From our studios in new york city, this is charlie rose. Kevin rudd is a former Prime Minister of australia. He is also a diplomat and mandarin speaker. He became the first president of the Asia Society Policy institute. I spoke to him recently. We spoke about the chinese Prime Minister and u. S. Policy. I have heard lots of stories. People have come to my table to talk about how he is exercising power, talking about how to exercise power. Tell me your impressions of him. Who and what enabled him to become the president of china. The first thing to bear in mind with xi jinping is his family background. He is the son of politburo member. He was entrusted with an important task, to oversee the implementations of the four special Economic Zones. That is what he set out to do. He was put in charge of what in china was a highly controversial project. Those four special Economic Zones coincided with the 19th century treaty ports where foreign countries, namely the british but others as well demanded exclusive access to the ports in what was called the unequal treaties between china and the west. To go talk to these after the revolution of 1949 and say, 30 years after that, we are going to open the door to these treaty ports the left of the party said, you are going to do what . This is the vehicle through which chinese exploitation initially occurred in the internal historiography. So he was given this job. The Economic Zones were expanded in scope. The number of zones grew. In time, the policies adopted across the country. His father represents a liberal reformed agenda. The other thing about his father. He was a revolutionary commander for the red army. In the lead up to the 1949 revolution. He is a Party Loyalist. Strong in the partys role in bringing about a revolution. You have this combination of a hardline. A political supporter of the Chinese Communist party. At the same time, somebody that sees the future hinges on the continued reform of the economy. That very much explains in part the political worldview and economic worldview of his son. And as a leader, what have you seen so far . I have met him a number of times. I first met xi jinping when he was vice mayor to one of the treaty ports. He did not know me but i knew he was a significant figure in municipal politics. Rolling the clock forward, since he has been president , he is one of the few chinese leaders who i have seen conduct his engagements with foreigners without speaking notes. He does not speak to a brief. He speaks offthecuff career those scribbling furiously are those around him. What you discover is he is steeped in his own countrys history and that of his party. There is a profound historical frame of reference, which affects his current worldview. Namely that china, having been first occupied by the british after the opium war, when hong kong was ceded, through to the defeat of the japanese, what they call the century of foreign humiliation, this is burned deep into his worldview. Therefore, the need to cause china to go through its own national reawakening renaissance rebirth. The chinese word for that is a core part of his view for the future. Bringing it back to a respected place in the Global Council of nations. The last thing i will say about him as a person. Beyond his selfconfidence, not using notes. His historical frame of reference. He is a deeply committed Party Loyalist himself. Many in the west and u. S. As well assume that what we have seen in china when he visited houston. Which i understand is in a state called texas. I am beefing up on my american knowledge. The bottom line is, we often assume since the leader wore a cowboy hat, through tiananmen square, through the 1990s and the next decade, there is a slow evolution of an open economy creating a more open system. Under xi jinping, the opening of the economy will continue. There will be a continued openness to the society. His political frame of reference is a conservative party view. What he will seek to advance is what he calls the china model. The China Development model is not a liberal capitalist model. It is more of a state capitalist model. It is important that we understand that. What do you think misconceptions are among western leaders about him and his intent . There is always a predisposition on the part of any nationstate looking at another to think the worst. That is how diplomats keep in business. I have been one of those. Themselves, intelligence agencies, and defense departments. Whatever the country over there says is one thing. We are paid professionals to assume the worst case scenario. Often, you see that around the world in relation to china. The largest misperception is this. Somehow, china has a growing military capability and military ambition to occupy in time parts of its region. The bottom line is, whatever negative things you can say about the chinese tradition, it is not a substantial part of the chinese tradition as it was with the europeans to say, now we have wealth and power. How do we conquer the next territory . There is a deep civilizational view alive in beijing that theres enough to manage here to not go and conquer the other half of the world. That is a misconception. We see here, clearly in the 21st century, the rising power. A country that has not yet decided it is a stakeholder in the world, but seems to want to increasingly be perceived as such. What are they up against . Can they make it work . Where do they think they are going . A lot gets lost in translation when we are dealing with chinese friends. You mentioned the word stakeholder. Bob zelig, a good friend of mine and head of the world bank in days past, and it is good to see my compatriot here, he coined this phrase. China should become a responsible global stakeholder. This led to two lines of mistranslation. One around barbecues. Like i have to hold a steak and what does that mean . They were confused when they heard that. There