U.S. says China recognizes need for stronger yuan

By Glenn Somerville and Eadie Chen

XIANGHE, China (Reuters) - U.S. Treasury Secretary Henry Paulson came away from two days of talks on Thursday convinced China sees the need for a stronger yuan and with a promise that Beijing will open its financial markets a little wider.

The grand-sounding "strategic economic dialogue" produced only modest immediate gains but Paulson said it provided a foundation on which to expand cooperation between two nations whose ties he deems vital to global economic prosperity.

The exchange rate was a major focus of the meetings because, as Paulson put it, the pace of the yuan's rise had effectively become a proxy for China's willingness to permit market forces to play a greater role in its economic development.

Paulson sought no specific commitments from Beijing on the yuan, but he said Chinese policy makers now knew that a stronger exchange rate would help them to fight inflation.

"The Chinese recognize growing inflationary pressures in their economy and that a more flexible currency expands their ability to use monetary policy to stabilize their economy," Paulson said at a closing news conference.

China's central bank, which keeps the currency on a tight leash, let the yuan rise on Thursday to its highest level since it was revalued and depegged from the dollar in July 2005. The bank is battling inflation of 6.9 percent, an 11-year high.

The yuan has climbed about 6 percent against the dollar in the past year, but some U.S. lawmakers say it remains grossly undervalued and are preparing legislation to force China's hand.

YUAN'S RISE

Paulson declined to say how much more quickly Beijing needed to let the currency climb. "The pace of appreciation has increased over the past year," he said. "I've talked to the Chinese enough that we've agreed we don't talk about how fast is fast. We agree with the principle (of appreciation)."

The U.S. Treasury chief later held separate meetings with Chinese President Hu Jintao and with Premier Wen Jiabao.

Wen congratulated Paulson and Chinese Vice Premier Wu Yi, who led the Chinese delegation, saying they had helped reach "common understanding" on product safety.

"China takes seriously the imbalance in China-U.S. trade," Wen told Paulson, the Chinese Foreign Ministry spokesman Liu Jianchao told reporters. But Wen "also hoped that the U.S. would heed China's concerns and implement open trade and investment policies", Liu said.

A highlight of the talks was an agreement to increase safety standards for Chinese food and product exports to U.S. markets -- a highly sensitive topic after millions of Chinese-made toys were recalled and American indignity over tainted food and pharmaceuticals from China ran high.

Paulson cited other progress, including a Chinese commitment to let banks and other foreign companies doing business in China issue yuan-denominated debt and equity securities.

"MODEST PROGRESS"