that has taken hundreds of millions of people out of poverty. And this is a country where we’ve got – you know, they have – a formidable competitor today, and they’re very active on the foreign policy scene for the first time. But it’s very much in our interests to have a, you know – in our pragmatic interest to have a strong relationship with China. Because virtually every major issues that I can think of globally is going to be easier to meet if we’re working constructively with China, and much more difficult if we’re working at cross-purposes with them.

ROSEN: In the book, you make the point that many Americans harbor the fear that China at some point will become an outright enemy of the United States. In the minds of many Americans – and perhaps some, even, in our elite national security establishment – China already is an enemy of the United States, in the sense that it is aggressively waging cyber-warfare against our corporations and even aspects of our government. Is that correct?

PAULSON: Yeah, well, I would – let me start with the question about “an enemy,” okay? I would definitely not classify China as an enemy. As I said, they are a competitor, and we’re competing with them on one hand and we’re partnering with China on the other hand. And I think it’s very important – and I don’t think we should fear competition. We don’t want – we don’t unhealthy, debilitating competition, or destructive competition. So it’s very important that we, we work to get things done where we are – where are – ah, where we do have a common interest. Now, to get to, to cyber. And I think that, you know, there’s several things that get inflated, or conflated, with cyber. And you – people tend to conflate technology procurement, Internet censorship and then what I call cyber-theft. And I think the cyber-theft – taking technology from, from, from U.S. companies and putting that in the hands of the private sector – is something which I think is a very serious problem.

ROSEN: Piracy.

PAULSON: Piracy. In my book, I point to that as what I think [is] the most serious economic risk, or risk to the economic relationship between the two countries. And I think it’s very, very important that we find common ground there.

ROSEN: The New York Times’ David Sanger published a really interesting piece sometime in the last year or so [sic; “Chinese Army Unit Is Seen as Tied to Hacking against U.S.,” co-authored with David Barboza and Nicole Perlroth, published February 18, 2013] about this building in – I think it’s in Beijing [sic; in Shanghai, the headquarters of People’s Liberation Army Unit 61398] – where it’s basically an Army facility and thought to be the locus of China’s cyber-warfare efforts against the United States. And to classify what China is doing in cyber as confined mostly to cyber-theft, I wonder if that’s accurate or not. Because part of it seems destructive in nature; it’s designed to disable.

PAULSON: Oh, yeah, right. Let me step back and say, with cyber, there’s another thing that gets conflated, [and that] is cyber-espionage, okay? And cyber-espionage is something that governments – all governments, major governments, gather information from others, okay? This is something that the Chinese government, the U.S. government, the Israeli government, the Russian government, the French government, and so on [all do]. And the reason I went to cyber-theft is I think cyber-theft, which – which is taking information – and again, this goes even beyond piracy; it goes beyond, you know, intellectual property, stealing patents. It – when you get into another – into a company’s computer system, you look at their latest plans for new plants, you can learn what they’re planning to bid for an oil contract, or whatever – this is, I mean, the oil bid. So this, this is serious. And again, I make the case that this is ultimately, I think, it’s going to be in China’s interest to solve this problem, because I don’t think you can have a global economy work if we don’t come up with some way of protecting property rights. And as I said, this is – of all the issues I would point to – I think this is the, the – the most difficult economic issue is the cyber-security as it relates to corporate secrets. The other, I’m not minimizing; the other is huge. You know, the, the whole – I think we need new protocols for, you know, around cyber-warfare, you know, around cyber-espionage. But again, those activities don’t necessarily differentiate the Chinese government from other major powers.

ROSEN: They’re not more aggressive than Israel, France, and Germany toward the U.S.?

PAULSON: I can’t comment on that in any kind of detail. I’m just simply saying they’re a very large company – country – and it was very difficult, at least when I was there, to tell where the – you know, where the cyber-intrusions were coming from. Because this is a country without a strong rule of law and, so – [voice trails off]

ROSEN: What are the greatest obstacles for U.S. businessmen and businesswomen who want to do good and honest business in China?

