U.S. woes may dampen China reform drive

By Glenn Somerville - Analysis

BEIJING (Reuters) - Persistent strains in U.S. financial markets threaten to drain energy from a drive to persuade China to take on a bigger role in helping stabilize the global economy by becoming more of a nation of consumers.

Concern that the U.S. credit-market upheaval, which some fear is dragging the United States into recession, sets a bad example was clearly part of the reason for U.S. Treasury Secretary Henry Paulson's latest whirlwind trip to Beijing this week.

"There's no doubt that what is happening in U.S. markets clearly has to give the Chinese pause," Paulson conceded to reporters during a two-day trip that he used to beat the drum for a U.S.-China "strategic economic dialogue" (SED) that he played a key role in launching in September 2006.

The next SED round is scheduled for late June in Washington and Paulson was at pains to stress that he thinks China sees enough value in the talks for the process to live on after the Bush administration fades into history next January.

"Absolutely. This is beneficial to both sides," he insisted when questioned about whether the forum could survive the highly personal stamp that he has placed on it, dating from his days as a globe-trotting chief of Wall Street investment bank Goldman Sachs when he made some 70 trips to China.

But bad news kept coming as Paulson dashed about Beijing, displaying the extraordinary access he enjoys by meeting top leaders including President Hu Jintao, Premier Wen Jiabao, Vice-Premier Wang Qishan, who will head the SED on China's side, Finance Minister Xie Xuren and Commerce Minister Chen Deming.

U.S. ON THE BRINK

On Thursday the International Monetary Fund slashed its 2008 outlook for world economic growth for a second time, to 3.7 percent from the 4.1 percent it estimated in January and the 4.8 percent it foresaw last October.

The United States is now at "a virtual standstill", IMF chief economist Simon Johnson said, and may be so for a while because of a housing slump and financial market problems.

That alone makes it harder for Paulson to hold up the United States as an example for China.

Still, he showed no loss of zeal for pushing Beijing along the road to a market-driven economy with capital markets that make it easier to borrow and less necessary for Chinese consumers to save a lot for a rainy day.

"They've headed down the path of a market economy. Capital markets are a very powerful force of good and until they have efficient, competitive capital markets ... the economy won't develop in the way they want it to develop," he said.

Paulson said explicitly what the Bush administration -- and many international institutions like the IMF -- want from China in an address to students at the Academy of Sciences.

"For China, the challenge is to save less and consume more," Paulson said. "For this relationship to be as healthy and productive as it needs to be, the Chinese economy is ... going to have to transition away from low-cost manufactured exports and toward a more balanced economy."

HALF-WAY THERE