Paulson: China could change its yuan policy

WASHINGTON -- Treasury Secretary Henry Paulson warned China against using current U.S. economic weakness to avoid moving faster on currency reform.

"It would be a mistake if they used as an excuse what was happening in any other economy around the world, because I think the key thing when they look at their currency is what is happening in China," Paulson said in an interview Friday with USA TODAY.

The Treasury secretary will be in Beijing this week, with several other Cabinet members, for the third round of "strategic economic" talks between the two trading partners.

The United States has long complained that China's policy of keeping the yuan undervalued makes its goods less expensive in world markets. The yuan has risen about 12% in dollar terms since July 2005, but Paulson and U.S. manufacturers complain it is still too low.

Paulson hopes that China's need to curb inflation, which a rising currency would help cool, plus increasingly loud complaints from Europe about the yuan, may spur accelerated change. "The environment has shifted. … There's been more voices publicly calling for greater flexibility," he said.

China is reluctant to let its currency rise more quickly for fear of disrupting its job-rich export industries. Since Chinese officials regard a U.S. recession next year, and thus a sharp fall in their exports to the USA, as a "virtual certainty," they see no need to compromise on currency, says Nicholas Lardy of the Peterson Institute for International Economics, who was recently in Beijing.

Political calculations also argue against a significant change in China's policy of gradual yuan appreciation. In Beijing, officials expect a tough-on-trade Democrat to be elected president in 2008, Lardy said. So they see no value in making concessions to the Bush administration, if a new president will only demand more.

The two days of talks starting Wednesday also will focus on food and product safety, cooperation on environmental and energy projects, and efforts to spur domestic consumption in China.

Concern in the USA over a seemingly endless spate of defective toys and contaminated food products imported from China has driven product safety to center stage.

"Coming into the Christmas season here, that is top of the agenda for the American people. It's important for China and important for us," said Paulson.

Michael Leavitt, secretary of Health and Human Services, will lead the specific discussions in that area. One goal is to finalize two agreements on ensuring the safety of food, animal feed, medical devices and drugs.

The talks this week come against a backdrop of continued anti-China sentiment on Capitol Hill and sagging public support for trade. In a survey released last week by the non-partisan German Marshall Fund of the United States, 57% of Americans said trade cost more jobs than it created.

More Americans view China's rise as a threat rather than an opportunity. But the percentage fearing China is lower in the USA (51%) than in Europe (55%).