PAULSON: Well, let me begin by saying there are huge opportunities in China. And China is, you know, our, our second-largest trading partner. It’s, it’s our fastest-growing export market. And there are real, I think, important opportunities, in terms of making investments, and for U.S. companies making investments in China and Chinese companies making investments in the U.S. So they’re really – there are real opportunities. I think there are two issues I would – I would point to. The first is, I think we need to continue to press the Chinese and encourage them to open up more of their markets to competition, for competition from the private sector, including foreign companies and U.S. companies. And I think that will create more opportunities. And that’s why I’ve been such a big proponent of this bilateral investment treaty that’s being negotiated between the U.S. and China, because I see that as a – it’s an opportunity, and it’s something that the reformers in China can use to lever [sic], and open up those markets. I think another obstacle is – and this comes from many small- and middle-sized companies who see there’s a real opportunity for their products. But figuring out how to do business in China is a really difficult thing; it’s very, very different. And that, that – one of the reasons why I believe that more U.S.-China – more Chinese investment in the U.S. could be beneficial is that Chinese investment in small- or middle-sized companies, where they take a minority position but then work with them to help sell their products in China, I think, will create an important growth opportunity for middle-sized companies in the United States.

ROSEN: I have so much I want to cover with you. Do you – let’s put it this way: Given certain aspects of the conduct of the Chinese government that we have already witnessed and agreed upon – such as the lack of rule of law, the censorship of a free flow of information, and other things – should we readily assume that China’s statistics that it puts out, that it issues officially about its economy, its GDP or what have you, are always honest?

PAULSON: Well, one of the issues which we – which is very important to push for in China is greater transparency. And so I think that there’s – that, that is a problem. And I think [that is true of] transparency as it relates to financial statements, transparency as it comes to a number of facts and figures. And I’ve tended to look at the economic growth in China as, as something that we can – there are a good number of things you can look at. And it’s, it’s not very difficult to see that the economy has been growing at a very rapid rate. So –

ROSEN: And that’s not, that’s not a false projection in your view?

PAULSON: Yeah, I think, I think I’m much more – the thing that I focus on, James, is the quality of the growth. Because the point I make all the time to Americans when they say, “Has China developed a better form of capitalism?” or “Are they gonna eat our lunch?” or “Are they gonna out-compete us?” I say that this country has some monumental challenges, and they have an economic model that has run out of steam. It’s been too reliant on exports, been overly reliant on, you know, real estate-financed debt to drive growth at the municipal level. So they’ve got a broken municipal finance system. And debt’s been growing faster than their – than their economy, overall. So the challenge for China is to reboot its economy. And so here you have a, a new president that’s inherited an economy that needs to be rebooted. He’s inherited an urbanization program that needs to be greatly reformed. And trust me: If you look at the next twenty-five years, one of the big economic events globally is going to be the next 300 million people in China going to the cities. There’s already 650 million in the cities. He’s – so he’s inherited, you know, a huge pollution problem he’s, he’s got to solve. And he’s trying to do all of this without government institutions or a legal system with a rule of law. So he’s doubling down on the Party and – and he’s someone that is looking to reboot all of China, or transform it into a modern country. So it’s, it’s not just the economy, the urbanization program, dealing with the environment. It’s – he’s modernizing the legal system, trying to make it more consistent and professional. He’s –

ROSEN: Within limits?

PAULSON: Yeah, yeah, oh, absolutely. Because this is a legal system that, that, that applies to everyone but the Communist Party. But there’s still an awful lot you can do in terms of having district courts, federal courts –

ROSEN: Right.

PAULSON: – modernizing it, having specialists if, if, you know, judicial specialists in areas like the environment, and so on. So he’s looking to, to reform the military, their foreign policy, on and on and on. So this is a monumental task. And so I say to – the other thing I say to Americans when they worry “Is China going to surpass us?” you know and, and, as a major superpower, I say, “Look it. We’ve got our problems, but their challenges are much greater.” We’ve got the strongest, biggest economy in the – in the world. So the challenge I see to America doesn’t come from China as much as it comes from ourselves. You know, it’s in our own hands. Shame on us if we don’t fix our economy and restore it, and restore its competitiveness. Because ultimately, that’s what’s going to determine whether we continue to be a great power twenty-, thirty years from now – not what happens in China. Yet the relationship with China, the reason I wrote Dealing with China, is I believe very strongly this is our – by far our most important bilateral relationship and that, that it’s going to be increasingly difficult and increasingly challenging but it’s in our pragmatic interest to have a healthy relationship with China. And I’m only talking about our interest. They’re going to do what’s in their interest; we need to do what’s in our interest. And there are some significant areas – you’ve been point – you’ve been pointing to all of the areas where there are differences. And, you know, those int – those differences are significant. We need to understand them and be prepared to deal with them and recognize them, and recognize the reality we’re dealing with. But there are also some hugely important common interests. We have a common interest in, uh, perpetuating sustainable global growth. We have a common interest in having a clean environment. I see, you know, I see climate change as one of the major economic risks in the world today. And China is responsible for 28 percent of carbon emissions. If we don’t work with ­­– if China isn’t successful in meeting their challenges, it’s gonna impact us. We have an interest in limiting nuclear proliferation. We have an interest in, in combating terrorism. We have, we have a lot of common interests. And so I think it’s important to, to work on those, but then be a realist when it comes to the others.

