Treasury Secretary urges more nimble monetary policy from Beijing.
September 13 2006: 12:11 PM EDT

WASHINGTON (Reuters) -- China must swiftly adopt a more fully market-based economy and flexible currency exchange rates or risk losing its ability to control its economy, U.S. Treasury Secretary Henry Paulson said Wednesday.

"China faces several critical, immediate challenges," Paulson said at the Treasury in remarks intended to set the stage for a key trip to China next week following weekend sessions in Singapore with other world financial leaders.

Paulson noted the United States and China were the key drivers of the global economy and will remain so, and made clear he will oppose any measures in the Congress to impose tariffs or other protectionist measures against swelling Chinese-made imports.

"We will not heed the siren songs of protectionism and isolationism," Paulson said. But he stressed that Beijing needs to step up the pace of reforms to keep its own economy healthy and to play its role in stabilizing global expansion.

"The first is the pressing need to put in place widely accepted, market-based tools to keep its economy from veering out of control," he said. "A much more flexible, market-driven exchange rate along with a more nimble, self-determined monetary policy are key ingredients to stable and sustainable, non inflationary growth."

On to China
Paulson will meet his counterparts from the G7 - Britain, Canada, France, Germany, Italy and Japan - in Singapore on Saturday on the sidelines of semi-annual meetings of the International Monetary Fund and World Bank.

From there, he moves on to China on Tuesday and is expected to spend the balance of the work week there, urging China toward a more flexible currency and other reforms in hope that will help reduce record U.S. trade deficits with China.

While China agreed in July 2005 to end a long-standing peg between its yuan currency and the dollar, and to revalue it by 2.1 percent, it has since risen by only about two percent and is widely regarded as significantly undervalued.

Still, it is considered unlikely that Chinese officials will agree to do anything dramatic in the short term. Paulson indicated he wants to shift the emphasis of talks to make clear it is in China's interest as much as that of disgruntled trade partners for it to do so.

"I will say: we want you to succeed," Paulson said. But to do so, China needs market reforms that will liberalize its economy and make it more responsive to global economic forces.

Boom or bust
"Accordingly, maintaining an overly rigid exchange rate and relying on administrative controls are outdated and increase the risk of boom and bust cycles," he added.

Paulson indicated he would like to see a revival of the stalled Doha trade liberalization talks, and sounded a strong note of disapproval of any effort to impose protectionist trade measures, as some U.S. lawmakers are threatening against China.

"By closing off competition and blocking the forces of change, protectionism reduces the losses of the present by sacrificing the opportunities of the future," the Treasury chief said.

Paulson said that, in Singapore, he will support China and other nations getting a greater voting share in the IMF. But he indicated he will link it to Beijing "adhering to the spirit and letter of the rules and regulations" set by the global lender, which is also to get a larger role in surveillance of global currency practices.

Paulson noted China was "only part way between a managed and market economy" but its global influence was so great that the United States was caught up in its success or failure.

"The tasks faced by Beijing are so daunting that the biggest risk we face is not that China will overtake the U.S., but that China won't move ahead with reforms necessary to sustain its growth and address the very serious problems facing the nation," Paulson said.

Paulson had formerly served as CEO of investment bank Goldman Sachs (up $1.88 to $160.17, Charts).