Paulson says China market reforms to continue

By Glenn Somerville

BEIJING (Reuters) - China is too far down the road toward a market economy to turn back from reforms now, even if U.S. financial market turmoil is causing it some qualms, U.S. Treasury Secretary Henry Paulson said on Thursday.

Near the end of a two-day visit, Paulson told reporters the biggest threat to continued reforms came from firms in China that want to be protected against competition at a time when the United States is pushing for more open markets.

"I think it's pretty hard to say, if you're China, that we want full integration in trade and we want everybody else to open their markets but we're not going to open ours because we're concerned about turmoil in our markets," Paulson said.

"That just isn't going to wash," he added.

Paulson said he was confident China would keep moving toward adopting reforms needed to have a market economy.

"Reform never moves in a straight line. I think the biggest threat for reform in China is a strong domestic industry that doesn't want competition," he added.

Paulson said Chinese officials indicated they were closely monitoring U.S. market conditions and signaled that he had pulled no punches in describing to them the difficulty the U.S. economy faced.

"There is no doubt we're having a tough quarter, that the economy has turned down sharply," Paulson said, but he refused to be drawn into discussion of remarks by Federal Reserve Chairman Ben Bernanke on Wednesday that recession was a possibility.

WON'T DISCUSS RECESSION

"I'm just not going to get into a technical definition and I'm not going to get into that debate," Paulson said. "To me, the relevant thing is the economy has slowed way down and we're focused on it."

Paulson again praised China for letting its yuan currency rise more quickly, a long-standing demand of the Bush administration.

The Chinese currency, also known as the renminbi (RMB), gained 4 percent against the dollar in the first quarter and has now risen 18 percent since July 2005, when it was depegged from the dollar.

"Although the process of adjustment is not complete, the accelerated pace of appreciation is significant and welcome, and should continue," Paulson said in a speech to the Chinese Academy of Sciences.

A stronger exchange rate would help China to tackle inflation, now at a near-12-year high of 8.7 percent, he said.

Although China would shed some jobs as its economy adapted to a stronger currency, there was no sign that overall growth had been hurt by the rising exchange rate, Paulson told reporters.