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Paulson says China no threat, needed for growth

US Treasury Secretary Henry Paulson said on Tuesday that China’s economic growth should not be seen as threatening and said it would be more worrisome if its economy falters.

“The real concern should be that China stumbles, has problems along the way and that this hurts the global economy and our economy,” Paulson said in a teleconference arranged by Foreign Affairs magazine, for which he wrote an article.

He said the United States was continuing to push Beijing to open up its economy, adopt currency and other reforms, and said that so far the appreciation of its yuan currency was “inadequate” though headed in the right direction. Paulson refused to answer repeated questions about the condition of troubled mortgage finance companies Fannie Mae and Freddie Mac, which Barron’s magazine speculated over the weekend may eventually need a bailout by the Treasury.

Paulson just returned from China late last week, after attending the Olympics on a private visit. While there he confirmed he had undertaken some talks with Chinese economic officials. Much of his 45-minute discussion with reporters covered familiar ground on issues like currency reform, which Paulson has pursued through the so-called “strategic economic dialogue” that he initiated with Beijing after taking over Treasury in mid-2006. He said China was "moving in the right direction" on currency reform by letting its yuan rise in value against the dollar, which tends to make Chinese-made goods more expensive for Americans to buy.

Paulson said Congress can see the yuan is appreciating, which should help meet US criticisms that Chinese goods are unfairly low-priced, and it will help make China less dependent on exports and more reliant on growth from domestic demand. "I think that Congress has been satisfied that we’re making progress," Paulson said, but later modified his remark to say that he was not personally satisfied that China’s yuan has yet risen as much as it needs to. “I think Congress believes and can see a change because the rate of appreciation has increased,” he said, adding that Treasury is encouraging the International Monetary Fund to step up its role in overseeing currency practices of key countries.

Paulson said China needs a market-determined currency eventually, even if it is not ready for it yet, and won’t be successful in the long term unless its currency’s value is able to move in relation to underlying economic fundamentals. The final round of the twice-a-year strategic talks is set to take place in Beijing in December, after US presidential elections in November. Paulson said they will focus on energy and environmental protection issues and on a bid to get a bilateral investment treaty that will protect American investors in China and encourage more Chinese investment in the United States.

The US Treasury chief has made no secret that he hopes SED talks will continue in the next administration but refused to say whether he had discussed it with either the Republican prospective nominee Sen. John McCain or with the anticipated Democratic nominee Sen. Barack Obama. Any talks he held with the senators were private, Paulson said. (Reuters)