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Treasury Chief: China 'Must Move to Market Economy'

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In an exclusive interview on CNBC, Treasury Secretary Henry Paulson said China must move quickly to a market economy to remain competitive.

Paulson, who is traveling to China next week with Federal Reserve Chairman Ben Bernanke to discuss trade and economic issues, told Maria Bartiromo that "a big part of the dialog is to persuade the Chinese to acclerate the pace of their reform...There's total agreement about what they need to do so the question, the debate is about timing."

Paulson said the Chinese argue that reforms must proceed slowly, but he said the U.S. believes there is more risk in going too slow than in moving too fast. He said the large and complex Chinese economy must reform quickly becasue it's now a mix of markets and and "adminsitrative means to manage the economy and that will get them nowhere."

In September, Paulson and China’s vice premier, Wu Yi, agreed to meet twice a year for economic talks. At the time, Paulson said he hoped to persuade China to allow its currency to rise and to open its capital markets.

“On a short-term basis, we need more flexibility (on currency),” Paulson told CNBC. “But obviously, on an intermediate term basis, (the Chinese) need to have a currency where the value is set in a competitive market place. That’s what every other major participant in the economic system has. China is unable to do that now and they will be unable to do it until they open up their capital markets. They need capital markets that work...and the only way they’re going to be able to get to that point is to open then up to competition and foreign investment.”

The U.S. has charged that China violates its trade agreements by illegally subsidizing goods, including steel and auto parts. Washington also has alleged that China ignores pirated designer accessories, DVDs, CDs, aviation parts and prescription drugs.

Both sides downplayed expectations for next week’s meeting. The issues are complex and some analysts say China can’t be seen as immediately bending to U.S. pressure.

China will mark its fifth anniversary of admission to the World Trade Organization on December 11. Franklin Lavin, undersecretary of commerce for international trade, praised China’s efforts to comply with membership requirements.

“Some people will find an issue here and an issue there, but I would say they have essentially completed their commitments and they should get high marks for their work on the WTO commitments,” Lavin told The Associated Press after addressing the American chamber of Commerce in Hong Kong.

Lavin said the U.S.-China trade gap is likely to hit a record high this year, surpassing last year’s $202 billion. But he said U.S. exports to China are increasing and are expected “to come in some where in the mid-$50 billion range.” China holds Treasuries valued at about $340 billion.

Lavin said November’s mid-term elections gave Democrats control of both houses of Congress and this could result in a turn to economic populism that would almost certainly create a less hospitable climate for trade with China.

Earlier this year, U.S. Sens. Charles Schumer (D-N.Y.) and Lindsey Graham, (R-S.C.) withdrew a bill threatening to impose tariffs on Chinese goods if China didn’t let its currency float.