AP
U.S. Treasury Secretary Visits China
Sunday July 29, 2:48 pm ET
By Joe Mcdonald, AP Business Writer
U.S. Treasury Secretary Henry Paulson Visits China Amid Rising Congressional Frustration

BEIJING (AP) -- For months, U.S. lawmakers have warned Treasury Secretary Henry Paulson that patience was wearing thin as his economic dialogue with China failed to produce breakthroughs on currency and other disputes.

Now, as he meets this week with Chinese leaders, Paulson faces new pressure in Congress, where legislators have proposed measures that would punish Beijing for manipulating its currency.

"The problem is, there is very little they can do in the immediate future that will make Congress happy," said Andy Rothman, a China strategist for investment bank CLSA.

Paulson is due to hold talks with President Hu Jintao and other officials on the "strategic economic dialogue" launched by the two governments last year to deal with tensions over China's swollen trade surplus and other issues. The secretary also is to meet with Vice Premier Wu Yi, who leads the Chinese side of the dialogue.

But Paulson's real target audience is as much Congress as Beijing.

"Paulson is going to be hoping to come back from the current trip with private whisperings and confidences that he can share with members of Congress so as to discourage drastic action," said Sherman Katz, a former trade lawyer and researcher at the Carnegie Endowment for International Peace in Washington.

Paulson has appealed for patience, saying the dialogue launched last December needs time to produce results on complaints about China's currency controls, product piracy, barriers to foreign entry into its financial industries and other issues.

Beijing has begun easing currency controls and taken steps to rein in its surging trade surplus. But Washington and other governments that have seen trade deficits with China soar want faster action.

Critics say Beijing keeps its currency, the yuan, undervalued by up to 40 percent, giving its exporters an unfair price advantage and adding to China's swollen trade surplus.

Last week, over Paulson's objections, a Senate panel approved a bill to require Treasury to identify and punish currency manipulators. Another measure proposed earlier would tighten the legal definition of currency manipulation to make China more likely to be cited.

Beijing says the yuan will eventually be allowed to trade freely on world markets. But it says abrupt changes would hurt its underdeveloped banking industry and cause financial turmoil.

China revalued the yuan by 2.1 percent against the U.S. dollar in July 2005 and has allowed it to rise by about 7.2 percent since then. Last week, it was trading at about 7.6 yuan to $1. Financial analysts expect Beijing to let the yuan rise by an average of about 5 percent annually over the next few years -- far less than critics want.

On Sunday, Paulson began his latest China visit with a stop at Qinghai Lake in the country's far west to highlight environmental challenges amid the country's breakneck growth.

Paulson's stature as a former Goldman Sachs chief executive and personal lobbying of Congress have bought him time, analysts say. But China's supercharged economic performance is fueling arguments that it can afford to move faster.

The economy expanded by 11.9 percent last quarter -- the fastest quarterly growth in 12 years -- and the trade surplus jumped by 85 percent in June to $26.9 billion.

Beijing's standing with critics of its trade record has been hurt by its disastrous string of safety complaints about products ranging from toxic toothpaste to faulty tires, Katz said.

"It contributes to a sense that this may be a government that has a lot to learn about acting as a responsible citizen in the global economy," he said.

The last formal meeting of the economic dialogue in May ended with no progress on currency or other major issues.

Since then, China has announced measures to rein in surging export growth. It repealed rebates of value-added taxes on more than 2,000 types of goods ranging from cement to plastic products in June. Last week, the government said it would limit the growth of its "processing trade," a big but low-profit segment of the economy that imports components and exports finished goods.

"It will have a small impact but not enough that members of Congress will say they are satisfied," Rothman said.

American companies are split over how to treat China. Small and midsize manufacturers are demanding an end to what they say are unfair advantages for their Chinese competitors. But companies that do business with China are urging caution, warning against any steps that might disrupt growing commercial ties.

American exports to China soared by 240 percent in 2000-06, far ahead of the 10 percent to 40 percent rate for other key markets, according to the U.S.-China Business Council. The group represents some 250 companies, including major American exporters.

"Companies feel like, we want to make sure that we don't do anything legislatively that will do more harm than good," said John Frisbie, the council's president.