WASHINGTON — Treasury Secretary Henry Paulson Jr. said Thursday that he will urge China to adapt more flexible currency exchange rates when he visits Beijing next week.
“I believe that if China doesn’t move quickly to continue reforming its economy, it will face a backlash from other international economic stakeholders,” Paulson said during his first public speech here since taking the cabinet post in July. “This backlash will not benefit any of us.”
China’s fixed currency and trade policies artificially lower the price of Chinese goods by 15 to 40 percent relative to the dollar and act as an export subsidy, according to many economists. This puts U.S. companies at a disadvantage, leading to job losses and a bilateral trade deficit that hit a record $202 billion last year. China has raised the value of its currency slightly, to change the peg of the yuan to a basket of currencies instead of just the dollar. It raised the yuan another 1 percent this year, the currency appreciating 3.4 percent, but these are seen as symbolic actions.
Paulson, a former head of Goldman Sachs, indicated the Bush administration will oppose moves in Congress to penalize China by erecting trade barriers.
“We will not heed the siren songs of protectionism and isolationism,” he said, criticizing antitrade and anti-China sentiment here and abroad.
He acknowledged that the roots of the protectionist movement in many countries stem from job losses associated with China’s fast-growing economy, which many critics say gets a boost because of low wages and few worker rights.
“This widespread and growing resistance [to China’s growth] is not surprising because the benefits of competition, while significant, are not spread evenly and competition can create winners and losers,” Paulson said. “Protectionist policies do not work and the collateral damage from these policies is high.”
China faces several “critical, immediate challenges” as it moves to stabilize its economy, Paulson 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 noninflationary growth,” he said at the Treasury Department. “Accordingly, maintaining and relying on an overly rigid exchange rate and outdated administrative controls increases the risk of boom and bust cycles.”
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Paulson’s predecessor John Snow began to pursue a tougher stance with China before he left office. However, Snow became a target of criticism for stopping short of labeling the country a “currency manipulator,” which could potentially lead to trade sanctions at the World Trade Organization.
Sen. Charles Schumer (D., N.Y.), who has co-sponsored legislation with Sen. Lindsey Graham (R., S.C.) that would impose a 27.5 percent tariff on all Chinese imports if China does not let the yuan’s value increase in relation to the dollar, said in a statement, “When I spoke to Hank Paulson last night, we discussed how important his trip is in the fight to get China to play fair. Today in his speech, he said if China does not move, it does so at its own peril. No truer words were spoken. I hope the Chinese were listening.”
Schumer and Graham could try to bring up the bill for a vote as soon as Sept. 29. It is unclear whether they will, since they have delayed it several times, maintaining China has made some progress.
Paulson cited currency reform as one of several steps the Chinese need to take to complete the transition from a state-owned economy to a market-based economy. He said China needs to modernize its rural agriculture economy, provide “an adequate” pension system, develop lagging capital markets and “free up an inflexible currency regime that hinders the efficient allocation of capital and the achievement of balanced sustainable growth.”
With a high savings rate of 50 percent of gross domestic product, the Chinese need a more balanced growth pattern, he said. Competing arguments that China’s economic engine will continue to gain steam at the detriment of others and a belief that China is still a developing nation in transition “miss the greater truth,” said Paulson, adding that the dynamic of its market dictates that China take more responsibility as a global leader, such as taking a more active role in reviving the faltering global round of trade talks.
Paulson’s first stop will be in Singapore this weekend to attend the annual meeting of the International Monetary Fund and World Bank. He will then go to Beijing.