US chides China over currency valuation

The US raised the temperature of the debate over China's undervalued currency last night, warning that the Asian tiger must adopt a market system or risk losing its ability to control its economy.

Henry Paulson, the US Treasury Secretary said China should adopt flexible currency exchange rates.

"China faces several critical, immediate challenges," he said in an address at the Treasury.

His remarks appeared to set the stage for a key trip to China next week after weekend sessions in Singapore with other world financial leaders at the annual meetings of the International Monetary Fund and World Bank.

However, he insisted he would oppose any protectionist measures in Congress such as tariffs against Chinese-made imports.

Earlier this week figures from Beijing showed China scored a record trade surplus in August.

"We will not heed the siren songs of protectionism and isolationism," Mr Paulson said.

But he stressed Beijing needed to step up reforms.

"The first is the pressing need to put in place widely accepted, market-based tools to keep its economy from veering out of control," he said.

"A much more flexible, market-driven exchange rate along with a more nimble, self-determined monetary policy are key ingredients to stable and sustainable, non-inflationary growth."

The US as well as European governments will use the meetings of the IMF and G7 to step up pressure on China to allow its currency appreciate, in effect putting up the price if its exports.

However Beijing is likely to point to figures yesterday showing that the measures it has already putting in place have had an impact.

The central bank has raised lending rates and reserve requirements twice since late April and stepped up the pace of open market operations to drain cash from the banking system.

It said urban spending on fixed assets such as property, factories and roads in August was up 21.5 per cent from a year earlier compared with annual growth of 27.4 per cent in July.

Qiu Xiaohua, the commissioner of the National Bureau of Statistics, said the slower pace showed government tightening measures had achieved "positive results".

The IMF has unveiled plans to beef up its surveillance role to spot potential crises.

In a speech in Jakarta today Ed Balls, the Economic Secretary to the Treasury, will call on leading IMF nations to set a timetable to make the new surveillance framework fully operational.

- INDEPENDENT