A Bridge over Troubled Water

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In virtually the same breath, however, Paulson acknowledges that mind melds about the large economic issues confronting the two countries aren't what a lot of folks in Washington are looking for these days.

Led by a Congress now controlled by the Democrats, the get-tough-on-China brigade in Washington is growing. Some U.S. lawmakers are demanding tangible action by Beijing on a range of issues, including the massive bilateral-trade imbalance, piracy of intellectual property and the perceived loss of U.S. manufacturing jobs to low-cost labor in China. Specifically, the trade hawks want a faster revaluation of the yuan, China's currency, against the dollar, which would help balance trade by making Chinese goods more expensive in the U.S. and American products cheaper on the mainland. Absent significant policy shifts by Beijing, Congress might try to punish China by erecting punitive trade barriers, which could damage both countries, politically and economically. Does Paulson have any sense of what might be deliverable—and when? "None of the issues we're dealing with lend themselves to quick fixes," he says. "But I've never been known as the world's most patient person. I totally recognize that we need to get results."

Therein lies the formidable challenge of Paulson's position. For the moment, he's still riding his Wall Street résumé in Washington, where his Goldman pedigree has given him the instant credibility in financial markets that his two immediate predecessors at the Treasury Department helm (Paul O'Neill and John Snow) lacked. The result, for now, is that both Democrats and Republicans respect him—a rarity in an Administration that's loathed by most Democrats. Paulson counts among his friends Democrat Charles Schumer, a New York Senator who co-sponsored one of the most egregiously protectionist bills to emerge from Capitol Hill in recent memory—the legislation would have imposed a 27.5% tariff on Chinese imports if Beijing failed to revalue the yuan sharply upward. It was Paulson's low-key lobbying that helped convince Schumer and his colleague, Republican Senator Lindsey Graham, to withdraw the bill last year.

At the same time, Beijing views Paulson as a "Friend of China." During his tenure as CEO, Goldman Sachs advised the government on numerous privatizations of state-owned companies. Paulson himself was a key behind-the-scenes force in the controversial—and ultimately unsuccessful—attempt by state-controlled oil producer CNOOC to buy U.S.-based Unocal. Paulson also has a genuine interest in China that goes beyond profits. During his interview with TIME, he became most animated when discussing the Nature Conservancy, an environmental NGO that he chaired until last year, and the work the group is doing in China's southwestern Yunnan province.

But being Washington's Mr. China is a delicate balancing act for Paulson. Chinese leaders such as Vice Premier Wu expect him to understand where China is coming from—and cut it some slack. In Washington, however, his China background means something else entirely: he's the man who knows which buttons to push in Beijing to get fast results. "That's the expectation, sure," says Nicholas Lardy, a senior fellow at the Institute for International Economics in Washington. "It may not be realistic, but it is what it is." To make any progress on trade issues, Paulson will have to play to perfection his role as intermediary—one part translator, one part referee—between an increasingly sinophobic Congress and the always wary cadres in Beijing.

Paulson says that on the current, headline-grabbing issue between the two countries—the yuan's undervaluation against the dollar—the difference between the two sides is all about timing. "I've been in meetings with my colleagues on the Hill and have explained to them that they are saying the same things as the Chinese," he says, "but [the two sides] are not communicating very well." In 2005, Beijing abandoned its practice of fixing the yuan directly to the dollar and instead linked it to a basket of currencies. But the yuan's value is still managed by the government, which has allowed the currency to rise less than 6% against the dollar since the dollar peg was scrapped. Beijing argues this policy has delivered a strong flow of foreign direct investment that has stabilized the country's weak financial system and helped modernize its economy. While most Chinese officials recognize that the yuan is undervalued, they insist adjustments must come gradually. They fear that an abrupt rise could trigger financial instability, a sharp slowdown in economic growth and rising unemployment. The U.S. is pushing for faster action.