Paulson acts as "good cop" on China currency

By David Lawder - Analysis

BEIJING (Reuters) - U.S. Treasury Secretary Henry Paulson's trip to China this week solidified his position as a buffer between a stubborn, cautious leadership in Beijing and a U.S. Congress frustrated with the "glacial" strengthening of China's currency.

Paulson urged Chinese President Hu Jintao and Vice Premier Wu Yi to allow the yuan to rise more quickly, arguing it would boost China's stability and modernization.

He also warned them about the exasperation U.S. lawmakers feel on the issue, which has led them to push for legislation to ratchet up pressure on Beijing. Paulson quickly added, however, that he opposed this approach and would pursue his "strategic economic dialogue" with China instead.

"In the good-cop, bad-cop scenario, he's the good cop trying to tell them how to do the right thing and hold off these bad guys in Congress," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington.

As expected, Paulson returned home on Wednesday with no breakthroughs on the currency front. A headline in Wednesday's China Daily newspaper, the Communist Party's English-language mouthpiece, read: "Yuan steady despite pressure."

He said Chinese officials told him they were committed to reforms, but maintained the country's economic stability was critically important.

Speaking to reporters before boarding a plane home, Paulson said no one in the U.S. Congress was expecting a currency deal from the visit.

SECOND BILL PASSES

Even before Paulson left Chinese air space, the Senate Banking Committee voted 17-4 to approve a bill that would tighten the Treasury's definition of currency manipulation, requiring it to make that finding against any country that has both a material global current account surplus and a significant trade surplus with the United States.

It was the second China-focused currency bill passed at the committee level within the past week. The Senate Finance Committee approved a measure last week that would allow countervailing duties against products from countries deemed to have "fundamentally misaligned" currencies.

Many U.S. lawmakers and manufacturers believe China deliberately undervalues its currency so that its products undercut American competitors in price.

"They've respectfully said, 'Continue with your direct engagement, Mr. Secretary, but we have a different plan,'" Paulson said of the lawmakers. "I've got more work to do with Congress."

He also said China's leaders may be wondering whether they will be able to ever to satisfy U.S. lawmakers.

"For a lot of the critics in Congress, nothing short of a 30 percent overnight appreciation (in the yuan's value) will satisfy them, but that is not going to happen," said Daniel Griswold, director of trade policy studies at the libertarian Cato Institute in Washington. "A dramatic appreciation would probably be destabilizing."

Griswold said he believed the bills were mainly aimed at satisfying labor unions and other Democratic political supporters and risk a dangerous trade backlash from China.