US Treasury chief Paulson says China's currency policy 'unnatural act' UPDATE

US Treasury chief Paulson says China's currency policy 'unnatural act' UPDATE

	Published : Wed, 02 May 2007 18:27 By : Agencies Print this Story

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WASHINGTON (Thomson Financial) - Economic reform is urgently needed in China and 'it's a bit of an unnatural act' for a country with an economy as large as China's to be highly integrated into the world trade system but not into the world's capital and currency markets, Treasury Secretary Henry Paulson said today.

'Time is of the essence' for China to make its currency more convertible, Paulson said in remarks to a forum at the Peterson Institute for International Economics in Washington.

The Treasury chief drew a close link between capital market improvements in China and movement toward a market-driven exchange rate for the yuan. The Chinese currency is widely considered to be undervalued and appreciation is limited by government intervention.

Having open, competitive and deep capital markets will make it much easier for China to have a market-driven exchange rate, he said. But without more short-term flexibility in the rate, the Chinese will not be able to expand their capital markets.

Though the Chinese economy is growing faster than 10 pct a year, Chinese people have the equivalent of 2 trln usd in savings earning about 2.5 pct a year after inflation and taxes, Paulson pointed out.

By contrast, major industrial economies growing nowhere near that fast, commonly have pension funds earning in the neighbourhood of 8 pct a year.

The undervalued yuan 'has become a symbol and rightly so,' Paulson said, of the lack of progress on economic reform in China and of the United States' growing trade deficit with the country.

Chinese vice-premier Wu Yi will lead a delegation to Washington later this month for the second round of the Strategic Economic Dialogue between the two countries. Paulson said he was looking forward to her and her colleagues to talk to members of Congress 'behind closed doors.'

There are various proposals for restricting Chinese imports floating around Congress.

Paulson said he wanted the Chinese to understand that 'it's in their best interest if Congress believes and the American people believe we can make more progress through negotiations than through legislation.'

dennis.moore@thomson.com

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