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Paulson Says Impact of Subprime Largely Contained

Reuters
Wednesday, 1 Aug 2007 | 7:46 AM ET

Treasury Secretary Henry Paulson said on Wednesday that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades.

The recent volatility in global stock and currency markets reflected a repricing of risk and the unwinding of market excesses, Paulson said.

He also repeated his call for China to let the yuan strengthen more quickly and said that Beijing agreed on the direction of reform but differed from the United States on the pace of that reform.

Paulson was speaking to reporters before leaving Beijing, where he met President Hu Jintao, Vice Premier Wu Yi and other top officials to press them to speed up appreciation of the yuan and other economic reforms.

Paulson in China

Paulson brings his overtures for a faster rise in the yuan to Chinese President Hu Jintao on Wednesday, a day after the Bush administration warned that anti-China legislation in the U.S. Congress could provoke a global trade backlash.

Paulson and other top Bush aides are trying to head off several trade-focused bills that are aimed at ratcheting up pressure on Beijing to allow the yuan to appreciate more quickly to ease trade imbalances.

Paulson's China Swing
An update on Treasury Secretary Hank Paulson's meeting in China, with CNBC's Melissa Lee

"At a time when U.S. exports are growing globally, such legislation also exposes the United States to the risk of 'mirror legislation' abroad and could trigger a global cycle of protectionist legislation," Paulson, U.S. Trade Representative Susan Schwab and Commerce Secretary Carlos Gutierrez said in a joint letter to senior senators.

The letter was released after Paulson met Chinese Vice Premier Wu Yi on Tuesday and urged her to make faster and bolder currency and economic reforms.

After a closed-door meeting, Wu lectured Paulson in front of reporters on China's economic challenges, saying that the country was still too poor to pose an economic threat to anyone.

"China still has 23 million people living in poverty. China's very goal in its development is so that its 1.3 billion people can eat their fill, dress warmly and live well," Wu said. "Who could we threaten? We don't have the ability. China does not and will never threaten anyone."

Her comments went to the heart of Beijing's refusal to permit a more rapid rise in the yuan: officials fear a stronger currency could not only destroy millions of export-orientated jobs but would also make it tough for peasants who make up over 60% of its population to compete against cheaper food imports.

On the U.S. side, many lawmakers and manufacturing firms feel the yuan is deliberately undervalued, keeping Chinese goods cheap in U.S. stores and driving American competitors out of business.

Meeting 'Constructive'

In an interview with China's Xinhua news agency on Tuesday, Paulson said the meeting with Wu was "very constructive" and sought to downplay the trade tensions.

"I will not say anything other than the Treasury's view that legislation is not the proper way to proceed and deal with the currency issue," Paulson told Xinhua. "I believe it is much more productive to have bilateral talks and engagement."

Wu is Paulson's counterpart in a twice-yearly "strategic economic dialogue" (SED) that Paulson has instituted to try to persuade China that difficult reforms are in its own interest. "Both sides agreed the SED is important and that we need to work and achieve positive outcomes for both countries," he said.

Paulson said the two sides had drafted "an ambitious work schedule" that will focus on a smaller number of issues deemed the most important. He did not identify the topics.

Paulson would meet Hu on Wednesday afternoon and also planned a second round of talks with Wu, Treasury officials said.

He will also have meetings with the China Securities Regulatory Commission, the National Development and Reform Commission, the main planning agency, and the State Forestry Administration. He is expected to brief reporters before flying back to Washington on Wednesday evening.

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