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Paulson: US Economy Faces a Tough Quarter

The U.S. economy has taken a sharp turn for the worse and is facing a tough quarter, U.S. Treasury Secretary Henry Paulson said on Thursday.

Henry Paulson
CNBC.com
Henry Paulson

Speaking to reporters during a visit to Beijing, Paulson sidestepped a question on whether the economy was at risk of toppling into recession, something that Federal Reserve Chairman Ben Bernanke said on Wednesday was a possibility.

"There is no doubt we're having a tough quarter, that the economy has turned down sharply," Paulson said.

But he said a swoon in the housing sector, which was largely to blame for the rough patch, was necessary.

"We need to have this correction. It's not pleasant, but we need to have it," Paulson said in reference to declining U.S. house prices and homebuilding.

For the second day in a row, Paulson praised China for letting the yuan rise more quickly, a long-standing demand of the Bush administration.

The Chinese currency, also known as the renminbi (RMB), gained 4 percent against the dollar in the first quarter and has now risen 18 percent since July 2005, when it was depegged from the dollar.

"Although the process of adjustment is not complete, the accelerated pace of appreciation is significant and welcome, and should continue," Paulson said in a speech to the Chinese Academy of Sciences.

A stronger exchange rate would help China to tackle inflation, now at a near-12-year high of 8.7 percent, he said.

Although China would shed some jobs as its economy adapted to a stronger currency, there was no sign that overall growth had been hurt by the rising exchange rate, Paulson told reporters.

By contrast, maintaining a misaligned, undervalued currency was fraught with risk.

"China's economy is so large, complex and integrated that it is dangerous if it does not have an RMB that reflects fundamentals," Paulson said.

Pollution Tariffs

The Treasury chief, who said on Wednesday that the U.S. subprime crisis was bound to give Beijing pause about the pace of financial liberalization, said China was carefully studying the lessons to be learned.

But he did not see this as the most serious threat to further opening of China's markets.

"Reform never moves in a straight line. I think the biggest threat for reform in China is a strong domestic industry that doesn't want competition," Paulson said.

In his speech, which dwelt on what he called China's daunting environmental problems, Paulson urged Beijing to drop barriers against foreign-made anti-pollution equipment as a way to help clean up its dirty air and water.

"A high priority should be given to eliminating tariffs and non-tariff barriers on products, goods and services that can improve the health and welfare of the Chinese people," he said.

Although China's economy is only one-sixth the size of America's, it is about to become the number one source of greenhouse gas emissions, Paulson noted.

China is also the world's largest coal producer and consumer, a significant cause of the smog that regularly blankets Beijing. Sixteen of the world's 20 most polluted cities are in China.

China can afford to buy the advanced environmental control and energy-saving equipment it needs to cut emissions and pollutants, yet it levies tariffs on such imports, Paulson said.

"It doesn't seem economically sensible and morally right to not use clean technology and to charge a tariff on it," Paulson told a questioner after his speech.

The Treasury chief was due to meet Premier Wen Jiabao before leaving Beijing on Thursday evening.

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