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Former US Treasury Secretary Urges Change in China

Friday, 7 Jun 2013 | 3:47 AM ET
Hank Paulson: China Needs to Change
Henry Paulson, Chairman of the Paulson Institute and Former U.S. Treasury Secretary said China needs to make significant changes to its economic model in order to continue to be successful.

Ahead of a key weekend meetings between the presidents of the world's two largest economies, former U.S. Treasury Secretary Henry Paulson said China needs to change its economic growth model, because the current one is running out of steam.

Henry Paulson, now chairman of the Paulson Institute that promotes sustainable economic growth, told CNBC on Friday that changes to China's economic model need to be made in order for the world's second largest economy to continue to succeed.

"There's been huge progress but the growth model [in China] needs to change, they need to reinvigorate reform," Paulson said on the sidelines of the Fortune Global Forum, where CEOs from the world's top 500 firms have gathered in the southwestern Chinese city of Chengdu. "Reform has essentially stalled in this country for 10 years and that's the bad news."

Economic reforms need to address China's big environmental issues stemming from rapid urbanization, plus social issues due to migration, and also an overhaul of capital markets by opening up the private sector is needed, said Paulson, a former Goldman Sachs CEO.

"This economy is so big and so complex, it's becoming increasingly difficult to rely on this combination of administration and market measures," Paulson said. "They're going to need to have a growth model, which places less emphasis on government led investment and exports and more on domestic led growth and consumption."

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Paulson's comments come as Chinese leaders try to address growing concerns over slowing growth - China's annual economic growth of 7.8 percent in 2012 was the weakest since 1999.

At the same forum on Thursday, Chinese Vice Premier Zhang Gaoli said the government was committed to accelerating change in its development model and move faster to a consumer-driven economy and expand imports, Reuters reported.

(Read More: China President Takes Charge of Sweeping Economic Reform Plan: Sources)

Paulson, who was U.S. Treasury Sectary during the global financial crisis, said the good news is that China's leaders are planning reforms for the economy, but it will take some time to sort through the challenges.

"I'm convinced they're [China's leaders] going to take some very positive action to do something about it, but this is not easy to change a growth model - it's going to take time," Paulson said. "I don't care what economic system it is, you're not going to outlaw economic gravity, there's going to be bumps along the road."

(Read More: Fed Tapering Could Mean Instant Problems for China)

Challenges like eliminating the privileges that Chinese state-owned enterprises enjoy to boost the private sector will be difficult when there's strong vested interest opposing such moves, Paulson said.

Chinese President Xi Jinping and U.S. President Barack Obama are scheduled to meet on Friday and Saturday in California as part of a weekend summit.

— By CNBC.com's Rajeshni Naidu-Ghelani. Follow her on Twitter @RajeshniNaidu

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