By Andrzej Zwaniecki
Washington File Staff Writer

Washington – U.S. Treasury Secretary Henry Paulson says the U.S.-China relationship must be recognized as a long-term, strategic opportunity with huge potential benefits for both nations rather than a threat.

“We are not afraid of Chinese competition,” he said. “We welcome it.”

The Treasury secretary said the U.S.-China relationship demands a “long-term strategic engagement on our common issues of interest” and warned against protectionism in both countries. Paulson made his remarks at the Treasury Department September 13 to set the stage for his trip to China the following week.

Paulson, who presented himself as an ”outspoken advocate” for free and fair trade, said the two countries have many mutual economic interests, including energy and protection of the environment.

“The biggest risk we face is not that China will overtake the United States but that China will not move ahead with the reforms necessary to sustain its growth," he said.

Paulson said China needs to pursue further economic reforms to assert the role of a global economic leader and avoid a protectionist backlash in other countries. He praised Beijing for engineering “one of the most dramatic transformations in world economic history.”

Now, he said, China faces a “daunting” challenge of completing the transition from a managed to market economy.   

“[Future] growth will depend on raising productivity, which … will require markets to allocate capital as opposed to administrative decisions,” he said.

To assure continued economic expansion, Paulson said, China needs to modernize its financial sector, open its capital markets and move toward production aimed more at local consumption than for export.

He said a “much more flexible, market-driven” exchange rate and a “more nimble, self-determined” monetary policy must be an essential part of this effort.

Paulson said that China’s rigid exchange-rate policy is increasingly viewed as a “symbol of unfair competition" and that Chinese authorities who underestimate this reaction do so “at China’s own peril.”

U.S. and European officials, lawmakers and labor union leaders have criticized Beijing for undermining their countries’ manufacturing sectors by flooding their markets with products made relatively cheaply by an artificially low exchange rate.

In 2005, Beijing abandoned its long-standing policy of pegging its currency - the yuan - to the U.S. dollar at the fixed rate and instead pegged the yuan to a basket of currencies, allowing it to fluctuate within a narrow band. This move has failed, however, to mollify critics.  

Paulson said China’s economic policies affect other countries, and an economic crisis or significant slowdown in China would weaken the global economy.

He said the United States has a huge stake in a prosperous and stable China - a China “able and willing” to accept co-responsibility for maintaining the health of global economic and financial systems.

By pursuing further reforms, Paulson said, China will send a clear signal that it is ready to do just that and will dampen rising anti-Chinese protectionist sentiments.

The full text of Paulson’s prepared remarks is available on the Treasury Department’s Web site.

For more information on U.S. policy, see The United States and China.