Treasury Chief Delivers New Warning to China

By STEVEN R. WEISMAN

Published: September 13, 2006

WASHINGTON, Sept. 13 — Treasury Secretary Henry M. Paulson Jr. said today that Chinese leaders were imperiling their nation’s future by following economic policies that Americans and others see as unfair.

Speaking as he prepared for his first trip to China since taking office this summer, and one day after China’s monthly trade surplus set yet another record, Mr. Paulson said the United States “has a huge stake in a prosperous, stable China” and that “we are not afraid of Chinese competition.”

But he used unusually forceful language in saying that China has kept the value of its currency artificially low relative to the dollar. A growing number of economic analysts say China’s exchange-rate policies are distorting trade in its favor, making other nations’ goods cost more than they should in China while giving its own exports a price advantage in foreign markets.

Mr. Paulson also repeated longstanding demands by the Bush administration that China loosen its regulations and controls on foreign investment and on the activities of its own banks.

“Maintaining and relying on an overly rigid exchange rate and outdated administrative controls increases the risk of boom-and-bust cycles,” Mr. Paulson said. “Also, to be underestimated only at China’s own peril, is the fact that their currency exchange rate is increasingly being viewed by their critics as a symbol of unfair competition.”

Aides said he was alluding to proposed legislation in Congress that would impose tariffs on imports from China if China does not allow its currency, the yuan or renminbi, to rise in value against the dollar.

The sponsors of that measure in the Senate — Charles Schumer, Democrat of New York, and Lindsey Graham, Republican of South Carolina — have held it back, awaiting Mr. Paulson’s trip. But they have said they will press for passage this fall if Mr. Paulson fails to elicit action from the Chinese.

Treasury officials say that in his few months in office, Mr. Paulson, a former head of Goldman Sachs who visited China scores of times as a business executive, has been surprised by the growth of protectionist sentiment toward China in Congress, which has been reinforced by anti-Chinese sentiment on a range of other issues.

Leaders of both political parties criticize China for doing too little to assist American efforts to prevent North Korea and Iran from amassing nuclear weapons and to stop the civil war in the Darfur region of Sudan. The Bush administration has also deplored China’s military buildup in recent years.

Mr. Paulson’s speech was unusual for an American treasury secretary in that it set out an extensive analysis of China’s economic policies and structure. He repeatedly praised China for liberalizing its economy over the last two decades, even as he implored the Chinese leadership to do more.

In 32 years at Goldman Sachs, Mr. Paulson said, he learned that “those nations that reform their economies and open themselves to competition benefit their citizens greatly” and “have better jobs, improved living standards, and greater opportunity.”

But he said that protectionist sentiment in China was preventing it from doing more to open up to foreign competition, and was in turn breeding protectionist sentiment in the United States.

“Ironically, this protectionist sentiment comes from many quarters in those nations — including in the United States and China — which have benefited the most from the economic growth generated by global competition.”

Mr. Paulson pledged that the United States would not “heed the siren songs of protectionism and isolationism,” but that China had to do its part as well, by reforming its heavily subsidized industries and farms, by allowing capital to flow freely and by guiding Chinese consumers to spend more and save less, a step that economists say would increase the country’s imports.

Before reaching China, Mr. Paulson plans to stop in Singapore for a meeting with finance ministers from around the world, and to press for changes at the International Monetary Fund, the agency that oversees the global financial system and rescues countries whose economies collapse, to give China a greater voice in its policies.

But the proposal has run into some difficulties. Other major developing nations like India, Brazil and Indonesia oppose the plan because they fear being left out.

The plan requires an 85 percent affirmative vote from the agency’s 184 member nations, which are assigned weighted votes under a complex formula related to the financial contributions they make to the agency. Treasury officials say there are some “rumbles” of protest among some countries, but they predict success nonetheless.

Although Mr. Paulson was in Vietnam last weekend for a meeting of officials from Asian and Pacific nations, some officials say this week’s trip to Singapore and China is his principal debut on the international scene. So it was notable that he began the trip with a warning, one of the strongest the administration has yet given to China on economic issues.

Noting that “anti-trade and anti-China sentiment” was growing among Americans, he said: “I believe that if China doesn’t move quickly to continue reforming its economy, it will face a backlash from other economic stakeholders. This backlash would not benefit any of us.”