Henry Paulson Jr., U.S. Treasury secretary, at a news conference Friday in Beijing. (Nelson Ching/Bloomberg News)

Big issues unresolved in Paulson's final China dialogue

By Andrew Jacobs

Published: December 5, 2008

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BEIJING: There was an agreement to make it easier for foreign banks to trade bonds in China, memorandums on energy conservation and the creation of a formal partnership to encourage a Kansas town shattered by a tornado to share green reconstruction methods with an earthquake-devastated city in Sichuan Province.

For Treasury Secretary Henry Paulson Jr., the two days of economic dialogue with Chinese officials that ended Friday produced a modest stream of achievements, including pledges by both nations to spend $20 billion to help finance trade in developing countries.

Even if the marquee economic conference that Paulson helped establish in 2006 was supposed to be more about big ideas and less about deliverables, the pressure to come up with tangible successes has been hard to resist.

This year was no exception, and the jointly issued "fact sheet" listed five pages of agreements ranging from forest management and food safety to plug-in hybrid cars and offshore wind farms.

But the U.S.-China Strategic Economic Dialogue, or SED as it is called, also left many large issues unresolved and served to highlight tensions between the world's biggest economy and the world's largest developing one.

For the Americans, they include efforts to open China's financial sector to U.S. securities firms and longstanding tensions over government control of the yuan, whose weakness against the dollar has helped fuel a yawning trade gap between the two countries.

For the Chinese, there were oblique criticisms that America's profligate ways had sent the global economy into a tailspin and threatened China's stability. Largely unspoken is the fact that the Chinese government has become the largest holder of U.S. Treasury securities, with about $600 billion of China's savings invested in American debt.

"The important reasons for the U.S. financial crisis include excessive consumption and high leverage," Zhou Xiaochuan, governor of China's central bank, said in a statement. "The United States should speed up domestic adjustment, raise its savings rate and reduce its trade and fiscal deficits." Wang Qishan, China's deputy prime minister, was more blunt: The United States, he said, should stabilize its economy as soon as possible to "ensure the safety of China's assets and investments in the U.S."

In his public comments, Paulson was careful not to criticize the Chinese about their resistance to a currency overhaul, although at a time when both countries are grappling with enormous economic pressures, the yuan's sudden 1 percent drop against the dollar Monday could not have helped lighten the mood.

Although it is largely conjecture, some economists say the government is intentionally pushing down its currency, a move that would help Chinese exporters by lowering prices on goods they sell overseas. Others have suggested the downward swing this past week was designed to warn the United States against pushing China too hard on trade, currency and other economic issues.

Paulson would not take the bait offered by reporters, saying that China had made strides on the currency question in recent years, although more progress was needed. "The Chinese understand, as do we, how important currency reform is to balanced growth in China," he said.

This will be Paulson's fifth and final conference and it remains to be seen whether the Obama administration will see fit to continue the meetings.

During his campaign for president, Barack Obama often accused China of manipulating its currency, but it is worth noting that his choice for Treasury secretary, Timothy Geithner, has lived in China and speaks Mandarin.

In a statement handed out to reporters in Beijing, Senator Max Baucus, Democrat of Montana and the chairman of the Senate Finance Committee, urged Obama to continue the talks. "At this time of unpredictability in our world, high-level engagement with China must be a constant," he said.

Although Paulson started the talks partly as a way to soothe congressional fury over the exchange rate issue, the forum quickly became a catch-all venue for a range of issues frustrating American trade negotiators.

Arthur Kroeber, editor of China Economic Quarterly, said he thought Beijing would not be terribly disappointed, should the forums be discontinued. "The Chinese were willing to go along, but I would not say they were vastly enthusiastic," he said.

Niu Xiaobo, an economist at Access Pointe, a firm that advises American companies seeking to invest in China, had a more upbeat appraisal of the dialogue, saying it had helped build trust into a relationship that is frequently plagued by mutual suspicion. "I think the Chinese would love to maintain or even improve the effectiveness of this dialogue mechanism," he said.

In an interview after the conference, Paulson suggested that people should not judge the forum by bullet-point achievements but by its role in fostering economic dialogue between high-ranking officials in both governments.