China needs to speed up currency reform, Paulson says

WASHINGTON (AP) — For the sake of the global economy, China needs to accelerate the pace of currency reform and overhaul its economy to be less dependent on exports, Treasury Secretary Henry Paulson said Wednesday.

Testifying before the House Financial Services Committee, Paulson defended the Bush administration's decision last week not to cite China as a currency manipulator in a report it is required to make to Congress twice a year.

While the administration did not believe China met the technical requirements to be branded as a currency manipulator, Paulson said the administration would continue to press Beijing to move more quickly to let the yuan rise in value against the dollar.

"The risk that China now faces is moving too slowly on exchange rate reform, rather than moving too quickly," Paulson said in prepared remarks for a hearing.

American manufacturers contend the yuan is undervalued by as much as 40%. That makes Chinese goods cheaper for American consumers while increasing the price the Chinese must pay for American products.

Paulson also cautioned that the U.S. economy would be harmed if it raised barriers to trade.

"I have been and will continue to be an outspoken advocate for maintaining and extending open trade. This is fundamental to the long-term competitiveness of the U.S. economy," he said. "We must resist the sentiment that favors economic isolationism."

The administration is under growing pressure to take a get-tough approach with the Chinese in light of soaring trade deficits. They include an imbalance of $233 billion last year with China alone, the largest ever recorded with a single country.

Paulson said that China must overhaul its economy so that it is less dependent on sales to the rest of the world and gets more support from domestic demand. He said this could be done by boosting competition in such industries as financial services and improving the country's social safety net, which would address China's high savings rate that is spurred by concerns about the lack of pensions and health care.

Paulson said the administration would keep raising these issues as part of new high-level talks known as the Strategic Economic Dialogue. The second of those meetings was held in Washington in May and a third round is scheduled for China in December.

Critics in Congress have complained that these discussions have so far produced little progress in narrowing the soaring trade gap with China, which they say has played a role in the loss of more than 3 million manufacturing jobs since 2000.

Unhappy with the lack of action on the currency front, lawmakers introduced two Senate bills last week that would require the administration to take a tougher line in its dealings with China. Those measures join a host of other proposals put forward by lawmakers who are feeling political pressure from constituents unhappy with the loss of American manufacturing jobs.