By Susan Krause
Washington File Staff Writer

Washington - The newly launched U.S.-China Strategic Economic Dialogue will increase the efficiency of contacts among the two countries' most senior officials, says U.S. Treasury Secretary Henry Paulson.

"This is, I think, an important step, and it's a step that maximizes our chance of getting results," he said.

Paulson, in Beijing for his first official visit as the secretary of the Treasury, took questions from reporters September 20 on the initiative, a framework for sustained high-level discussion and coordination on long-term bilateral economic issues.  (See related article.)

"The important part of this process was not to have different parts of our economic relationship siloed, but to be able to have broad access to senior people," Paulson said, calling the dialogue "a process that begins with our presidents."

Challenged on whether the initiative was a substitute for concrete progress on contentious trade issues, Paulson said he did not expect to "bring home a solution to a long-term economic issue" or "magically negotiate something" on his first official visit to China.  The secretary said his goal was to put a process in place, and he would judge the success of his efforts by whether he is able to establish a more constructive tone and lay a framework for long-term bilateral relations between the United States and China.

He also stressed the need for progress on short-term issues, where equity and fairness are major concerns on the U.S. side. 

"Only by addressing the short-term issues can we establish the confidence on both sides that is going to get us to keep the relationship on track," he said.

ECONOMIC REFORM PROCESS SHOULD BE ACCELERATED

Asked what China should do to increase the flexibility of its exchange-rate regime, an area of continuing friction that has led members of the U.S. Congress to consider the imposition of tariffs, Paulson said truly flexible exchange rates could only be established in a competitive marketplace.

"We're not going to be able to get there until we get China to … the point where they have capital markets that are really competitive in an open financial system," he said.  "And that isn't achievable right away."

Paulson is scheduled to meet with Chinese President Hu Jintao and Prime Minister Wen Jiabao during his visit, which runs through September 22.  He said he planned to congratulate them on the country's "remarkable" progress, but encourage them to move forward even more quickly with economic reforms.

"[China's] economy is becoming so big and complex that it's becoming, in my judgment, increasingly difficult to run it with administrative procedures, and particularly when they are partway between the planned economy and a market-driven economy," Paulson said.

The secretary acknowledged that China's financial markets have a difficult job ahead.  It took years for the United States to establish its capital markets, he said.

"But in order to get the Chinese capital markets where they're going to need to get," he said, "I really do believe that they'll get there quicker if they let in foreign investors and let foreign firms come in and establish businesses there."

Paulson said he was "a huge proponent of and believer in the Chinese economy," and praised the commercial talent of the Chinese people as well as the pragmatism of the country's leaders. 

"My own view is, though, that you can't take the past success and automatically extrapolate it and just assume it's going to keep growing like this and pass all the other economies in the world," he cautioned. 

China faces a difficult transition in evolving beyond its current status as an assembling and manufacturing economy based on low-cost labor, Paulson said. 

The secretary said he was confident this evolution would happen, but only if China continued to make the transition "to using market-based devices as opposed to administrative."

"And that means speeding up the reforms," he said.  "It doesn't take any magic."

China's leaders already have identified what needs to be done, Paulson said.  "I believe they're right," he said.  "They just have to do it."

A transcript of Paulson's press briefing and a fact sheet on the U.S.-China Strategic Economic Dialogue can be found at the Treasury Department Web site.

See also "U.S. Finds No Conclusive Evidence of China Currency Manipulation."

For more information on U.S. policies, see The United States and China and Trade and Economics.