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A soft sell on China trade

Paulson's team shows restraint, drawing agreement on principles but few concessions.

December 16, 2006|Mark Magnier | Times Staff Writer

BEIJING — Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke on Friday called on China to revalue its currency, protect intellectual property, save less and spend more at the close of a two-day trip meant to address economic irritants between the Asian giant and the United States.

The seniority and size of the U.S. team, which included the trade representative and six Cabinet secretaries besides Paulson, was impressive, but apparently not impressive enough to exact many concessions. The trip came at a time of growing concern in Congress and among Americans about the record trade deficit and widespread patent and copyright infringement.

High on the agenda was China's tightly controlled currency, the yuan. Many U.S. companies, labor groups and members of Congress see the government's policy as an unfair trade advantage that weakens U.S. competitiveness.

"China's currency policy is a core issue," Paulson said. "We indicated [this] to China in the clearest possible terms."

U.S. officials, though, appeared to be cautious about pushing the issue too hard. Bernanke, in a speech Friday after the conclusion of the talks, backed away from calling China's currency a subsidy for its exports. His written remarks, released before his speech at the Chinese Academy of Social Sciences, contained three instances of the politically charged word "subsidy."

The Fed described Bernanke's changes as "spontaneous," but observers speculated that he may have been advised, possibly by Paulson or his staff, to drop the term.

"Once you talk about subsidies, it escalates the debate," said Oded Shenkar, a management professor at Ohio State University and author of "The Chinese Century." "It's kind of an accusation," he said, with political and legal implications.

Chinese officials reportedly agreed in broad terms on the need for greater liberalization over time but declined to be pinned down to a timetable even as they acknowledged ongoing differences between the world's largest and fourth-largest economies.

"That such differences remain is understandable because the actual situations of China and the United States are completely different," said Vice Premier Wu Yi.

China's leadership is wary of moving too quickly in light of the shaky banking system, growing wealth gap and mounting concerns about social instability.

Chinese officials also agreed in principle that their economy would benefit from many of the structural reforms proposed by the American officials, which included better intellectual property protection, lower Chinese trade surpluses and a more open service sector. The trade gap with China is on track to hit $229 billion this year, well above 2005's record of $202 billion.

But they did not share the Americans' sense of urgency. "We have a view that there's more risk in going too slowly than too fast," Paulson said, "and the Chinese see it differently."

The two sides agreed at this first meeting of the so-called Strategic Economic Dialogue that Nasdaq Stock Market Inc. and the New York Stock Exchange would open formal business offices in China. They also agreed to discuss financial services reform, granting foreign airlines more access, investors' rights, energy and the environment. A second meeting is scheduled for May in Washington.

Chinese analysts said the sides were still far apart on the yuan. But some praised Paulson for focusing broadly on capital markets reform.

"This shows more flexibility by the U.S. and makes Chinese people feel more comfortable," said Zhu Feng, an international relations professor at Peking University. "Paulson is much more tactical."

Li Ruobing, 29, an employee at an import-and-export company in Beijing, said further appreciation of the currency would hurt his employer but help him by allowing him to buy more abroad as a tourist.

"Of course, America will continue to pressure us on the yuan," he said. "And we're not strong enough to resist. Eventually we'll have to give way more."

Opinions on Chinese websites appeared divided about the summit. Some viewed the composition of the U.S. delegation as a bullying tactic. Others felt it gave China great "face" and indicated America's growing respect for the Chinese economy.

During his speech at the Academy of Social Sciences, Bernanke argued that more open markets, more spending and less saving would benefit China and the world economy.

Some, however, questioned Paulson and Bernanke's altruistic tone and call for quick results. "America wants everything to happen tomorrow," said Wang Yiwei, an American studies professor in Shanghai. "There's a cultural difference here."

U.S. officials acknowledged there are good reasons Chinese consume relatively little and save a lot: The country has a weak social safety net. Only 14% of the population has health coverage and 16% of workers can expect a pension.

The solution, Bernanke and Labor Secretary Elaine Chao said, was for Beijing to spend more on welfare so citizens feel more secure and spend more.

Wang Xiaofeng, 38, a Beijing-based magazine writer, said his quality of life had risen tremendously in the last decade and there was much more consumer choice and disposable income in China. But he still saves roughly half of what he makes.

"America has a very good and mature social security system, so they 'dare' to spend," he said. "China has a huge population and not all that much money for good infrastructure. So we save because we don't feel secure. Americans and Europeans can afford to be confident because they have enough to eat."

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mark.magnier@latimes.com

Gu Bo in Beijing and staff writer Don Lee in Shanghai contributed to this report.

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