was a long pause. The concept is a strong concept. But that is how things get lost in translation. On my core point, it is worth understanding that we have an expectation that china will increasingly follow and comply with the rules of the global system. We the collective west half of have evolved for ourselves. Towards the chinese would say, that is terrific. We were not even there, thank you very much. To which we say, you were. They were one of the victors in 1945. To which they say, that was the kmt, not us. If i look at some of the more recent speeches of xi jinping, he says the rules need to be reformed in a way that makes the system more just and equitable between states. That is a big challenge for us. We, the collective west, much of the developed world, that is accept the status quo. China is saying something quite different. We are engaged in the business of reforming, changing, the system as our power grows. The obvious example i see is the dollar as a reserve currency. What else . At this stage of their public pronouncements on all of this, it is opaque. Let me give you one clear example. There has been a great debate about chinas decision to establish the Asian Infrastructure bank. The response from the u. S. , the west, and the rest has been along the lines of, why do we need that . We have the Asian Development bank. A system of Multilateral Development banks around the world. They are run according to International Rules and have gone fine and dandy. To which the chinese say, no not really. They established their own Asian Infrastructure bank. They are establishing an institution outside of the u. N. And brenton woods. The capital is 100 billion. It is not going to shake the world in one go. But i would not be surprised if it expands. My own view, given the Global Investment of infrastructure deficit around the world multiple sources of capital should be welcomed into the system so long as the governments of these institutions we have not raised objections to the thing called the Islamic Development bank, though it operates across the middle east. We have to be careful about saying no to any Chinese Initiative on the condition that governance is a properly formed instituation. What about militarily . It is a phenomena which is unfolding. Military expenditure in terms of annual growth has outpaced the u. S. For arguably the last 25 years. Annual growth. And with increasing intensity. If you look at some of the International Data released on this, say that put out by the International Peace research institute, which is regarded as a neutral, credible institution assessing the hardware of each countrys military, they would put chinas total aggregate expenditure at about one quarter to one third of the u. S. We need to be mindful of where that heads in the decades ahead. Even the Chinese Military planners do not conceive of a spot where u. S. Conventional power could be exceeded by china. The role of the Foreign Policy is different. They see themselves as having expanding Foreign Policy footprint. How is the military somehow part of that . Or the expansion of chinese interests . If you go to the military the core interest which xi jinping has in the military is to make sure it is modern, sophisticated, and capable of engaging in and prevailing in a military conflict in and around chinas periphery. The first function of the military is to protect the party. Under the party and state constitution. Contingencies for which the Chinese Military plan are primarily those associated with the longterm scenarios for the recovery of taiwan to the mainlands tender embrace. They wish to do that by diplomatic means, but if that is not possible, their wargaming is around how to secure taiwan. Stop the u. S. Military or naval action in the taiwan strait. Planning for that, you acquire additional capabilities which add complexity. The u. S. Defense and naval planners in the pacific. Is outlook for china less than when they were growing at 10 . Or was it to be expected, as they got larger, the growth would slow . Any of us who are students of economic history know that an expanding continental economy, engaging in growth you will have rapid growth. As you did with the history of the u. S. When it began exporting and trading with the rest of the world. Effectively becoming the largest economy in the world. This is natural. Slowly, with the maturation of the economy, the growth rate narrows to a historical medium between 23 . Like your economy and the australian economy. They are trying to avoid what they call the middle income gap. Here is the kicker. On the way through, can they sustain growth at sufficiently high levels to provide the buffer necessary for the transformation to occur . That has been tough. Global demand has been so flat. Look at europe at present. Look at the u. S. Net exports have turned out to be frankly a minor or even negative contributor to chinese growth. What they have done historically to fill that gap is engage in massive capital projects, which has had the consequence of creating asset bubbles in the property sector. Real estate. Real estate and redundant state construction. I give the government credit, as growth slows, not to engage in that on the way through. There are seeds of a positive way to look at the model for the future. One piece of data that has emerged since they adapted to these new blueprints for longterm Economic Performance moving from manufacturing and investment to services and consumption, the phenomenal increase in new business registrations. A phenomenal increase. This has been achieved in part through regulatory changes which do not require you to mortgage or life, wife, and house. If you want to start a new business. The driver for growth is through an emerging Small Business sector. Greater opportunity for private firms. If the reform goes according to plan a contracting size of the state enterprise sector. Leveling the you