By Andrzej Zwaniecki
Washington File Staff Writer

Washington - U.S. Treasury Secretary Henry Paulson is calling on China to modify its economic policies in order to maintain rapid growth and address its large trade surpluses.

By continuing economic reforms, further opening its markets and shifting from export-driven to consumption-driven growth, China will sustain its growth while contributing “even more” to the global economy, Paulson said.

The secretary spoke at the first meeting of the U.S.-China Strategic Economic Dialogue in Beijing on December 14.  He led a delegation that includes six other Cabinet-level officials and the chairman of the U.S. central bank for discussions wih their Chinese counterparts, led by Chinese Vice Premier Wu Yi.

To achieve balanced growth, Paulson said, the Chinese government needs to make full use of macroeconomic policies, including monetary policy.  That policy, he added, would be more effective if the value of China’s currency - the yuan - was determined in a competitive, open marketplace. Paulson said China should move toward such a system over the next several years while introducing more flexibility to its exchange-rate policy in the short term.

For many years China pegged the yuan to the U.S. dollar, resulting in an artificially low exchange rate. U.S. manufacturers claimed that the policy unfairly undermined their competitiveness and fueled a bilateral trade deficit.

In 2005, Beijing abandoned its fixed rate and moved to a "managed float," pegging the yuan to a basket of currencies and letting it trade within a narrow band.  Since then, the value of the yuan has risen by 3.7 percent.  This result has not mollified critics of China’s exchange rate policy, who argue that the Chinese currency now is undervalued by as much as 40 percent.

Some experts, however, question the impact of Beijing’s exchange-rate policies on the U.S. trade deficit. (See related article.)

In the first 10 months of 2006, U.S. bilateral trade in goods with China increased by 14 percent over the same period in 2005.

Paulson said he wanted to emphasize the importance of continued efforts to open markets to trade, competition and investment, as well as energy and environmental cooperation. He said that increased openness in financial services can help China attract and channel investment to all economic sectors, making growth more balanced across the entire economy.

China’s greater integration into the global economy meets with resistance in both countries, Paulson said, adding that the two countries need to counter resistance and skepticism over the possible results of a new high-level dialogue by making progress on “pressing needs, while advancing on a number of fronts by laying the foundation for long-term cooperation.

“It is incumbent upon us, not only to have frank and energetic discussions, but also produce tangible results on the most important issues facing our nations,” Paulson said.

Vice Premier Wu said that China will work to achieve a “rough” balance between exports and imports and continue market liberalization and economic reforms. She said further reforms of the financial system and the “price-forming mechanism” will aim at a system that produces interest rates and exchange rates “genuinely based on market supply and demand.”

Wu expressed hope that the discussions would help the two countries “enhance mutual trust and remove misgivings.” She said the Chinese sometimes feel that “some American friends are not only having limited knowledge of, but [also are] harboring much misunderstanding about the reality in China.”

Later in the day, Paulson said the United States needs a better understanding of China’s policy objectives and priorities.  But in certain areas where there is a great deal of understanding, he told reporters. “They have just got to move quicker.”

The talks are scheduled to continue through December 15.

The texts of Paulson's opening statement and introductory remarks are available on the U.S. Treasury Department's Web site