The US, China and Wall Street’s new man in the middle

In his offices a short walk from Zhongnanhai, the Chinese Communist party’s leadership compound in central Beijing, vice-premier Liu He maintains a large collection of photos taken with foreign VIPs.

According to foreign government officials and diplomats who have visited President Xi Jinping’s most trusted economic adviser regularly since his boss assumed power in late 2012, the photos are often rotated — pictures of Mr Liu with European dignitaries displayed for European visitors, and pictures of the vice-premier with American dignitaries hung on the walls for American visitors.

But, these people add, one picture in Mr Liu’s collection is always on display. It shows the vice-premier engrossed in conversation with Henry Kissinger.

Few statesmen are as revered in Beijing as Mr Kissinger, who as Richard Nixon’s national security adviser and secretary of state masterminded the US and China’s rapprochement at a time when Mr Xi and Mr Liu were teenagers trying to survive Mao Zedong’s cultural revolution. “Dr Kissinger is a foreign policy deity in Beijing,” says Drew Thompson, a former US defence department official now at Singapore’s Lee Kwan Yew School of Public Policy. “He has always had a sympathetic ear in Beijing and Chinese leaders have continually sought to use his celebrity and access to influence Washington.”

But a new generation of China whisperers is emerging as Mr Kissinger, 95, grows frail and US President Donald Trump jettisons the principles that formed the bedrock of Sino-American relations through eight successive US administrations — namely the conviction that the two countries’ common interests outweighed their differences, and that their periodic disputes could always be managed peacefully.

They include Henry Paulson, the former US Treasury secretary and Goldman Sachs chief executive, and Michael Bloomberg, former New York mayor. Yet the most prominent — and controversial — of the potential next-generation Kissingers is Blackstone co-founder Stephen Schwarzman, who has longstanding commercial interests in China and a close personal relationship with Mr Trump.

“All of those folks to one degree or another have been trying to run backchannels, in particular through [Treasury secretary Stephen] Mnuchin, there’s no two ways about it,” says one person close to the US-China trade talks. “They have also been counselling the Chinese all the way along. If the president announces a deal, they will be patting themselves on the back.”

The willingness of these Wall Street leaders to try and build bridges with Beijing has attracted the ire of the more nationalist members of Mr Trump’s inner circle.

“When these unpaid foreign agents engage in this kind of so-called diplomacy all they do is weaken this president and his negotiating position,” White House adviser and leading China hawk Peter Navarro said this month. “No good can come of this.”

Mr Schwarzman declined to comment for this article. But one person familiar with his role as a conduit between the US and China argues: “Steve has been uniquely suited to help advance US interests because he is trusted and known by both sides. He has been asked by the [Trump] administration to get candid views from the Chinese that can be used by the administration in their negotiations.”

Mr Schwarzman, Mr Paulson and Mr Bloomberg all either control or have run firms with extensive interests in China. All three have founded China-focused non-profit organisations. But Chinese officials are keenly aware that Mr Schwarzman has the best relationship with Mr Trump.

Mr Paulson endorsed Mr Trump’s rival for the presidency Hillary Clinton, while Mr Bloomberg is considering a bid for the presidency in 2020 as a Democrat.

Mr Schwarzman, by contrast, hosted a fundraiser in his Park Avenue home for Mr Trump just after the US Senate passed big tax cuts for corporate America last December.

The two men’s chumminess — and rivalry — was on display at a fundraiser in August. According to one person briefed on the event, when Mr Schwarzman was the last to be seated, “the president said, ‘Oh look Steve is so rich he thinks he can come to a meeting with the president with no tie’”. When Mr Trump went on to tell his guests that he was committed to maintaining a more confrontational approach to Beijing, he noted that “Steve’s got all this business in China”.

