China takes U.S. to task on currency, food safety

XIANGHE, China (Reuters) - An assertive China fended off U.S. pressure over currency policy and food safety on Wednesday and told Washington to put its own house in order rather than blame Beijing for its economic problems.

The jousting, during a high-level "strategic economic dialogue" near Beijing, underscored the growing complexity of a relationship that Treasury Secretary Henry Paulson said was now central to maintaining global economic prosperity.

Paulson, who called the first of two days of talks "lively but friendly", urged China to let its currency rise faster to curb inflation, now at an 11-year high of 6.9 percent.

"China's leaders have voiced concerns about China's macroeconomic stability, in particular mounting inflation, growing asset bubbles and possible overheating. A more flexible exchange rate policy is especially important to China now, given these risks," Paulson said.

China's central bank let the yuan rise as high as 7.3647 per dollar on Wednesday, the strongest level since the currency was unpegged from the dollar in July 2005. The yuan has gained 12.4 percent against the dollar in total since then.

Vice-Commerce Minister Chen Deming dug in his heels against a faster rise, saying China's economy could not afford it.

Turning the tables on the United States, Chen criticized the recent decline in the dollar, which he said was pushing up oil and other resource prices and eroding the value of U.S. assets held by countries such as China.

"What I'm worrying about now is the weakening dollar and its potential impact on global growth," Chen said.

WAGING A MEDIA WAR

Central bank chief Zhou Xiaochuan also spoke out for a strong dollar and said he was concerned that loose U.S. monetary policy could flood the global economy with cash and buffet China's markets in the process.

The news appearances by Chen, Zhou and others appeared to be an attempt by Beijing to win the battle of public opinion. High-ranking Chinese officials usually keep a lower profile at such conferences.

Vice-Premier Wu Yi , known as China's "Iron Lady", also came out swinging. With several bills wending their way through Congress aimed at getting Beijing to speed up the yuan's rise, she warned Paulson that business ties would be severely undermined if the measures became law.

"Obviously, to resort to trade protectionism and blame another country for the structural problems in the U.S. economy is the wrong approach which would only harm the interest of the U.S. itself," Wu said.

The talks began on a prickly note after Washington, alarmed by a string of recalls of toys and other China-made goods, put the safety of food and other imports at the top of the agenda.

"I need to point out frankly that the United States should also assume its due share of responsibility for improving product quality and food safety," Wu said as the delegations faced one another in a tightly guarded government resort outside Beijing.

She accused U.S. interest groups of stirring up trouble and said: "We must oppose attempts to politicize trade issues."

PAULSON'S PLEA

Paulson said he was worried about a rise in economic nationalism and protectionist sentiment in both countries.

"Neither China nor the United States can protect our way to further prosperity. We must resist attempts to reduce transparency or increase regulatory obstacles in order to protect domestic industries," he said in his opening remarks.

Trade tensions were on the boil and both countries needed to take action: "Whereas trade was once largely a source of stability in U.S.-China relations, it has recently become a source of tension, and not only because of safety concerns."

China's surging inflation rate prompted Paulson to make the case that a stronger currency was in China's own interest because it would reduce import costs and let the central bank raise interest rates more freely.

Instead, with the yuan on a tight leash, China was "missing a tool" for managing economic affairs.

"I made the point that monetary policy can be an effective tool and monetary policy can be more effective if there's a currency that is more reflective of underlying fundamentals," Paulson later told a small group of reporters.

"China has sped up the rate of appreciation over the past year and there is no evidence this has harmed them," he added.

China's economy grew 11.5 percent in the first three quarters of the year, the fastest pace in more than a decade.

(Editing by Alan Wheatley and Roger Crabb)