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US worried about Chinese backsliding

"The rest of the world is not going to tolerate China taking too long to make the sorts of adjustments in the currency that need to be made."

Henry Paulson, US Treasury secretary

US Secretary of the Treasury Henry Paulson warned on Friday ahead of a high-profile trip to Beijing that global patience with China's currency and economic regimes was wearing thin.

Paulson will lead a stellar US delegation including Federal Reserve Chairman Ben Bernanke to Beijing for the launch next Thursday of a "strategic economic dialogue" with the Asian powerhouse.

Just before the trip, the US Trade Representative's office will tomorrow issue what is expected to be a highly critical report to mark the fifth anniversary of China's accession to the WTO.

The report will accuse China of "backsliding" on pivotal reforms covering intellectual property rights (IPR), industrial policy and market access, a senior trade official said.

Paulson, speaking on the financial news network CNBC, reaffirmed that the point of next week's two-day dialogue is to thrash out some of the longer term challenges thrown up by China's meteoric economic rise.

But as the Democrats prepare to retake control of Congress next month, the treasury secretary also acknowledged that accelerated progress is needed on irritants such as China's exchange rate system.

A more flexible yuan would help China allocate capital more efficiently, he said, while noting the anger felt by many in the US at what critics say is a skewed yuan-dollar rate that boosts Chinese exports and hurts US jobs.

"The rest of the world is not going to tolerate China taking too long to make the sorts of adjustments in the currency that need to be made," Paulson said.

The Chinese must recognize that faster reforms are required because an administrative, rather than market-driven, approach to economic management "will get them nowhere," he added.

"It might be easier for them to say we're in transition, give us more time, but they're a global economic leader and the rest of the world isn't going to give them a lot more time."

A treasury official, speaking on condition of anonymity, said redressing the yuan-dollar rate was a "necessary but insufficient condition to address the [trade] imbalance."

"It's not a silver bullet but a key part of our conversation," the official said, adding that the US team in Beijing is "not going to lecture but to truly have a conversation on these issues."

Paulson's delegation will also include other top officials such as Secretary of Commerce Carlos Gutierrez, Secretary of Energy Sam Bodman and US Trade Representative (USTR) Susan Schwab.

Ahead of tomorrow's USTR report, the trade official said few observers dispute that China's membership of the WTO has benefited the world economy. But its record on keeping its WTO promises has been "decidedly mixed."

The official, briefing reporters on condition of anonymity, denied that the 100-page report's criticisms could sully the atmosphere at next week's landmark talks in Beijing.

"China has done some very important things to bring itself into compliance with its WTO obligations," he added.

"But at the same stage, there is a substantial amount of work left to be done, and we are particularly troubled by signs of backsliding, or at least a slowdown in the reform process," the official said.
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