http://www.washingtonpost.com/wp-dyn/content/article/2006/09/19/AR2006091900446_pf.html
BEIJING, Sept. 19 -- U.S. Treasury Secretary Henry M. Paulson Jr. is fond of
recounting stories from his dozens of visits to China as chief executive of
Goldman Sachs, a legacy that has fueled expectations he can accomplish a feat
that eluded his predecessors: persuading China's leaders to significantly raise
the value of their currency, the renminbi.
Paulson has applied his brash charm toward securing mega-dollar deals here.
He has visited remote villages and the highest offices of the ruling Communist
Party. He refers to China's central bank governor, Zhou Xiaochuan, by his given
name.
"In China, I've had a lot of experience," Paulson said Monday in Singapore,
on the eve of his departure. "It helps if you have spent time, know the culture,
know the people. And so I've got to believe that's an advantage."
But as Paulson landed Tuesday in China, his first official visit since
assuming his post in July, his knowledge of the local terrain had him laboring
to keep expectations to a minimum. He was cognizant that outside pressure tends
to backfire in China and aware of the cautious ways of China's leaders, who are
loath to tinker with a burgeoning economy. Above all, Paulson sounded like a man
trying to avoid having his report card based on his ability to extract something
from China's leaders, who have said repeatedly that they will act on their own
timetable.
"Everyone today wants to measure everything immediately," Paulson said,
sidestepping a question about what would constitute a success here. "I am not
looking for immediate solutions or quick fixes to any particular economic issue.
I'm looking to set a tone."
In recent years, the shrill tenor of the United States-China trade
relationship has centered on the Chinese currency. In the American narrative,
China's prodigious exports and its resulting trade surplus with the United
States -- $202 billion last year -- are the result of a low-priced renminbi,
which makes Chinese goods unfairly cheap on world markets. China retorts that
its factories are providing Americans with desired wares at a good price and
that it has been made a scapegoat for the decline of U.S. manufacturing.
Paulson brings a new twist to this debate, asserting in recent pronouncements
that China should adjust its currency upward not because it is a rogue trading
power, but because doing so is in China's own interest. In place of hectoring,
he says, the United States would do well to convince China's leaders that it
wants China to succeed, and that American fortunes are linked to China's rise.
Without change, he warns, both countries will suffer from a protectionist
backlash.
"When sovereign nations are working on important issues, generally the way to
make progress is you need to convince the other side that there's a mutual
interest," Paulson said.
Analysts suggest these may be good days for such a tack, because of a
palpable shift in Beijing: After years of resistance, a rough consensus has
emerged that increasing the currency is the proper course for managing China's
economic challenges.
Grave concerns remain about dampening the fast-growing export trade that
provides tens of millions of factory jobs to peasants streaming toward China's
cities. There are worries about China's troubled financial system, which is
choked with $500 billion in bad loans, according to private estimates. A dip in
China's exports would likely diminish deposits.
But in recent months, China's leaders have seen concerns about exports
eclipsed by fresh worry about an excessive surge of investment. Beijing has been
snuffing out new ventures in the fastest-growing sectors of the economy such as
auto-making and real estate, worried that a boom will produce inflation for
commodities such as cement and steel, and then yield more factories and office
parks than even China can use, sending prices plummeting. A crash could leave
China's banks reeling.
According to two senior economists who advise the central government, China's
leaders view booming exports and the resulting pile of foreign exchange
reserves, now nearly $1 trillion, as added fuel for unwanted bank lending that
is exacerbating the pace of investment. Many Chinese leaders have come to see a
faster appreciation of the currency as a useful tool in the effort to slow
investment and stave off trouble.
"A consensus among policymakers has emerged," said He Fan, an economist at
the Chinese Academy of Social Sciences in Beijing, which is affiliated with the
State Council, the equivalent of the cabinet. "More and more people now agree
that China needs a more flexible exchange rate."
But even as China's leaders have come to see a moderate appreciation of the
currency as being in the national interest, debate continues over the pace. The
central bank pushes for a more aggressive timetable. The Ministry of Commerce,
representing exporters, lobbies for little change. The State Council must
decide.
Since China announced in July 2005 that it would allow the renminbi to float
a little more freely, it has gained only about 4 percent. Analysts expect a
gradual appreciation of another 3 to 5 percent annually during the next year,
not enough to have any real impact on China's exports or its trade surplus with
the United States.
Now, this problem belongs to Paulson, who landed in the lakefront city of
Hangzhou Tuesday, where he planned to meet officials in one of China's booming
provinces, Zhejiang. He is expected in Beijing on Wednesday, for three days of
meetings highlighted by a talk with China's President, Hu Jintao.
Chinese here say Paulson is a familiar and comforting figure to his Chinese
counterparts from his days at Goldman. But while the name on his business card
is the same, the corporate logo has changed.
"You should not underestimate that I'm wearing a different hat," Paulson
said. "This is a very different job."
