Paulson Promotes Flexible Yuan Policy for China

By Hu Shuli, Wang Shuo and Li Xin of Caixin

The former U.S. treasury chief, in an exclusive interview, said further yuan rate reform would help China’s economy as it continues contributing to post-crisis growth.

On a visit to Beijing, former U.S. treasury secretary Henry “Hank” Paulson encouraged China to build more flexibility into continuing yuan exchange rate reforms.

Paulson’s comments April 5 came two days after his successor, U.S. Treasury Secretary Tim Geithner, decided to delay a scheduled April 15 decision on whether to slap a currency manipulator label on China.

A more flexible yuan policy would help China with “allocating capital, creating new industries, jobs and growth,” Paulson said in an exclusive interview with Caixin in Beijing. “For prosperity to continue to spread, I think it’s very important for the Chinese people to have products and investment opportunities for their savings.”

Yet Paulson, who repeatedly declined to tag China a currency manipulator while serving under former President George Bush, warned that slow-paced reform could pose a risk.

Although “China is charting its own path of reform,” he said, “there is bigger risk of not going ahead or going too slowly.”

The former treasury chief, who helped steer the U.S. economy through the outbreak of the global financial crisis in 2008, refused to guess the next step for Geithner and President Barack Obama’s administration on the critical exchange rate issue, which could affect bilateral trade relations.

“I’m not going to speculate” on how the currency manipulator decision might play out, he said. “I’m not a treasury secretary anymore.”

It was Paulson’s first trip to China since a December 2008 summit between Chinese and U.S. officials, which was part of a high-level economic talks process he began in 2006. He planned to attend the annual Boao Forum for Asia in China’s Hainan Province later in the week.

Paulson said U.S. officials appreciate steps taken by China to support the global economy in the wake of the financial crisis, as well as the influence of China’s robust growth.

Speaking on China’s domestic economy, Paulson said he expects the nation’s inflation risks to be manageable. But on the home front, he’s worried how entitlements are affecting the U.S. government deficit.

“In the next couple of years, I think there is very low likelihood to have inflation in the U.S. economy operating so far below capacity,” said Paulson. “The money that has been invested to stabilize the financial system will come back over a five-year period.”

“I think the more serious problem is the longer term, fiscal deficit embedded in entitlement programs,” he said. “It’s a generational issue. The longer we wait, the less flexibility we will have.”

An experienced China hand, Paulson has visited the country more than 70 times, first as an investment banker for Goldman Sachs and later as treasury secretary. This week’s stop included a promotion for his recently published financial crisis memoir On the Brink, which was released in the Chinese language April 5. 

Reflecting on his experience during the near-meltdown of the global economy, Paulson said he and other financial regulators were “working with imperfect authorities and tools in facing some unprecedented challenges.” But he said he thinks “the major decisions we made were the right ones.”

About Caixin: Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and TV/video programs