Treasury Secretary Prepares for First Official Trip to China

U.S. Treasury Secretary Henry Paulson on Monday stressed the importance of further economic liberalization in China, but said on the eve of his first official visit there that he will be patient in dealing with the fast-growing country.

"I do care a lot about China progressing with their reforms," said Paulson, who spoke to reporters in Singapore. "I am not looking for immediate solutions or quick fixes to any particular economic issue."

That's a message the former head of Goldman Sachs Group Inc., who begins a four-day trip to China on Tuesday, has maintained while attending a gathering of Group of Seven finance ministers and the annual meetings of the International Monetary Fund and World Bank.

"This is a relationship that is very important to both our countries," he said. "There is a good deal of interdependence." On Saturday, he told a press conference that he was going to China with the intention of listening to officials there.

At Goldman Sachs, Paulson visited China on numerous occasions, making key contacts there. He said he would like to utilize that experience, but downplayed expectations.

"We should not underestimate the fact that I'm wearing a different hat now," he said.

Since taking over the top Treasury spot in July, Paulson has been careful to avoid statements that appear to put strong pressure on China, especially on the sensitive issue of currency reform.

The U.S. and other major trading partners have urged China to make the yuan's exchange rate more flexible. They contend that restrictions keep it artificially cheap, boosting China's exports and contributing to its trade surplus, which hit a historic high of $102 billion last year and has continued to rise.

Paulson on Monday declined to say what he saw as an appropriate rate for the yuan. He said, however, that "the strong dollar is clearly in our nation's interest" and that it wasn't just China that needed to change.

"We've got a low savings rate and it is a problem in the U.S.," he said. "We can do more there and we can do more on deficits."

Paulson spoke before the Commerce Department reported Monday in Washington that the U.S. current account deficit increased in the spring to its second highest level ever, reflecting a big jump in payments for foreign oil.

The deficit in the current account, the broadest measure of trade that includes goods and services as well as investment flows, rose to $218.4 billion in the April-June quarter, an increase of 2.4 percent over the first three months of the year.

The shortfall represents the amount the United States must borrow from foreigners to cover the gap between exports and imports.

So far, foreigners have been content to hold dollars in payment for U.S. purchases of cars, televisions and foreign oil. Countries like China, Japan, South Korea and Middle Eastern oil producers have for years been investing those dollars in U.S. Treasuries, helping fund the deficit.

But the concern is what would happen should they and others decide they want to hold less in dollar-denominated assets and more in other currencies, such as the euro or yen, possibly sending U.S. stock prices and the value of the dollar plunging and pushing U.S. interest rates sharply higher.

Paulson on Monday expressed confidence that foreign governments and investors who hold securities, such as U.S. Treasuries, do so "because they've got confidence and they know that they're getting the best risk-adjusted rate of return."

Paulson did express some carefully couched criticism of China, saying that he was concerned about "protectionist sentiment" there, but quickly qualified that to say it could also be found elsewhere.

In recent months, Beijing has placed limits on real estate investment, tightened controls on mergers and acquisitions, imposed a series of new regulations tightening restrictions on some kinds of foreign investment and new distribution regulations for foreign news agencies.