Paulson Rejects Criticism, Says China Talks Yielding Results

July 30 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson, rejecting claims in Congress that he's too soft on China, said negotiations rather than sanctions have led to a faster appreciation of the yuan.

``We are getting results through this process that wouldn't have been achieved without it,'' Paulson told reporters as he traveled to China, where he arrived late yesterday. The Chinese currency's ``rate of appreciation has gone up materially over the past year,'' he said.

Paulson returns to China with the U.S. Congress increasingly hostile toward America's second-largest trading partner, which lawmakers claim keeps its currency weak to increase exports. At the same time, China's leaders have failed to cool their economy, which grew at the fastest pace in 12 years last quarter, and rein in the record trade surplus.

On July 26, the Senate Finance Committee approved legislation aimed at pushing China to let the yuan appreciate more rapidly. The measure allows U.S. companies to seek anti- dumping duties to compensate for the effects of an undervalued currency.

``I'm sick and tired of our Treasury Department pussyfooting around,'' Iowa Senator Charles Grassley, the senior Republican on the Finance Committee, said in an interview on July 23.

The yuan has risen about 5 percent against the dollar in the past year, compared with a gain of about 1.7 percent in the previous 12 months. On July 21, 2005, China ended a decade-old peg to the dollar.

Paulson, 61, didn't discuss the U.S. economy or financial markets during the media briefing on his military aircraft.

Treasury Strategy

He was selected for the Treasury job last year partly because of ties with Chinese officials honed as chief executive officer of Goldman Sachs Group Inc. Paulson said in a July 26 interview that his strategy is to engage China, convincing its leaders that a flexible exchange rate and open markets are in their interest.

The four-day trip is his fourth to China in a year as Treasury secretary, surpassing the combined total of his two immediate predecessors, John Snow and Paul O'Neill. One of the visits was to launch a series of twice-annual talks called the Strategic Economic Dialogue.

The dialogue, led by Paulson and Chinese Vice Premier Wu Yi, puts the heads of each nation's central bank and the leaders of ministries ranging from Finance to Health around one table. Paulson considers it important because officials such as Federal Reserve Chairman Ben S. Bernanke and Trade Representative Susan Schwab get to make their case to most of China's cabinet, rather than only their direct counterparts.

China's Pledges

The second meeting, held in Washington in May, ended with a pledge by China to open its skies to more U.S. flights and to allow international banks to issue yuan-denominated credit cards. That failed to impress the lawmakers who were looking for an appreciation of the yuan of as much as 40 percent.

``Paulson has not done a very good job either in managing expectations in Washington or in constructing goals for the SED that would create clear victories that he could carry back home,'' Arthur Kroeber, managing director of Dragonomics Research & Advisory in Beijing, said in an interview. ``He is basically on the defensive right now.''

Widening Surplus

Behind the rising congressional ire is China's surging trade surplus. China exported $112.5 billion more than it imported in the first six months of this year, an increase of 84 percent from a year earlier. The National Development and Reform Commission, China's top planning agency, forecasts the surplus will widen to between $250 billion and $300 billion this year.

China's economy, which accounts for about a 10th of global growth, expanded 11.9 percent last quarter compared with a year earlier. Three interest rate increases since March and restrictions on bank lending haven't slowed the surge.

Paulson said China is no more likely to change its policies under threat of sanctions than would be U.S. legislators if the situation were reversed. The country's leaders are more likely to respond to an argument that the country's economy has grown too large to manage from Beijing.

``There's a lot of concern around the world about the pace of China's economic development and the perceived threat that represents to a lot of economies,'' Paulson said. ``A lot of that is misplaced. The biggest concern is if China had a major shock or problem. The greatest risk is if they move too slowly.''

Meeting With Hu

Paulson will be in Beijing on July 31 and Aug. 1 for meetings with President Hu Jintao, Wu and other officials. He said the sessions will cover ways to ``rebalance'' China's economic growth, the environment, opening China's financial markets and the safety of Chinese exports, including food. The aim is to prepare for the next ministerial gathering under the dialogue, set for the Chinese capital in December, Paulson said.

First, Paulson will today visit Qinghai Lake, China's largest inland sea, covering 2,278 square miles of the Tibetan Plateau at 10,515 feet (3,205 meters) above sea level.

The point of the visit is to show that the U.S. is concerned about more than the exchange rate and pirated Hollywood movies, he said. Due in part to the effects of global warming, the lake is shrinking at a rate that would see it disappear in 200 years, according to the Chinese government.

Paulson said he wants to highlight the efforts the U.S. and China are making to try to better the environment, such as a push to lower import tariffs that increase the cost of buying technology that cuts smokestack emissions.

``People in China care about the environment every bit as much as Americans care about the environment,'' Paulson said. ``This trip gives us an opportunity to talk about these things and hopefully that will resonate with the Chinese people.''