By Andrzej Zwaniecki
USINFO Staff Writer

Washington - U.S. Treasury Secretary Henry Paulson says the Bush administration will continue to press China to accelerate its currency reform as U.S. lawmakers demand more immediate results from the administration on bilateral currency and trade issues.

Paulson said increased flexibility of China’s currency - the yuan - is “absolutely necessary” in the short term but insufficient in the long term.

“My goal is to make significant progress toward a fully market-determined, floating Chinese currency,” he told the Senate Banking Committee January 31.

Paulson testified about Treasury’s semiannual currency report issued in December 2006, which, like all previous ones, did not name any major U.S. trading partner as a currency manipulator.

The Treasury secretary said he told the Chinese they face a greater risk from moving too slowly on currency reform than from moving too quickly, as they seem to believe.

Paulson cautioned, however, that making the yuan more flexible would not significantly reduce China’s trade surplus, nor would it eliminate distortions in the Chinese economy. Only by undertaking broader market reforms aimed at encouraging domestic spending can China grow without generating huge trade surpluses, he said.

U.S. labor unions and many legislators believe Beijing’s policy of keeping the yuan undervalued gives unfair competitive advantage to Chinese exports, thus significantly contributing to job losses in the U.S. manufacturing sector and to the growing U.S. bilateral trade deficit.

Several senators on the committee - both Democrats and Republicans - expressed frustration that the administration is not willing to resort to a more forceful action designed to make China’s leaders more responsive to U.S. concerns.

But Paulson said naming China a currency manipulator would not bring any immediate results, as the United States would be obliged under law to begin negotiations with that country on the currency issue.

Instead, he said, the Strategic Economic Dialogue (SED) established in 2006 by the presidents of the two countries “gives us the best chance to get some progress.” (See related article.)

With the SED in place, he said, the U.S. government, for the first time, can speak regularly “with a single voice” to the highest levels of the Chinese government on the economic issues that “matter most.”  (See related article.)

Paulson said the administration will establish benchmarks, monitor progress and hold the Chinese accountable as the SED process continues. The next SED meeting is scheduled for May in Washington.

Paulson said the U.S. relationship with China is so significant and complex that it needs to be handled cautiously.

“Getting it right is vitally important to the citizens of both our nations - and the world - and will be for many years,” he said.

Paulson said the Chinese economy has such a great bearing on the global economy that it is in everybody’s interest to “have China keep doing well.”

“A serious bump in the road with China would have repercussions to all of us,” he said.

The full texts of Paulson’s testimony and the December 2006 report on exchange-rate policies can be viewed at the Treasury Department Web site.

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