US's Paulson - China proposals could hurt markets

WASHINGTON, Sept 11 (Reuters) - U.S. Treasury Secretary Henry Paulson said legislative proposals aimed at punishing China over its economic policies could further unsettle financial markets rattled by problems in the housing sector.

In an interview with the New York Times published on Tuesday, Paulson said the U.S. economy was at "an inflection point" and that it would be ill-advised to impose punitive actions against China.

"When we look at taking unilateral actions aimed at another nation, this can have enormous repercussions to our economic well-being," Paulson said, "You know, we're playing with fire."

Paulson said the U.S. economy was resilient enough to weather problems in the housing and mortgage sectors. But he said he feared China might retaliate against any U.S. legislative measures and pinch off a market for U.S. exports.

The Bush administration has been pressing China to let its yuan currency CNY= CNYNDF= CNY=CFXS appreciate, which might slow the flow of Chinese imports into the United States by making them more expensive.

But U.S. lawmakers, impatient for faster currency appreciation, have proposed a series of measures to try to force faster action by Beijing.

One of them, supported by Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and by the committee's ranking Republican, Sen. Charles Grassley of Iowa., would not only penalize China for not letting the yuan float against the dollar but also could force higher tariffs on Chinese imports and ban federal agencies from buying Chinese products.