Treasury's Paulson wants faster China yuan rise

"Policy-makers in both countries must resist the impulse to discard the hard-fought and long-term gains of open economies by pursuing short-term and misguided policy responses," Paulson told the George H.W. Bush U.S.-China Relations Conference.

There would be greater chances of balanced economic growth in China and the world if China let its yuan currency rise faster in value immediately and let markets set its value completely in the medium term, he said..

"Accelerating the rate of appreciation and introduction of flexibility will help China deal with the imbalances that have grown in the economy and make monetary policy much more effective in responding to inflation," Paulson said.

Questioned later, Paulson refused to specify how much he thought the Chinese yuan, also called the renminbi, should appreciate. U.S. manufactures say it is undervalued by as much as 40 percent, given China's rising economic might.

The yuan has risen only about 8 percent against the dollar since it was unpegged from the U.S. currency in July 2005 and it has fallen against the euro, prompting Group of Seven industrial nations on the weekend to unite in demanding a faster yuan rise.

U.S. Commerce Secretary Carlos Gutierrez and U.S. Trade Representative Susan Schwab echoed Paulson's warning that protectionist forces in both the United States and China are threatening relations.

"In both our countries, there are forces that would have us close our doors to the other -- potentially in contravention of our international obligations, and certainly against our best interests. This would, in my judgment, be an enormous mistake," Schwab said.

Schwab criticized China for subsidizing its industry in violation of World Trade Organization rules, imposing other barriers to U.S. exports and not playing a more constructive role to bring world trade talks to a successful conclusion.

But she also said China had become the "poster child" for rising protectionist sentiment in Congress and urged lawmakers not to be swayed by free trade critics pushing proposals that would slap retaliatory tariffs on China.

The rapid growth in U.S.-China trade over the past five years has benefited both countries, Gutierrez said.

But he criticized Chinese barriers that make it difficult for U.S. financial services, distribution and telecommunication companies to operate in China and said there were other disturbing signs in the relationship.

"While we are trying to lower barriers to trade, there is a risk that some in China are stepping away from long-standing policies of closer global economic integration -- policies which have been a source of China's incredible growth," Gutierrez said.

Paulson also warned that "recent and repeated reports" of tainted food and other imports were damaging consumer confidence in Chinese products and urged Beijing to address the concerns head on.

SPEED IT UP

China needs to accelerate the pace of market-based reforms, open up its economy more and allow the benefits of trade to be spread more evenly, even though Chinese businesses might resist, Paulson said.

"The greatest risk to China's long-term economic security is that protectionists prevail, and Chinese reforms proceed too slowly," he said.

All three U.S. cabinet officials will travel to Beijing in December for two high-level trade and economic forums -- the Joint Committee on Commerce and Trade spearheaded by Gutierrez and Schwab on the U.S. side and U.S.-China "strategic economic dialogue" led by Paulson for the United States.

Paulson said he believed the SED has been useful in managing U.S.-China relations over the past 18 months, but said the United States needed to see "tangible progress" from China to demonstrate that the process was worthwhile.

(Additional reporting by David Lawder, Alister Bull, Doug Palmer and Mark Felsenthal)