ROSEN: We’re bound together, in short.

PAULSON: I say, listen: What history would tend to say is that when you have an established power and you have a rising new power, that they will come to blows, come to conflict. I don’t think that that needs to happen; I don’t that’s inevitable. But I think it’s in both countries’ best interest to avoid that. And how do you avoid it? You get some very important things done that are clearly in both countries’ interest, and so that the publics on each side can see that.

ROSEN: You know, when I was covering the Bush-Cheney White House –

PAULSON: Yeah.

ROSEN: I used to attend these briefings with John Snow when he was Treasury secretary.

PAULSON: Yeah.

ROSEN: And the agenda for his upcoming meeting with his Chinese counterpart would be, usually, something like that it will be our effort to get the Chinese to ease their currency manipulation, for example. And this seems to be a perennial concern. And I just wonder if you feel as though we are making progress with China on the various fronts we need to.

PAULSON: We’ve made a lot of progress with China. I think we could make a, you know, a, a lot more. But this administration, as I write in my book, Xi Jinping and this group of reformers, that he’s – has around him, want to revitalize reform. Because economic reform stood still for ten years. And –

ROSEN: Well, you wrote an op-ed in December [sic; “China’s Economy, Back on Track,” published in the New York Times on October 4, 2013] that suggested we might soon see some of these reforms. Are we?

PAULSON: And so they’ve laid out quite a blueprint which really, you know, the, the thesis is: The market should be decisive when it comes to the economy. And what I would say is: We’re seeing a number of the reforms. So we’re seeing things that make it easier for the private sector to compete in China right now. And, you know, they – some of the red tape and regulatory barriers for the, for the private sector. We’re seeing reforms in the financial sector, where they’ve clearly said now they’re going to put, uh, deposit insurance in place for banks. They’ve eliminated the ceiling on rates that banks can charge for corporate loans. They’re preparing to, to remove that for deposits. You’re seeing a fair number of changes. But this is a president, in China, who also faces political obstacles. He’s consolidated more power than any leader since, since – since Deng Xiaoping, maybe since Mao. But they’re still a country where there’s a strong vested interest, and my own view is it will take years for him to do some of the things he wants to do – additional things with regard to the economy – and he will have to wait, maybe, until another term when he’s got more of his people in key positions in the country.

ROSEN: Let’s do some real quick ones, because I know you need to go.

PAULSON: Yeah.

ROSEN: And we’re grateful for your time.

PAULSON: Okay.

ROSEN: First, do you see any kind of conflict – military conflict – between China and some of its neighbors as being likely in the short term or medium-term?

PAULSON: Well, I think that is – first of all, the tensions that I see, and the geopolitical tensions and the territorial tensions in the East China Sea with Japan, or the South China Sea, are something which are of a significant concern to me. I think the biggest risk I see is what they can do to the economic integration in the region. I think the Chinese are taking a calculated risk that they can step up their assertiveness here and they won’t undermine the economic integration. And I’ve been going to this region for a long time, and going back a number of years. I spent a lot of time in all of these countries in, in Asia. And they’ve all benefited greatly from this economic relationship, and cross-relationship, and it’s benefited the region and the whole world. And so I think this is, again, a risk that – that I am concerned about.

ROSEN: A quick question about North Korea. For many years, U.S. administrations have been hoping that China would play a greater, more constructive, role with North Korea toward a non-proliferation regime. We have – do you think we’ve seen them try? Do you think – have we over-estimated the influence that the Chinese actually have on Pyongyang?

PAULSON: I think that is a really serious problem in the region. Rightfully, there’s a lot of focus on Iran today; but that is a huge problem. And so this is an example of something where we have a common interest at a hundred-thousand feet. We both want stability; we both don’t – [chuckles] – we, we, we want to fight nuclear proliferation. So we have, we have that interest. But I think the difficulty has been when you get down into the details, the Chinese have placed much more emphasis on the shorter-term stability; and so I think there’s, there’s clearly more that can be done there. And at a minimum, more should be done in terms of doing some contingency planning around different scenarios.

ROSEN: Including some of the most cataclysmic ones.

PAULSON: Including some of the most cataclysmic ones, but are including things like just a collapse of the regime. In terms, in terms of –

ROSEN: That’s what I had in mind, yeah.

PAULSON: – in terms of how, how you deal with it.

ROSEN: One last on China, and then two quick ones on our economy, if you don’t mind.

