BEIJING -- Arriving in Beijing on Wednesday from southern China, U.S. Treasury Secretary Henry Paulson said he will press the Chinese government to move faster with economic reforms, with the goal of helping more U.S. workers benefit from global trade. A number of American critics have complained, with increasing vehemence, that trade gains have lately been skewed in China's favor. Paulson also announced plans to take part in a new semi-annual U.S.-China meeting on economic issues, billed as a "strategic economic dialogue." The first such meeting is expected to take place before the end of 2006, with backing from President Bush and Chinese President Hu Jintao. Paulson will represent the U.S. side. Speaking before reporters at the U.S. embassy in Beijing, Paulson said ongoing work between the economic meetings would help create "a more constructive tone" for negotiations and lay a framework for a long-term relationship between the two countries. In one of the most closely watched aspects of his visit, Paulson is expected to make the Bush administration's case for allowing a strengthening of the Chinese currency, the renminbi. In a speech in Washington last week, the Treasury Secretary said China's exchange rate "is increasingly being viewed by their critics as a symbol of unfair competition." Yet the former chairman and CEO Goldman Sachs has also underscored that progress in currency reforms is not likely to happen on an isolated basis, but in concert with broader capital markets reforms.
Asked to define the "flexible" exchange rate he and others have called for, Paulson said Wednesday that it refers to one that is "set in a competitive marketplace. We're not able to get there until we get China to the point where they have capital markets that are really competitive and an open financial system." Meanwhile, in a nod to the growing clamor at home over the U.S. trade deficit with China, Paulson told reporters in Beijing Wednesday night that it's "very important that benefits that come from economic growth are shared equitably in both countries. Regrettably, there's a sense in the U.S. that the Chinese don't play fair when it comes to trade and the economy." Most notably on that front two senators, Democrat Charles Schumer of New York and Republican Lindsey Graham of South Carolina, are pushing a bill that would impose a stiff tariff on Chinese imports to the U.S. unless Beijing allows a rise in the value of the yuan. The Treasury Secretary, who decried protectionism in principle in a speech
last week , alluded to the legislation when he said:"I don't agree with their tactics. You'll never have me favoring protectionist action and I will try to talk them out of it." Even before arriving in China, Paulson hadalready been criticized for not setting an aggressive enough negotiating tone.
"His claims that Chinese reforms 'will take time' and his criticisms of 'quick fixes' inevitably tell Beijing that it can stonewall with impunity," said Kevin Kearns, president of the Washington-based U.S. Business and Industry Council in a statement. But Paulson, alluding to such complaints, said, "I don't think I've indicated to anybody that I would make my first trip to China as Treasury Secretary and bring home a solution to a long-term economic issue." Asked when he was likely to see success, Paulson said, "I wouldn't want to predict when we'll see concrete results. But I'm not famous for being very patient. Check with anybody who's worked with me." Paulson called himself "a huge proponent and believer in the Chinese economy." While working on privatization projects in China while still at Goldman, he said he noticed that "something that would have taken over a year in another country would sometimes get done in six months" in China. That said, Paulson cautioned that China's bureaucrats must not get complacent. "The biggest danger China faces is not that it will go ahead too quickly with reforms, but that it won't go forward quickly enough." As the economy grows increasingly complex, it has become more difficult to run based on administrative measures. More market-based policy responses will be required in the future, he said.
While discussing reforms China needs to make, Paulson also touched on the extensive shortcomings in its existing capital markets. Among those he mentioned:
Equity markets in Shanghai and Shenzhen are still dominated by retail investors; China's institutional investor base remains small. Most equity issues are from state-owned enterprises. Many of the best offerings, such as Bank of China's June IPO, have been listed outside mainland China. China's equity capital market is underdeveloped relative to the size of its economy, and the domestic bond market is even more "primitive in its development", according to Paulson. This has made it difficult for smaller, non state-owned companies to find financing.