Wednesday, August 1, 2007


BEIJING (Reuters) - U.S. Treasury Secretary Henry Paulson said on Wednesday that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades.

European and Asian stocks tumbled on Wednesday following a sharp drop in U.S. shares on Tuesday, after American Home Mortgage Investment Corp. said it may have to liquidate assets, fuelling worries over problems in the subprime mortgage market spilling over into other sectors.

The recent volatility in global stock and currency markets reflected a repricing of risk and the unwinding of excesses in U.S. mortgage and leveraged buyout financing, Paulson said.

"There's a wake-up call, and there's an adjustment to this repricing of risk, but I see the underlying economy as being very healthy," he told reporters before leaving Beijing, where he pressed top officials to let the yuan strengthen more quickly.

On the yuan, Paulson said he had told the officials that allowing it to appreciate more quickly would help both the Chinese and world economies.

"The case that I make is that the rate of appreciation so far, there is no evidence that it is hurting the Chinese economy," he said, adding that further acceleration of the yuan's strengthening would make it easier to manage the economy and hasten development of more value-added production.

"There is not a difference as to principle. They are committed to currency flexibility, to currency reform," Paulson told reporters. "They emphasized they are committed to reform, but financial stability is every bit as important."

Paulson met President Hu Jintao, Vice-Premier Wu Yi and other top officials in an effort to keep his "strategic economic dialogue" with China on track.

He said that China had agreed to move up to October from December the date by which it will lift a moratorium on the approval of new foreign-invested brokerage joint ventures.

His trip to Beijing and the impoverished western province of Qinghai came as the U.S. Congress intensified action on legislation aimed at pressuring China into allowing the yuan to appreciate more quickly to ease trade imbalances.

On Tuesday, two other top aides to President George W. Bush joined Paulson in speaking out against the bills, saying they could provoke a global trade backlash.

"At a time when U.S. exports are growing globally, such legislation also exposes the United States to the risk of 'mirror legislation' abroad and could trigger a global cycle of protectionist legislation," Paulson, U.S. Trade Representative Susan Schwab and Commerce Secretary Carlos Gutierrez said in a joint letter to senior senators.

Many U.S. lawmakers are tired of simply talking with China about the yuan, which they feel is deliberately undervalued, keeping Chinese goods cheap in U.S. stores and driving American competitors out of business.

"I appreciate the administration's ongoing efforts but the current dialogue isn't working," Sen. Charles Grassley said in a statement issued on Tuesday. "China can and should be moving more quickly to a market-based valuation of its currency. But it's not.".

Grassley, an Iowa Republican, said the dialogue should be continued, but should not be relied on solely. He also said the legislation, which would allow companies to seek anti-dumping duties against products from countries deemed to have "fundamentally misaligned" currencies, was not aimed solely at China.

During his meeting on Tuesday with Wu, Paulson received a lecture in front of reporters on China's economic challenges, that the country was too poor to ever pose an economic threat to anyone.

"China still has 23 million people living in poverty. China's very goal in its development is so that its 1.3 billion people can eat their fill, dress warmly and live well," Wu said. "Who could we threaten? We don't have the ability. China does not and will never threaten anyone."

Her comments went to the heart of Beijing's refusal to permit a more rapid rise in the yuan: officials fear a stronger currency could not only destroy millions of export-oriented jobs but would also make it tough for peasants who make up over 60 percent of its population to compete against cheaper food imports.

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