China has been an important buyer of the private equity investments Blackstone has been involved in. Since 2013, it has completed 12 asset sales to Chinese companies in deals valued at more than $32bn, accounting for about one-third of the firm’s total disposals, according to Refinitiv. Buyers included China Investment Corp, Beijing’s sovereign wealth fund, as well as three of the four “grey rhino” private conglomerates at the centre of a government crackdown on outbound deals: HNA, Dalian Wanda and Anbang, which paid $1.95bn for the Waldorf Astoria hotel in New York.

CIC was also an anchor investor in Blackstone’s 2007 initial public offering, paying $3bn for a 10 per cent stake. In February, Blackstone revealed that CIC was no longer a shareholder.

Despite criticism over conflicts of interest, in early September Mr Schwarzman spent a busy week in Beijing attempting to revive stalled trade talks between the Trump and Xi administrations, according to three people familiar with his efforts.

They added that he did so with the knowledge and support of Mr Trump and Mr Mnuchin, but did not consult Mr Navarro or Robert Lighthizer, the US trade representative and another of the administration’s leading China hawks.

The White House invited a Chinese commerce vice-minister, Wang Shouwen, to Washington on September 20 to pave the way for a potential follow-up round of formal negotiations with Mr Liu. “Schwarzman absolutely ran the whole thing,” one of the people said. “He was the progenitor of it and the go-between. It drove Lighthizer nuts.”

“I have no doubt Schwarzman drives Lighthizer nuts, a lot of people drive Lighthizer nuts,” says someone who has worked closely with the trade representative. “Schwarzman has access to the president and uses that access to push what he thinks should happen . . . He genuinely believes these two large superpowers need to get along somehow.” A USTR spokesman added it was “not true” that Mr Lighthizer was frustrated by Mr Schwarzman’s interventions: “Ambassador Lighthizer knows and respects Mr Schwarzman and has consulted with him on various matters.”

Although Mr Schwarzman and Mr Trump sometimes moved in similar circles in New York, they are not obvious political bedfellows. In an interview with the Financial Times in 2016 about his Beijing-based graduate programme modelled on Oxford university’s Rhodes scholarships, Mr Schwarzman said: “I could see in the US the start of populism . . . It’s now evolved into nativism and these are very dangerous trends once they start. I wanted to do something to stop it as best I could.”

Mr Schwarzman’s delicate diplomatic manoeuvring in September nonetheless blew up in spectacular fashion when Mr Trump announced, just two days before Mr Wang was due to arrive in Washington, that he was acting on his threat to impose punitive tariffs on more than half of all Chinese exports to the US. Mr Wang promptly cancelled his travel plans as formal trade talks between the world’s two largest economies were effectively frozen for two months.

The incident was the third time in just over a year that Mr Schwarzman had failed to deliver a promised meeting for his friends in Beijing with his friend in the White House, according to four people familiar with his other efforts.

In July 2017, he helped schedule a meeting between Mr Trump and Wang Yang, China’s lead negotiator in a failed round of “early harvest” trade talks. Mr Trump cancelled the meeting as Mr Wang waited in the White House.

Then in early March he attempted to arrange an Oval Office meeting for Mr Liu, who was in Washington for talks with senior administration officials, according to two people briefed on the effort. Mr Trump declined the meeting and, in a further snub, announced that he would impose punitive duties on all steel and aluminium imports while Mr Liu was still in Washington.

These incidents have heightened Chinese officials’ greatest fear about this week’s resumption of formal trade talks before Mr Trump and Mr Xi’s meeting on the sidelines of Friday’s G20 summit in Buenos Aires — their first face-to-face encounter in more than a year. They worry that Mr Trump may embarrass his Chinese counterpart by escalating the trade war either during their interactions at the G20 — or shortly after.

In contrast to Mr Schwarzman, Mr Paulson and Mr Bloomberg have kept relatively low profiles in Beijing as Sino-US trade tensions worsened this year. As he rose through the ranks at Goldman Sachs in the mid- and late-1990s, Mr Paulson secured lucrative mandates to restructure and list some of China’s leading state companies. During this time he first met Wang Qishan, who was an up-and-coming financial technocrat.

