Paulson stands up for strategic talks with China

Hank Paulson, US Treasury secretary, on Tuesday defended his strategic economic dialogue with China against charges it has achieved little.

Mr Paulson won support from James Baker, a former Treasury chief and secretary of state, who called for intensive engagement to minimise the risk of confrontation with China.

Mr Paulson told the Heritage Foundation the "task of the SED is long-term, and that is difficult in a town where short-termism is the order of the day".

Challenging reports that highlighted limited progress at last month's summit in Washington, he said: "This . . . misses the point." To get results "we must build relationships and take smaller, deliberate steps forward to create momentum for greater change".

The third meeting of the dialogue will be held in December.

Mr Paulson said the growth of China's foreign exchange reserves and trade surplus made a change to China's exchange rate more urgent than ever. The US trade deficit with China widened 15 per cent to a record $232.5bn in 2006.

"While currency reform is not going to eliminate our trade deficit, a market-determined exchange rate that reflects the underlying fundamentals of the Chinese economy is one component of the actions needed to address imbalances.''

Anger at China's currency policies has prompted members of Congress to introduce about six pieces of legislation aimed at China.

Mr Paulson said China could help him head off protectionist legislation in Congress.

"The more progress they make to open up their markets, the easier it is for me to fight the battles I have to fight to keep our markets open,'' he said.

"I'm going to be more effective in the administration if we have more progress in China.''

In a speech to the US-China Business Council, Mr Baker called for intensive engagement.

The "fundamental truth" was that "China can no more displace the US than the US can contain China".