May 23, 2007 / 12:34 AM / 11 years ago

U.S.-China currency deal illusive

WASHINGTON (Reuters) - The United States and China on Wednesday announced deals to increase flights to China and ease U.S. entry into its financial sector but made no headway on the thorny issue of speeding up Chinese currency reforms.

After two days of top-level economic talks, U.S. Treasury Secretary Henry Paulson claimed “tangible results” while China’s Vice Premier Wu Yi said relations between the two countries were “complicated” and needed careful handling.

“The China-U.S. economic and trade relationship is one of the most complicated in today’s world,” Wu said. “It calls for direct consultation and dialogue between us, instead of easy resort to threat or sanctions.”

Paulson is under pressure to push China more forcefully into letting its yuan currency rise in value to try to shrink a record U.S. trade deficit, and he said Chinese authorities know they need to do so for their own benefit.

After the talks, Wu, who led 15 cabinet members to Washington for the second round of talks under a “strategic economic dialogue” initiated last year, headed for Capitol Hill where lawmakers are eyeing legislation to impose tariffs on Chinese imports unless Beijing lets the yuan appreciate.

In July 2005, China abandoned an 11-year-old practice of holding the yuan fixed against the dollar and revalued it by 2.1 percent. Since then it has risen only a further 6 percent, frustrating U.S. legislators who claim an undervalued currency makes Chinese products unfairly inexpensive.

“The Chinese clearly see the need, and have stated the principle of greater renminbi flexibility,” Paulson told a closing news conference, referring to the yuan in the way Chinese officials most often do.

LET‘S MAKE A DEAL

The most significant deal announced on Wednesday was one that commits China to remove a bar on new foreign securities firms and resume issuing licenses for securities companies, including joint ventures, in the second half of 2007.

Paulson, who chaired Goldman Sachs before becoming Treasury chief last July, has made gaining greater access to the Chinese financial sector a key objective. He visited Shanghai earlier this year to stress the need for China to develop its capital markets to accommodate a more-flexible currency.

In closed-door discussions on Tuesday and Wednesday, the two sides also agreed on a new aviation pact that U.S. transportation officials said will more than double the number of passenger flights between the two countries by 2012.

In the wake of reports about toxic toothpaste and contaminated pet food imports from China, U.S. officials said they stressed the safety of food and medicine imports was a “top concern” and that these discussions were being extended.

REBALANCING

China remains an emerging-market economy only partly driven by free-market forces, but its cheap labor force and exporting prowess have enabled it to become the world’s fourth-largest economy, behind the United States, Japan and Germany.

In the process, Chinese citizens have flocked to trade in stocks of fast-growing companies, raising concerns about a potential “bubble” in prices. Paulson declined to respond to a reporter’s question on whether he thought Chinese stock values were inflated, saying he never comments on the topic.

If Chinese stocks were to collapse, the spillover could be felt worldwide, including in U.S. stock markets where prices are flying high.

Speaking via satellite to a conference in Madrid on Wednesday, former U.S. Federal Reserve Chairman Alan Greenspan predicted a “dramatic” drop in the Chinese stock market.

“It is clearly unsustainable,” Greenspan said. “There is going to be a dramatic contraction at some point.”

Paulson said Chinese officials agreed with the United States that their economy had to be “rebalanced” to take on a greater role as a global consumer and cut Beijing’s reliance on exports for growth.

That would help reduce a U.S. trade deficit with China that hit an all-time high of $233 billion last year and ease tensions over China’s economic success.

The U.S. Treasury chief called the aviation and other agreements reached in Washington “signposts on the long-term strategic road” which build confidence that the two countries are on the right track in their dealings with one another.

Paulson said he and Wu considered it their duty to “iron out differences and keep the economic relationship on an even keel, even during times of tension.”

Additional reporting by Jason Subler, David Lawder and Doug Palmer in Washington and Jason Webb in Madrid

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