The two also worked together as Treasury secretary and vice-premier respectively during the global financial crisis. Like Mr Kissinger, Mr Paulson’s experience in managing China-US relations through a period of transition, Mr Thompson says, “has translated into his impeccable access” in Beijing.

Today Mr Wang, after five years as Mr Xi’s anti-corruption tsar, is China’s vice-president while Mr Paulson is the founding chairman of a non-profit institute that aims “to strengthen US-China relations”.

After three terms as mayor of New York City, Mr Bloomberg returned to full-time duties at his eponymous financial data company in early 2014. At the time his company was still reeling in China from Beijing’s angry response to an investigative article detailing the wealth of Mr Xi’s family.

In May, Mr Bloomberg announced plans to launch a China-focused event modelled on the World Economic Forum’s Davos summit in co-operation with Mr Kissinger, Mr Paulson and a Chinese government think-tank. But as Sino-US relations deteriorated, the think-tank pulled out and Mr Bloomberg moved the event to Singapore.

Only as momentum began to build late last month for the G20 meeting between Mr Trump and Mr Xi did Beijing offer Mr Bloomberg’s forum a big consolation prize — a keynote speech by vice-president Wang at its opening on November 6.

While Mr Wang used the occasion to warn that the Chinese government would not be “bullied”, Mr Paulson issued a stark assessment about the rapid decline in bilateral relations while lamenting the slow pace of economic reform in China.

“I now see the prospect of an ‘economic iron curtain’,” Mr Paulson said. “If China wants to keep its relationship with the US from spinning out of control, it is going to have to look hard at some of its choices and policies. Above all, that means China will need to rediscover the spirit of market driven reform and opening up. ”

Despite this willingness to criticise Beijing in public, two days after the speech Mr Navarro unleashed his thinly veiled attack on the former Goldman Sachs chief, “globalist billionaires” such as Mr Schwarzman and Mr Bloomberg, and other “self-appointed Wall Street bankers and hedge fund managers” attempting to mediate between Washington and Beijing.

“[Mr Trump] didn’t need the help of Wall Street, he didn’t need the help of Goldman Sachs, and he doesn’t need it now,” Mr Navarro said.

Mr Schwarzman, Mr Paulson and Mr Bloomberg declined to comment on Mr Navarro’s remarks, which Mr Trump’s economic adviser, Larry Kudlow, said were “way off-base”.

Chinese officials disdain Mr Navarro and see him — one of them says — as one of “a few people” determined to “wreck” the China-US relationship. The question now is whether Mr Schwarzman and other “old friends” can help them save it.

Schwarzman College: why endowment demand irritates China

Stephen Schwarzman may be an “old friend of China”, but he drives a hard bargain in the country.

When Blackstone’s chairman was negotiating his Schwarzman College project at Tsinghua University, one point of contention was over who would manage its $450m endowment. Mr Schwarzman eventually agreed to entrust Tsinghua’s endowment fund with $50m, according to two people familiar with the arrangement, but only on the condition that the university guarantee an annual return of 8 per cent.

This arrangement struck some Chinese officials as unreasonably high. “It was a source of mistrust,” says one official. “Tsinghua felt it was not fair.”

Mr Schwarzman declined to comment on the mandatory return for his college’s endowment. Tsinghua did not respond to a request for comment.

In July Guo Shuqing, head of the China Banking and Insurance Regulatory Commission, warned investors that any financial product offering an 8 per cent return is “very dangerous”. Mr Guo was warning investors about the dangers of risky products from fly-by-night shadow bankers and peer-to-peer lending platforms.

Tsinghua University is neither. As one of China’s premier universities and a training ground for Communist party leaders, Tsinghua boasts one of the largest endowments in the country.

Last year the foundation that manages its money had net assets of Rmb7.3bn ($1.05bn), according to its annual report, and Tsinghua’s brand gives it an inside track to coveted investment opportunities. If it falls short of Mr Schwarzman’s target, it can easily shift funds to make good on its guarantee. But as the Chinese official told the Financial Times, the requirement still stings. “In New York how can you make 8 per cent?”