Paulson would really like to send his IMF hitmen to China, but China has economic success serving as a “Great Wall” to keep Paulson’s crew of hitmen out, so he is fraustrated. 

September 14, 2006

Paulson Says China Hurts Itself With Economic Policies

By STEVEN R. WEISMAN

 WASHINGTON, Sept. 13 — In the administration’s toughest warning yet to China on economic issues, Treasury Secretary Henry M. Paulson Jr. said on Wednesday that Chinese leaders were imperiling their nation’s future by engaging in policies that Americans and others see as unfair.

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

But he used forceful language in saying that China had kept the value of its currency artificially low in relation to the dollar, which a growing number of economic analysts say is making China’s exports cheaper and its imports more expensive.

Mr. Paulson also repeated longstanding administration demands for
China to loosen regulations and controls on foreign investment and the activities of its 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“Maintaining and relying on an overly rigid exchange rate and outdated administrative controls increases the risk of boom and bust cycles,” Mr.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, he added, China’s “currency exchange rate is increasingly being viewed by their critics as a symbol of unfair competition.”Mr. Paulson did not say so, but aides said he was referring to legislation that would place tariffs on imports from China if its government did not act to let the yuan rise in relation to the dollar.

The sponsors of the measure, Senators Charles E. Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, have held back pending Mr. Paulson’s trip. But they vow to press for its passage this fall if Mr. Paulson fails to get action from the Chinese.Treasury officials say that in his few months as secretary, Mr. Paulson, a former chief executive of Goldman Sachs who made scores of trips to China as a business executive, has been surprised by the growing protectionist sentiment in Congress toward China, abetted by anti-Chinese sentiment on several issues.

Leaders of both political parties accuse China of not cooperating on American efforts to prevent North Korea and  Iran from amassing nuclear weapons and to stop the civil war in Darfur. The administration has also deplored China’s military buildup.

Mr. Paulson’s speech was unusual for a Treasury secretary in that it embodied an extensive analysis of China’s economic policies and structure. He repeatedly praised China for liberalizing its economy even as he implored its leadership to do more.

Mr. Paulson said he learned in 32 years at Goldman Sachs 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 was preventing
China from doing more to open itself up to competition, and was in turn breeding protectionist sentiment in America.

“Ironically,” he said, “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 said the United States would not “heed the siren songs of protectionism and isolationism,” but that China had to do its part by changing its heavily subsidized industries and farms, allowing capital to flow freely and guiding Chinese to spend more and save less — a step that economists say would increase imports.

Before going to China, Mr. Paulson plans a stop in Singapore to meet with the world’s finance ministers and to press for giving China more of a voice in the international agency that oversees the global economy and rescues countries whose economies collapse.

The administration’s proposal to expand the role of China and other developing countries at the agency, the International Monetary Fund, has run into some difficulties. Brazil, India, Indonesia and some other countries oppose the change out of fear of being left out.

The administration needs 85 percent of the votes, which are assigned in a complex quota system to 184 countries, to have the change enacted at the fund. Treasury officials say there are some “rumbles” of protest but they predict success.

Although Mr. Paulson was in Vietnam last weekend for a meeting of Asia-Pacific nations, the trip to Singapore and China represents what some officials call his debut on the international scene. Accordingly, it was notable that he began the trip with a warning.

“I believe that if China doesn’t move quickly to continue reforming its economy,” he said, “it will face a backlash from other economic stakeholders. This backlash would not benefit any of us.”

In an interview after his 35-minute speech, Mr. Paulson cautioned against expectations that his trip to China would produce immediate results.The best policy in advance of this trip, he said, was to “diminish expectations” for any quick move by China to allow the value of its currency to appreciate.

“I believe that most things that are worthwhile take a period of time,” Mr. Paulson said.

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