Hank Paulson: China hasn't built better capitalism

Former Treasury Secretary Hank Paulson said Wednesday the growth model powering China's economy is running out of steam.

Paulson, author of the new book "Dealing With China: An Insider Unmasks the New Economic Superpower," said in an interview on CNBC's "Squawk Box" that the world's second-largest economy is too reliant on exports and municipal debt to build infrastructure.

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Rebooting China's economy is easier said than done, he said.

"[China] had a set of policies that served them very well for a long time. Anyone who says they've developed a better form of capitalism I think is wrong," he said. "There's a bigger risk in overestimating China's strength as it is in underestimating it."

China's economy grew at its slowest pace since 2009, building the case for further stimulus from policymakers. The government said Wednesday that gross domestic product expanded 7 percent in the three months to March.

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"When I look at the growth, I would much rather, and I know they would much rather, grow at a slower rate but have the right sources for growth," said Paulson, a former chairman and CEO of Goldman Sachs who headed Treasury in George W. Bush administration's from 2006 to 2009.

Those right sources of growth for China, he said, are opening up markets and having the private sector do more to stimulate the economy.

Paulson has made numerous trips to China. Since leaving Washington, he has worked on improving ties between East and West through the Paulson Institute.

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