China Needs Economic Reforms, Paulson Says

Despite the recent slide in its growing market, China needs to pursue reforms to open up its economy as quickly as possible, says United States Treasury Secretary Henry Paulson. On the eve of his trip to China, Japan and South Korea, Paulson says he's more concerned about the broader Chinese economy than the tumultuous week in global stock markets.

As Paulson prepares for his third trip to China in the eight months he's been secretary, the Dow Jones Industrial Average lost more than 100 points today — capping the worst week on Wall Street in more than four years.

Still, Paulson says, the U.S. economy is executing a "successful transition from a level of growth that was unsustainable to one that's quite sustainable."

The Treasury secretary says that China's markets don't yet reflect the country's economy — a situation which he says increasingly flexible currency and trade policies would improve.

And in terms of the U.S. trade imbalance with China, Paulson notes that America's trade deficit with all of Southeast Asia is shrinking — but its deficit with China is growing.

Still, as he referred to a speech he delivered yesterday, Paulson said that the United States must remain committed in its support for open markets and free trade. "Let's not trade away the benefits of the future," he says, "to deal with short-term problems."

Melissa Block talks with Paulson. A transcript of the interview follows:

MELISSA BLOCK: Secretary Paulson, welcome to the program.

SECRETARY HENRY PAULSON: Melissa, it is great to be here.

BLOCK: We have just seen a week of major volatility on world markets. What are the lessons that you take away from this week?

PAULSON: Well, I begin by looking at the underlying economies. And we are looking at a global economy now, and it's actually been strong now for two or three years, and it's as strong as I've seen it any time during my business career. In the U.S., we are in the process of making what I believe is going to be a successful transition from a level of growth which was unsustainable to one that's quite sustainable. And growth is slowing a bit. There is some weakness in the manufacturing area, some weakness in housing, but some real bright spots: The consumer is strong; exports are strong; we added about a percentage point to GDP growth; labor markets are in fine shape; low unemployment levels, adding a lot of new jobs. So, the economy is strong.

BLOCK: Is there a lesson, though, that the world economy is a more dangerous, more volatile place than it used to be?

PAULSON: I wouldn't use those words. What I would, you know, for at least as long as I've been looking at markets, there is volatility in markets. Markets at any one point in time don't necessarily reflect the economic fundamentals, and markets certainly don't move in a straight line one way or the other forever. So as long as you have markets, you're going to have volatility.

BLOCK: The downslide this week started with a big drop on the Chinese market. As you are heading out to Asia and to meetings in China, how worried are you about China's stock exchange being overheated, perhaps getting set up for some kind of crash?

PAULSON: Well, their capital markets are not yet very reflective of their overall economy. Their economy is still developing. And, so the things that I will be talking about are, if you open up the competition in your capital markets, you develop a strong institutional market. There will be less volatility.

I also see the development of the Chinese capital markets as a way to help them get where they need to get with regard to their currency. They need more currency flexibility in the short term, but they need to get to the point where they have a market-determined currency, and that'll be easier to get there if they have capital markets that work. And the of course, lastly, strong capital markets will very much help the Chinese economy develop in a way in which our balance of trade improves with China.

BLOCK: There is a lot to follow up on there. Let me start with this: One of your main criticisms of China has been that it manipulates its currency, keeps the yuan artificially low so that Chinese products cost less.

PAULSON: Melissa, I have never– a matter of fact, we have – Treasury has not found that China manipulates the currency. That gets to intent. And, what we have focused on is that we need more flexibility in the short term. We'd like their currency to appreciate; we'd like it to more adequately reflect the economic fundamentals. And we're really pressing to have China move forward with reforms so that they could have a market-determined currency rate.

The point I make all of the time to the Chinese is, we agree on the principles of reform. They argue that if they move too quickly, it will undermine their economic stability.

BLOCK: And do you agree with that?

PAULSON: We think it's exactly the opposite. We think there is a much greater risk in not moving fast enough. That is by far a greater risk than moving too fast.

BLOCK: The true deficit with China alone last year was the highest ever recorded, nearly $233 billion, almost a third of our total trade deficit. How concerned are you by that number?

PAULSON: Well, let me say, when you look at the trade deficit, Melissa, it could be very misleading looking at just one country, okay. The number I looked at was – the number was slightly different than your number the concept is the same.

BLOCK: It's big.

PAULSON: And here is how I think about it. The numbers I looked at showed that while China's trade deficit as a percentage of the overall deficit is going up, the deficit for all of Southeast Asia, including China, is going down. The U.S. exports to China are growing very quickly, and they are high value-added exports. So, again, I believe the solution is pressing hard for reforms in China to create opportunities for us to sell more goods and products in China; it's not for greater protectionism.

BLOCK: Fair to say that number, that trade deficit is not where you would want it to be.

PAULSON: No, I would obviously like to see more exports to China. Obviously. And they're growing quickly, and we're fighting very hard to open up the Chinese markets further for U.S. products and services.

BLOCK: You mentioned protectionism. You gave a speech yesterday here in Washington, and you said, "We must not heed the 'siren song' of protectionism." Who do you think is singing that song? Who are the protectionists in this country?

PAULSON: I would say this, here is how I look at it: The U.S. public, if you look at any poll I've looked at, although many people believe that trade generally benefits, more than half the people in this country are concerned that trade doesn't benefit them, and that the benefits of trade either aren't shared evenly among nations or within our country.

So the public, as they look at trade, the benefits of trade fall across this country overall in a higher standard of living. The dislocations and the job losses are very visible, but we've always had in this country bipartisan support for free trade, and I think a big part of my job, and one of the things that I was trying to do in that speech is just remind people how important it is to keep our markets open for trade and investment, because this benefits the American workers. And if we try to shut them off in some way, we'll just hurt the people we're trying to protect the most.

BLOCK: People whom you might consider protectionists would say, 'We're defending American workers who have seen their jobs shipped overseas. That's not – if that's protectionist, that's protecting people at home.'

PAULSON: Oh, absolutely. That's absolutely what they're saying. And another point I made in the speech is, let's not trade away the benefits of the future to deal with short-term problems, dislocations. You know, we've always had – job losses are very painful wherever they occur, and I don't take them lightly, and I don't think at any point in our history people have taken them lightly — but the fact is more of the job losses, in my judgment, are coming from technology and automation than they are for global integration. But I don't have people – one of the things I said in the speech is, you don't hear people say, let's turn back technology; let's shut off the Internet.

BLOCK: How do you respond to people, though, who would say, this isn't a fair fight, that Chinese markets aren't fully open to U.S. goods? So you can talk about the "siren song" of protectionism, but there is a real imbalance here.

PAULSON: That's my job. That's a big part of my job, is to fight hard for U.S. workers and fight to open up markets overseas and for products and services, and I am fighting very, very had to do that, and I think we're doing that all around the world.

BLOCK: Secretary Paulson, thanks very much.

PAULSON: Thank you, Melissa.

(END)

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