U.S. Markets

Treasury's Lew: China pause on reforms would have 'very bad consequences'

SEOUL (Reuters) - U.S. Treasury Secretary Jack Lew said on Friday China would see “very bad consequences” for its economy and bilateral U.S. relations if it backs away from its stated goals to open its markets and rebalance its economy toward consumer-led growth.

U.S. Treasury Secretary Jack Lew addresses the media during a visit at the Medical Center Hospital in San Juan, Puerto Rico, May 9, 2016. REUTERS/Alvin Baez/File Photo

Lew, in an interview with Reuters in Seoul, said he would “keep the pressure” on Chinese officials during talks in Beijing next week to stick to their reform commitments and execute pledges to reduce excess industrial capacity that is distorting world markets.

China faces diminished economic prospects in the medium and long term if it fails to continue its reforms, Lew said.

“Frankly, if China takes a time-out or a step back on the reform agenda, that will have very bad consequences for China’s economy and it will flow over and not be good in terms of our bilateral economic relations,” Lew said.

The U.S.-China Strategic and Economic Dialogue meetings on June 6-7 in Beijing come at a time of increasing trade tensions between the world’s two largest economies.

The U.S. Commerce Department has recently imposed steep anti-dumping and anti-subsidy duties on a wide-range of Chinese steel products, while U.S. business groups have complained about new Chinese regulations they say favor local firms.

Meanwhile, the Chinese yuan is plumbing five-year lows against the dollar, raising concerns about the potential for another devaluation as the Federal Reserve prepares to resume interest rate increases after pausing for the past few months.

Lew said China had largely been keeping its G20 commitments to avoid competitive currency devaluations, adding that its action in recent months to spend reserves to support the yuan, also known as the renminbi or RMB, have been consistent with those commitments.

“China’s intervention in the last year has not been to devalue but it’s been largely to support the RMB,” Lew said. “I think the test of whether China’s moved decisively in an orderly way to a more market-oriented exchange rate is whether they’re willing to tolerate movement in both directions.”

Likewise, Lew said South Korea also needed to resist temptations to intervene in currency markets when there is upward pressure on the won. He said Seoul had refrained from active interventions for the past six to nine months.

“We have made it clear that we’ve recognized that. But we’ve also said that that has to be a durable policy. It has to be a policy that can withstand pressure when markets are going in both directions,” he said.

He said South Korea’s interest in joining the Trans-Pacific Partnership free trade bloc, assuming the deal is ratified, would provide an incentive to improve its exchange rate policy. A currency side-agreement to the TPP would require transparency in interventions and commitments to avoid interventions to gain trade advantages.

The U.S.-China economic and foreign policy talks in Beijing will also provide a forum to air U.S. business groups’ concerns about regulations in China that they say favor domestic firms.

For example, foreign insurers have raised concerns about new cyber security regulations that require “secure and controllable” information technology.

“Whether it’s an anti-monopoly law, or a national security law, if it’s being either designed or implemented in a way that’s designed to create undue burdens on foreign competition, that’s problematic,” Lew said.

Lew said it was important for the next U.S. president to continue the Strategic and Economic Dialogue because otherwise such disputes may not be discussed on a bilateral basis.

At a separate meeting on Friday with South Korean Finance Minister Yoo Il-ho, Lew said that coordinated global action was needed to increase pressure on North Korea to drop its pursuit of nuclear weapons.

A senior Treasury official said that this would require additional actions by China to adhere to new sanctions aimed at cutting off North Korea from the international financial system until it changes its behavior.

Editing by Kim Coghill and Jacqueline Wong