BEIJING (Reuters) - Treasury Secretary Henry Paulson said on Wednesday the repricing of credit risk was hitting financial markets, but subprime mortgage fallout remained largely contained due to the strongest global economy in decades.
Speaking to reporters in Beijing, where he ran into stiff resistance in persuading Chinese officials to let the yuan strengthen more quickly, Paulson said markets were unwinding excesses in U.S. mortgage and leveraged buyout financing.
European and Asian stocks tumbled on Wednesday following a sharp drop in U.S. shares on Tuesday, after American Home Mortgage Investment Corp. said it might have to liquidate assets, fueling worries over problems in the subprime mortgage market spilling over into other sectors.
"The market has focused on this. There's a wake-up call, and there's an adjustment to this repricing of risk, but I see the underlying economy as being very healthy," he told reporters before leaving Beijing.
Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was "largely contained," despite losses in a number of financial institutions and a long period for subprime issues to filter through the economy.
On the yuan, Paulson said he told top Chinese officials that allowing it to appreciate more quickly would help both the Chinese and world economies.
"The case that I make is that the rate of appreciation so far, there is no evidence that it is hurting the Chinese economy," he said, adding that an acceleration would boost China's economic modernization and stability.
Since July 2005, the yuan has appreciated more than 9 percent against the dollar.
"There is not a difference as to principle." Paulson told reporters. "They emphasized they are committed to reform, but financial stability is every bit as important."
Paulson met President Hu Jintao, Vice Premier Wu Yi and other top officials in an effort to keep his "strategic economic dialogue" with China on track amid increasing anti-China sentiment in the U.S. Congress.
Paulson said he conveyed to them the increasing frustration of many U.S. lawmakers who view the yuan as deliberately undervalued to keep Chinese products cheap in U.S. stores and drive American competitors out of business.
"No one in Congress is expecting me to come back with a deal on the currency," he said, adding that he must work harder to allay lawmakers' concerns about China.
The U.S. Senate Banking Committee voted 17-4 on Wednesday to approve a bill that would make it harder to avoid citing China as a currency manipulator, a week after the Senate Finance Committee passed a measure that would allow companies to seek countervailing duties against products from countries with currencies deemed "fundamentally misaligned."
But Paulson also told Hu, Wu and other officials that he believes legislation is the wrong approach to persuading China to move on the yuan, preferring multilateral dialogue instead.
In a positive step, he said China had agreed to move up to October from December the date by which it will lift a moratorium on the approval of new foreign-invested brokerage joint ventures.
The December date had been reached at the May strategic economic dialogue meeting in Washington. Another meeting is set for December in Beijing and Paulson said a gathering of lower-level officials would take place in October.
Paulson also said he called for more foreign access to China's financial services, but said there is strong resistance to this from "entrenched domestic competition" that want to remain protected from foreign firms.
Wu, Paulson's counterpart in the strategic economic dialogue talks, on Tuesday lectured Paulson on China's economic challenges, saying China was too poor to be an economic threat and was too concerned with feeding and clothing 1.3 billion people.
"Who could we threaten? We don't have the ability. China does not and will never threaten anyone," she told Paulson.
Her comments went to the heart of Beijing's refusal to permit a more rapid rise in the yuan: officials fear a stronger currency could not only destroy millions of export-oriented jobs but would also make it tough for peasants who make up over 60 percent of its population to compete against cheaper food imports.