PAULSON:  Yeah.

ROSEN: What could the United States be doing differently with respect to China that it’s not right now doing?

PAULSON: Well, James, we’ve essentially had the same policy for – with China that we’ve – it’s, it’s evolved over the years, but we’ve had this for eight administrations. And we’re dealing with a different China today. As I said, it’s a formidable competitor; it’s got to be much more assertive in terms of its foreign policy [clears throat]. Xi Jinping isn’t waiting – is not waiting for the, uh, for the world to declare him a great power. [Sips water] He’s not waiting for the world to declare him a great power. He believes he already is one, and he’s more assertive on the global stage. We shouldn’t be surprised; that’s what every other great power has done, including the United States. But I think what we need to do is we need to be quite strategic. We need to act in our interest; we know they’re gonna act in their interest. We need to recalibrate and I think this means making a much bigger effort to get some important things done where we’ve got these shared interests. And –

ROSEN: I mean, the Obama administration would say, they – they’ve been pursuing the SED [Strategic Economic Dialogue]. What could they be doing different?

PAULSON: Well, I would say I give the Obama administration a lot of credit for what they’ve done with the SED. I give them a lot of credit for this – I think this, this climate change deal with China is very important. So again, I think we need to make a bigger effort, continue to make an effort there, because the tendency, always, is to go from one crisis to another. But if we’re able to reset China, a lot of the other crises would – would be easier to deal with. And then, secondly, I think that where there [are] differences, we need to be really strategic. Because the Chinese, like anyone else, understand strength. And we need to be strong militarily; we need to be strong diplomatically; and we, we need to be strong economically. Now, China is betting that by increasing their economic linkages – trade and investment – that’ll increase their influ – you know, influence, to help them achieve their national security and their economic agenda. And so I think – and again, I applaud the Obama administration for this Trans-Pacific Partnership.  I think – I think to try to get that deal done – I think it’s going to be very, very harmful if we’ve don’t get it done, because we’ve said we’ll get it done, and it’s important we do what we say. But also I think [sound of smart phone chime] it shows economic leadership. And so, again, it’s, it’s important to be strong, to be clear where we’ve got differences, and to make a huge effort to get – to get things done that are important in both countries.

ROSEN: I’m being told to wrap, that we’re out of time.

PAULSON: Good.

ROSEN: I said that the last question would be the last question about China; that was a lie. You can’t trust journalists, as you well know. [laughter in background]

PAULSON: Yep.

ROSEN: So this will be the last question about China, and the last question in our interview. And once again, you’ve been very kind. Does the fact China owns so much of the United states’ debt constrain U.S. policymakers in any significant way, do you think?

PAULSON: I sure don’t think so; I don’t think so. I think the thing that should constrain U.S. policymakers is we’ve got so much debt to begin with! That’s what should constrain us, because there’s no example I can think of, in the history of the world, [where] any country continued to be a great country if they’ve got a long-term fiscal problem. And so I think we need to deal with that. I think the fact that China owns, you know, is our biggest foreign creditor is much more significant to China than it is to us, because it’s a much smaller percentage of, of our overall debt than it is of China’s foreign currency reserves. And so, again, why does China buy our debt? What other debt are they gonna buy? Is, is it better to buy Japanese, eh, debt? Is it better to buy, buy Eurobonds? I don’t think so. But again, my concern is it’s, it’s been a good thing that the China – Chinese own our debt; we have a lower cost of borrowing. But the, the issue is our debt, not the fact that the Chinese buy it.

ROSEN: It’s reminiscent of the old line that, “If I owe you $50,000, I’m in trouble; if I owe you $500 million, you’re in trouble.”

PAULSON: Right. Well, hopefully, none of us are in trouble because we’ve got the strongest economy in the world, and – but the biggest concern I have, the biggest threat to our continued, uh, preeminence in the world is fixing our own political system, fixing a political system where there’s political gridlock. Because the only way we’re going to get where we need to get, I believe, is through fundamental reforms, which takes Democrats and Republicans working together. We, we need tax reform that lets us raise the revenues we need from the individual taxes while remaining competitive. We need a corporate tax that’s – a system that’s gonna let us – our companies be competitive with those around the world. We need trade policies. So we, you know, we – 95 percent of the people in the world live outside of the United States. We want to open those markets for, for U.S. businesses and workers. So again, we need some fundamental reforms to deal with the modern world. And if we, if we are able to succeed in getting those done, you know, we have a very bright future. If we don’t, we won’t have a bright future, and that’s irrespective of what happens in China.

ROSEN: Mr. Secretary, thank you very much.

PAULSON: Thank you.