Paulson wastes no time pushing China

BEIJING, Dec 14: US Treasury Secretary Henry Paulson urged China on Thursday to make its currency more flexible as a prelude to a freely floating exchange rate in the medium term.

Paulson was speaking at the start of high-powered talks with China aimed at easing trade and currency frictions that are bedevilling relations between the two economic powers.

Before leaving for Beijing Paulson had played down hopes for a quick fix to the trade strains, but he wasted no time in telling China that Washington wanted to see market forces setting the rate of the yuan, also known as the renminbi.

''We will consider ways to achieve balanced growth, and talk about the importance of currency flexibility in the short term and a path to freely tradeable currency in the medium term,'' he said in remarks prepared for the formal start of the talks.

In subsequent comments at the beginning of a meeting with Vice-Premier Wu Yi, Paulson said tangible results were needed to counter scepticism in the United States about the usefulness of the dialogue.

He said a market-driven currency based upon economic fundamentals would help China achieve balanced growth and give it more leeway in setting monetary policy.

Because it chooses to hold its exchange rate down, the flood of dollars from China's trade surplus means plenty of cheap money to help fuel an investment boom that risks destabilising the world's fourth-largest economy.

''You understand our strong view that in the meantime more currency flexibility is necessary,'' Paulson said.

CRITICAL

Wu, China's most powerful woman, described the talks as being of ''critical'' importance.

As the meeting got under way, China let the yuan rise to its highest level since it revalued it by 2.1 per cent in July 2005, scrapped its decade-old dollar peg and set the currency free to float within tightly managed bands.

The central bank set the yuan's daily midpoint at 7.8197 per dollar, marking a further 3.7 percent gain since the initial revaluation.

But some U.S. lawmakers and businessmen say the yuan remains substantially undervalued given China's bulging balance of payments surplus of some 10 percent of national output.

The United States reported a record .4 billion trade deficit with China in October, 40 percent of its total deficit.

Paulson, who is in Beijing with six other cabinet officers as well as Federal Reserve Chairman Ben Bernanke, says his aim is to lay the basis to handle a relationship that will have consequences for the United States and its economy for generations.

To emphasise the long-term solutions that will be needed to reduce the bilateral trade and savings imbalances, the talks have been called a ''strategic economic dialogue''.

But short-term political pressure have mounted since the Democrats won control of Congress in November's mid-term elections.

As well as emphasising the need for sustainable growth without large trade surpluses, Paulson said the U.S. delegation would also emphasise the importance for China to further open its markets to trade, competition and investment.

Paulson, a former chairman of investment bank Goldman Sachs, said the third focus would be energy and the environment.

Noting that the United States and China are the world's leading energy consumers, he said: ''We are committed to developing the use of cleaner, more abundant energy sources and we will talk about the best ways to do that.''

REUTERS