Paulson urges Chinese to continue currency reforms

WASHINGTON - December 2, 2008 - Paulson praised the Chinese for allowing their currency to rise in value by more than 20 percent against the dollar since July 2005, but he said it's critical that currency reform process be allowed to continue.

American manufacturers contend that undervalued Chinese currency puts them at a competitive disadvantage and is a key reason for the huge trade gap between the two countries.

In trading Tuesday, the Chinese yuan fell to its lowest against the U.S. dollar in more than five months, increasing worries that the Chinese may allow their currency to weaken against the dollar during the current global slowdown as a way to support their own manufacturing industries.

Paulson did not specifically mention recent movements in the yuan, but he said it was important that China not falter in its push to reform its currency as a way of relying more on domestic demand to support Chinese economic growth instead of exports.

"Making this shift will take bold leadership and decisive structural reforms to boost demand among households," Paulson said in a speech previewing his upcoming trip to China. "As I have said in the past, continued reform of China's exchange rate policies is an integral part of this broader reform process."

The U.S. and other major trading partners have long complained that the yuan is undervalued.

American manufacturers contend that the yuan is undervalued by as much as 40 percent even with its increase in value since the summer of 2005. They argue that the Chinese government is manipulating the yuan's value to gain unfair trade advantages against U.S. companies.

A cheaper yuan makes Chinese goods less expensive for American consumers, and U.S. products more expensive in China.

Paulson later this week will lead a high-level Cabinet delegation to Beijing for two days of talks with their counterparts from the Chinese government in what will be the fifth round of the Strategic Economic Dialogue.

These discussions, which began two years ago, have been one of the Treasury secretary's key initiatives. High-level delegations from the two countries have gotten together every six months for discussions on a range of economic issues.

While Paulson insisted in his comments that the talks have worked at bridging differences between the two countries, they have failed to yield the major successes he hoped to achieve in such areas as currency reform and opening China's market to giant U.S. financial service companies. The latter cause suffered a big setback with the recent financial turmoil that had its origins in the United States.

Treasury officials say they have kept the incoming administration apprised of the U.S.-China talks but there has been no indication yet from President-elect Barack Obama whether his administration will continue the twice-a-year meetings with China.

While the yuan has risen by 20 percent against the dollar since July 2005, the Bush administration has complained that the revaluation has not occurred quickly enough. The yuan's rise in value also has faltered in recent months as Beijing has tried to help struggling Chinese companies that are seeing foreign demand weaken.

Chinese officials insist they are moving as fast as their economy allows, hoping robust growth will help solve many of the problems. But as global demand slows, conditions have become more uncertain.

In his remarks, Paulson said a major agenda topic for the discussions will be energy use and the environment, where the U.S. is hoping to win commitments from China to do more to attack pollution problems.

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