Paulson Pushes China, Beijing Pushes Back

China must accelerate the pace of economic reforms, U.S. Treasury Secretary Henry Paulson said after the first day of talks between the two nations in Beijing, but his Chinese counterpart warned change will take time.

Paulson said earlier Thursday that he plans to push for currency flexibility in China as he meets with top Chinese officials over the next two days.

"They're so big and such an economic powerhouse that the rest of the world is going to be impatient, particularly the U.S., and so they need to accelerate the reform," Paulson told a small group of reporters who traveled with him to Beijing for the inaugural session of a "strategic economic dialogue" between the two countries, according to Reuters.

On Friday (Thursday night New York time), the focus will be on Federal Reserve Chairman Ben Bernanke, who is set to give a speech in Beijing, reported CNBC's Carl Quintanilla, who's traveling with the U.S. delegation.

"Productive Interchanges"

Paulson described the first session of the two-day talks as "productive and informative interchanges," Reuters reported. Paulson also said he agreed with a comment by Chinese Vice-Premier Wu Yi that America needed to better understand China's drive to reform its economy.

China "has the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," Wu said, according to CNBC's Quintanilla. "This is not conducive to the sound development of our bilateral relations."

In an interview with Quintanilla on CNBC's "Power Lunch," U.S. Commerce Secretary Carlos Guttierez said Wu's comments "set the tone for a very open candid discussion."

Paulson has warned against expecting breakthroughs from the two-day talks, billed as the start of a long-range dialogue. But President Bush is under pressure to show results after his Democratic rivals, including prominent critics of Beijing's trade record, won last month's congressional elections.

Paulson's delegation included Bernanke and four other Cabinet secretaries. The Chinese side included ministers of finance, commerce and technology, as well as China's central bank governor. The gathering includes side meetings on U.S.-Chinese cooperation in health, finance and other fields.

Guttierez told CNBC's Quintanilla that he sees these meetings as a unique opportunity to develop a strategic roadmap with China.

"You come to a meeting like this, you want to prevent short-termism," Guttierez said. "This is not a negotiating session. It's an opportunity to develop some strategic guidelines, to come to some consensus on where we're going and set up a series of tactics and meetings."

U.S. Trade Representative Susan Schwab said China has made dramatic changes in the last 15 years.

“However, they have a long way to go,” Schwab told CNBC. “We do not believe they are fully in compliance with their WTO obligations whether you’re talking about the letter of the obligations, or the spirit of the obligations.”

"We have a range of tools at our disposal to make sure that China is living up to its commitments, she added. "We heard positive responses today, but we will see how it plays out in the marketplace."

China Takes A Stand

As usual, U.S. officials tried to strike a delicate diplomatic balance between acknowledging China's progress and pushing for more. Paulson’s Chinese counterpart, Wu Yi, welcomed the chance to build "mutual trust." But she complained that Americans fail to understand China and said that could damage relations.

"We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," Wu said, according to a text released by the Chinese government. "This is not conducive to the sound development of our bilateral relations."

Wu said Beijing would "actively push forward trade and investment liberalization." But she stressed that changing China's economy is a "long-term and arduous" task.

Pushing for Yuan Appreciation

A key issue for U.S. exporters is China's currency, the yuan, which they say the government keeps undervalued, giving Chinese companies an unfair price advantage and contributing to a widening trade gap between the two nations.

At the talks, the Chinese are likely to show that they basically agree with Paulson's stance that the yuan needs to strengthen step by step rather that with quick, knee-jerk reactions, Arjun Mahendran, chief Asia/Pacific economist at Credit Suisse, told "Squawk Box Europe."

This will lead to "accelerations of appreciation of the yuan against the U.S. dollar as we go into December and early next year," Mahendran said. The Chinese currency is likely to appreciate by 8% in 2007, he added.

On Thursday, the yuan rose to 7.8180 to the U.S. dollar, its highest level since Beijing revalued the currency in July 2005 and adopted a system that lets its exchange rate increase gradually. The yuan has risen only 3.6% against the U.S. dollar since that time, not enough for American manufacturers.

A Chinese central bank official told reporters earlier this week that Beijing sees no reason for rapid changes in a system that restricts the yuan's daily fluctuations to a narrow band against the dollar.