went through a list of what can go wrong. Take most of those boxes you raised including this one. The real question for the leadership is will they continue to shrink the state owned enterprise sector . Given the sub Optimal Performance and distorted resource allocation in the economy . Will they allow that sector to contract and yield more space to private firms, or does that create too much of a political problem because the state owned sector becomes too small and their ability to affect decisions on the ground is reduced as a result . What is the threat to the future of the communist party . What might be a threat . Where is their paranoia justified . This is a very deep and searching question. Let me hazard a couple of answers. If you are looking at the world from xi jinpings perspective, the number one priority is keeping the party in power. What are they mindful of . Threats to the Party Position from within. You are seeing a tightening of the environment from the perspective of the activities of universities, cultural dissidents, political dissidents. This is occurring as we speak. The second source of concern is through the emergence of alternative centers of power. That is why authorities look with great skepticism at religious organizations which from their perspective become potentially sources of dissent. Not all, but some. That leads me to my third point. They are very much focused on the separatist tendencies in tibet and other regions. A great crescent of instability brought about by violent jihadism. If youre putting together the hierarchy of concerns. Finally, a deep view held within china is uncle sam is out there actively fermenting a lot of this. He is also engaged in a de facto policy of containment to prevent chinas rise and emergence. Im not going to rights and wrongs of them, i am describing them. I would say that is what animates internal party concerns. They are big concerns, together with the environment. Your ability to breathe the air. They are spending a lot of money on the search for alternatives. If you look at the seachange in chinese environmental policy in the last three or four years, i remember sitting in the room with president obama and chancellor merkel, 20 other Global Leaders in copenhagen five years ago. We tried to bring about a global agreement on climate change. It did not work. I went to copenhagen. I have a tshirt that says, i survived copenhagen. For a while, anyway. Life after being a Prime Minister. Yeah. Political exile in the u. S. [laughter] it is a good place to be in exile. When i contrast the position chinese negotiators took then on climate change, to where they are now, the shift has occurred because of the combination of air pollution and its partner in crime, greenhouse gases. The science is in within china. They know it is happening and they see the evidence. If, to start with, you only had 1012 of your country constituting arable land and it becomes degraded through the absence of water, pollution into the soil, other factors, this has brought about a seachange in chinese policies. The world will wait with anxiety because china is now the largest emitter. What ought to be a constructive american policy toward the rise of china . That would serve both countries . I have been to china about a dozen times and washington a lot. Chatting with leaders, those who advise them behind the scenes, i think there is a way through this. It might sound naively optimistic, from a happy and sunny country like australia. There is a basis for my optimism. If i was to give it a name, it would be for both sides to adopt a posture of constructive realism. What do i mean by that . Be realistic about where, at this stage, the two countries cannot agree. On fundamental geopolitical questions. Political values questions. And some others as well. Also agree on a mechanism by which those differences can be managed short of conflict. The constructive bid, the other side of your brain engaged on, there are a number of things we can work on together in order to advance not only our National Interest but bilateral interests in the worlds interest. That list is formidable. We have been talking about the change in chinese position on climate change. Two of the largest emitters in the world, the u. S. And china, they will decide effectively between them whether the paris conference succeeds or fails. India will also be important. Another question is whether there is an institution that can build confidence and security building measures. Working together on natural disasters. To avoid an issue when a submarine or airplane runs into another. How to avoid that from escalating . Down to a range of other bilateral cooperative issues. An investment treaty. That will be good for both economies. If you start investing in each others economies, you have a big interest in the economy succeeding. A bunch of cash there. That is what i describe as the constructive dimension. The final dimension, to have in the back of our mind a view that, if you develop sufficient Political Capital and dramatic capital from the things you work on together constructively over time, as circumstances allow you to draw on it, to solve some of the unfixable problems in the first place. These three elements i believe you can hold together in a common, strategic view. We are human beings. We go to one side of the brain and say, problems, difficulties, thank you. The others, which can be pie in the sky people, is into the wonderful. Lets forget about the development of the navies facing each other off each day. You need a strategic view that embraces both realities. We are capable of doing that. The mechanism evolving between president obama and xi jinping it gives us an Institutional Capacity to make that work over time. How is that relationship . Do you think it is a healthy relationship . Comparison to the relationship to the Prime Minister of israel . Im not even going to