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US Treasury chief urges China to revalue currency

06 December, 2007

Treasury Secretary Henry Paulson speaks to the Asia Society at a hotel in Washington, DC. Paulson called Wednesday for an immediate revaluation of the
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He said that allowing flexibility of the tightly-controlled yuan was critical to cool the world's fastest growing economy battling serious inflationary pressures.

"A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy," Paulson said ahead of high-level talks between Washington and Beijing on key economic issues.

Paulson, speaking at a US-based Asia Society forum, said increased currency flexibility would allow China's central bank to "use the powerful tool of monetary policy for China's financial and price stability."

Economists have partly blamed Beijing's market intervention to contain the yuan's rise as a factor for fuelling inflation, overheating growth and asset-price bubbles in China.

Some of the yuan sold to mop up incoming foreign money to keep the Chinese currency weak has found its way into stocks and other investments, they say.

Paulson's concerns over the Chinese economy came ahead of his China trip to attend the US-China Strategic Economic Dialogue on December 12-13.

Beijing said Wednesday it would tighten monetary policy in 2008 for the first time in 10 years, as it battles to rein in a soaring stock market and a red-hot economy at risk of overheating.

The shift to "tight monetary policies" was announced after the three-day Central Economic Work Conference, a closed-door meeting of top decision-makers from the Communist Party and government, Xinhua news agency said.

The conference, the most important economic gathering of the year, also made it a priority for 2008 to prevent overheating and curb inflation.

Paulson said the yuan might have appreciated by six percent in the past year but "the pace is still not fast enough to reduce China's global trade surplus, its internal imbalances, or foreign exchange market pressures."

The yuan exchange has become "more than an economic parameter" in US-China ties, he said. "It has become a touchstone for broader anxieties about competition from China."

Washington has led the international push for a rapid yuan appreciation, saying its artificially low value gives Chinese exporters an unfair edge on world markets.

China's economy expanded at a blistering rate of 11.5 percent in the third quarter of 2007, with inflation at a decade high.

Consumer prices are expected to shoot to a 10-year high of 4.5 to 4.6 percent this year, due mainly to soaring food prices, state media said.

Paulson cited Chinese Premier Wen Jiabao's recent remarks at an East Asia summit in Singapore, emphasizing that China must now undertake comprehensive measures to control mounting inflation, growing asset bubbles, and an overheating economy.

"We share the concerns of China's top leaders on this issue," he said.

Noting the rise of economic nationalism both in the United States and China, Paulson said some in China were suspicious that Washington's push for yuan appreciation and financial market liberalization was an attempt to gain trade advantages and generate profits for US firms while slowing China's economic expansion.

"They mistakenly believe that yen appreciation during the mid-1980s caused Japan's weak economic performance in the 1990s," he said.

Japan's economic difficulties then were caused by the growth, and then collapse, of a huge stock and property price bubble, and the failure to use monetary policy to prevent the emergence of deflation after the bubble burst, he said.

US Trade Representative Susan Schwab, who will also attend the economic dialogue, highlighted what she called China's continued signs of slowing or even backsliding in market-oriented economic reforms.

"Protectionism and isolation from market forces only yields inefficiency, corruption, and trade frictions -- and that is not the path to a more harmonious society," she said.

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