Paulson urges China to boost domestic economy

WASHINGTON Wed Dec 3, 2008 3:07am EST

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WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Tuesday that China needs to introduce more measures to boost domestic demand, while emphasizing the need for continued reform of China's exchange rate policies.

Paulson also noted the continued fragility of the global economy, and said the United States cannot afford to let its auto industry fail.

Speaking to the World Affairs Council just before heading for Beijing for two days of talks, Paulson said it was vital that China continue to let its currency rise in value and open its markets.

"Continued reform of China's exchange rate policies is an integral part of this broader reform process," Paulson said. "China has appreciated the RMB over 20 percent against the dollar since 2005 -- this is important and significant, but it is important that the process continue."

China's currency, the yuan, is also known as the renminbi or RMB.

Paulson will be participating in a fifth and, for him, final round of a so-called "strategic economic dialogue" with China that he initiated in 2006. It is unclear whether the incoming administration of President-elect Barack Obama will continue the effort.

Paulson said China must reduce its dependence on exports to drive its economy, but praised Beijing for actions it has already taken to help restore global economic growth.

"The Chinese throughout this process and throughout our financial market challenges ... have been very responsible partners and stakeholders and continue to stand by us and stand by our debt," Paulson said.

With current economic problems far from over, it remains vital the United States, China and others "take whatever further actions are necessary to stabilize the financial system, including using appropriate monetary, fiscal and financial regulatory policies," he said.

In the case of the United States, that means keeping the struggling U.S. automakers out of bankruptcy, he said.

"Given the state of our economic situation right now, given how fragile it is, I certainly don't believe -- and no one in this administration believes -- that bankruptcy of an auto company would be a good thing," Paulson said.

But any government aid package has to be one "leading to a viable industry," Paulson said, repeating the position the Bush administration has taken in talks with Congress on a bailout package for the auto sectors.

Paulson also said he believed, as a general policy, the United States should not allow any organization to get "too big, too important, too interconnected to fail. That's a bad situation to be in. No doubt about it."

The meetings in Beijing on Thursday and Friday will include talks on how the United States and China can work through international forums to strengthen the global economy.

The Bush administration has been pushing for institutions like the International Monetary Fund to be given a larger supervisory role over global economic policies, including exchange rates.

Along with currency, Paulson said the large U.S. delegation will also discuss consumer and product safety issues as well as how to maintain open investment policies.

Paulson noted China announced a major fiscal stimulus package in early November to spur domestic demand and urged it to continue to do all it can to boost growth at home.

Asked about his plans after the Bush administration comes to an end on Jan. 20, the former chairman of Goldman Sachs said he would not be returning to a job on Wall Street.

"I've got a lot of other interests. You know, things like conservation and others and I look forward to pursuing some of those other interests," Paulson said.

In the meantime, Paulson said he was doing everything he could "to make this transition as seamless as possible."

President-elect Obama is coming into office with a "strong mandate," which will be a big asset in helping the new administration cope with the financial crisis, he said.

(Reporting by Glenn Somerville, Doug Palmer and Lisa Lambert; Editing by Leslie Adler)

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