WASHINGTON (Reuters) - Treasury Secretary Henry Paulson repeated on Tuesday that China needs to let its currency rise in value more rapidly and warned that U.S.-China relations were under threat from rising protectionism.
“Policy-makers in both countries must resist the impulse to discard the hard-fought and long-term gains of open economies by pursuing short-term and misguided policy responses,” Paulson told the George H.W. Bush U.S.-China Relations Conference.
He said prospects for achieving balanced growth in China and the world economy would be much greater if China let its yuan currency rise in value more quickly immediately and let markets set its value completely in the medium term.
“Accelerating the rate of appreciation and introduction of flexibility will help China deal with the imbalances that have grown in the economy and make monetary policy much more effective in responding to inflation,” Paulson said.
Questioned later, Paulson refused to specify how much he thought the Chinese yuan, also called the renminbi, should appreciate. U.S. manufactures claim it is undervalued by as much as 40 percent, given China’s rising economic might.
“I don’t think it is useful to specify a number,” Paulson said. “The point I make here is that the Chinese have adopted the principle that they see a need to move their currency more quickly and they’re not moving it quickly enough.”
The yuan has risen only about 8 percent against the dollar since it was unpegged from the U.S. currency in July 2005 and it has fallen against the euro, aggravating tensions between the United States and Europe and prompting Group of Seven industrial nations on the weekend to unite in demanding a faster yuan rise.
“When you look at what’s happened to the renminbi on a trade-weighted basis and particularly if you make any allowances for productivity gains, they’re moving it very slowly and it’s not reflecting economic fundamentals,” Paulson said.
As the United States and China become increasingly interdependent through trade and other ties, they need to learn how to handle problems between themselves more effectively, Paulson said.
He warned that “recent and repeated reports” of tainted food and other products imported from China were causing anxiety and damaging the “made in China” brand.
“The effectiveness with which China manages these issues will have long-term implications for U.S.-China trade relations, the integration of China into the global trading system and the sustainability of China’s economic growth trajectory,” Paulson said.
There have been calls by U.S. consumer groups for boycotts of Chinese products after reports of toys with lead paint, seafood tainted with chemical residue and toothpaste containing an antifreeze chemical.
Commerce Secretary Carlos Gutierrez complained later that China still maintains barriers to some U.S. businesses trying to operate in China, citing restrictions on telecommunications companies and on securities firms.
“While we are trying to lower barriers to trade, there is a risk that some in China are stepping away from long-standing policies of closer global economic integration — policies which have been a source of China’s incredible growth,”
Paulson said China needs to accelerate the pace of market-based reforms, open up its economy more and allow the benefits of trade to be spread more evenly, though he acknowledged that Chinese businesses might resist.
“In my judgment, the greatest risk to China’s long-term economic security is that protectionists prevail, and Chinese reforms proceed too slowly.” he added.
Paulson helped initiate a so-called U.S.-China “strategic economic dialogue” and will travel to Beijing again in December to pursue trade issues.
He claimed the SED was useful in managing U.S.-China relations but said the United States needed to see “tangible progress” from China to demonstrate that the process was worthwhile.
Paulson told a questioner that foreign investment from China or anywhere else was welcome in the United States, and said he was not concerned that state-run sovereign wealth funds operated by China and others were a potential threat.
“I very much welcome investment in our country by all foreign nations, including China,” Paulson said. He added that G7 industrial countries had discussed sovereign wealth funds at a dinner last Friday night amid speculation that they could potentially be used for political purposes.
However, Paulson said: “From everything I see, the intent and practice of either all or the vast majority (of sovereign wealth funds)...were economically driven.”
The funds have grown into the trillions of dollars as countries like China and Middle East oil producers pile up huge surpluses from their trade with the United States and Europe, which they in turn reinvest.
Additional reporting by David Lawder, Alister Bull and Mark Felsenthal