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US’s Paulson urges China to open financial sector

BEIJING - US Treasury Secretary Henry Paulson urged China on Thursday to open its financial sector to foreign competition and warned that inaction on currency reform could bolster supporters of protectionism.

Speaking to students at Tsinghua University in Beijing, Paulson used the forum to reiterate Washington’s call for China to open its capital markets and to warn that the possibility of trade sanctions against China was real.

The US treasury chief who took office in July said freeing up financial markets was “absolutely necessary for long-term economic success” because it would allow more efficient investment and greater returns for China’s rising savings.

His comments came after the United States and China on Wednesday announced a plan for regular high-level talks about their long-term economic relationship that US officials said will not overshadow immediate concerns such as the yuan exchange rate.

The “strategic economic dialogue” was agreed to by President George W. Bush and Chinese President Hu Jintao in August but only disclosed as Paulson began a three-day visit to Beijing on Wednesday. He meets Hu on Friday before returning to Washington.

China is facing increasing pressure from trading partners to relax currency controls, a position reiterated on Thursday by Axel Weber, a member of the European Central Bank governing council, who is also visiting Beijing.

The head of China’s central bank promised further progress, while deflecting any commitment on timing.

“We will continue to redouble our efforts to develop our financial markets, to widen the openness of our markets gradually and in an orderly way, and to steadily push for free convertibility of the renminbi,” Zhou Xiaochuan, governor of the People’s Bank of China said.

But in response to a question, Zhou said Beijing had no set timetable for expanding the yuan’s daily trading band.

“There is no need (for a timetable),” Zhou told reporters on the sidelines of a financial forum. Pressed on details of a potential band widening, Zhou replied: “It depends on whether the band is enough for the market.”

The yuan hit 7.9230 against the dollar on Thursday, its highest level since Beijing revalued it by 2.1 percent and untethered it from a peg to the dollar last July.

It has now strengthened a further 2.36 percent since then, although critics says the pace of appreciation is far too slow to curb the country’s soaring exports.

The yuan is convertible on the current account, which covers trade, China still restricts most deals on its capital account and analysts say full convertibility could be years away.

In Washington, Democratic Sen. Charles Schumer of New York, co-sponsor of a bill that proposes tariffs against Chinese imports unless the yuan is swiftly revalued, indicated he was not yet satisfied with China’s steps.

“We have had four years of talk,” he said. “Everyone knows the Chinese are flouting the rules. We need action.”

Trouble at home

Paulson hinted at the political pressure he faces from US lawmakers when he cautioned about the risk of trade barriers.

“I think one of the biggest challenges will be to make the case in the United States and around the world for the benefits of trade, openness, because virtually everywhere in the world we have protectionist sentiment,” he said.

The ECB’s Weber reiterated a call made by the Group of Seven rich nations -- the United States, Britain, Canada, France, Germany, Italy and Japan -- for China to adopt more yuan flexibility to help correct global trade imbalances.

Weber told an audience at the Beijing Normal University that the G7, which met last Saturday in Singapore, “has always expressed that exchange rates should reflect economic fundamentals” and it was generally in a country’s best interest to to allow it.

Paulson similarly appealed to China to consider more open markets because it would reap benefits from more competition.

Paulson’s call for China to open its financial markets comes as foreign banks are rushing into China, in part to tap the roughly $2 trillion in personal savings in the world’s fourth-largest economy.

Paulson said he sought “a long-term strategic view” of US and Chinese relations that went beyond short-term irritants.

But senators Schumer and Lindsey Graham, a South Carolina Republican, are threatening to put their tariff proposal up for a vote by Sept. 29 before Congress adjourns for November congressional elections.