By Paul Blustein
Washington Post Staff Writer
Thursday, September 14, 2006

Can the Bush administration's new Treasury secretary pull off a feat in China that eluded his predecessor -- and save American jobs in the process?

Henry M. Paulson Jr., leaves today on a trip to Asia that is to include his first visit to China since taking the helm in July. Hopes are high, in Congress and in the business world, that the former Wall Street titan can use his powers of persuasion to secure changes in Chinese policies that critics view as unfair.

U.S.-China economic relations is an area where Paulson seeks to make an impact, based on his long experience doing business with the Chinese when he headed the investment banking firm Goldman Sachs.

His predecessor, John W. Snow, tried and largely failed to get China to adjust the value of its currency enough to help American manufacturers. Many members of Congress, U.S. business executives and economists have long complained that the Chinese yuan is kept at an artificially low level -- about 8 per dollar -- that makes the nation's exports too cheap, to the detriment of American workers in competing industries.

The first big rollout of Paulson's message to the Chinese came yesterday in a speech he delivered amid much pomp in the Treasury's ornate Cash Room.

In substantive terms, his remarks echoed the themes that Snow used to stress. While vowing to resist protectionism, he exhorted China to embrace market-oriented policies, an approach he said was in China's interest as well as that of the United States and the global economy.

"When I visit China in coming days I will discuss these issues with the Chinese leadership, and I will use a Chinese saying indicating that it is for the good of both of our economies that they undertake these changes," he said. "I will say . . . 'We want you to succeed,' " attempting the phrase in Chinese.

Specifically, he said, Beijing must take steps to combat piracy of patented products, shift its economy away from dependence on exports and toward greater consumer spending, and open its financial system to foreign competition. As for the currency issue, he called it one of "several critical, immediate challenges" that China faces.

"Maintaining and relying on an overly rigid exchange rate and outdated administrative controls increases the risk of boom-and-bust cycles," he said. "Also to be underestimated only at China's own peril is the fact that their currency exchange rate is increasingly being viewed by their critics as a symbol of unfair competition."

None of that was a departure from Snow's arguments, Treasury officials acknowledged. But they cited one difference: The speaker was Paulson, who boasts close ties with Chinese leaders and deep knowledge of the country's financial system, not Snow, the former railroad executive reputed to have had little clout at the White House.

"You're right, we have said in the past that these reforms are in China's interest," a senior Treasury official said at a briefing for reporters. "But that may be interpreted one way when it comes from someone who is relatively unfamiliar to them. Having Hank Paulson say to them, 'These things are in your interest' carries a different level of meaning to the Chinese." The official spoke on condition of anonymity because of concern for keeping the focus on Paulson's comments.

Asked whether this meant the Chinese would be more likely to act, another senior official said: "Relationships matter, and he matters. I don't think tomorrow the situation is going to change. But to have someone of his experience and stature make the case -- it will make a difference."

The Chinese are known for brushing off demands for change from outsiders and viewing themselves as the best judges of their own interests. Few experts believe China will change its currency policy during Paulson's trip or even soon after, for fear of appearing to cave to foreign pressure. But even some of the most prominent agitators for a higher yuan said they were pleased with the Treasury chief's approach.

"I can't second-guess him. He knows everybody in China; they trust him," said Franklin J. Vargo, vice president for international economic affairs at the National Association of Manufacturers. "He has an inside track that his predecessors did not."

Rep. Charles B. Rangel (D-N.Y.), the ranking minority member on the House Ways and Means Committee, issued a laudatory press release on the speech with the headline, "Past experience leaves Paulson well-positioned for results on currency reform."

Paulson also drew encouraging words from Sen. Charles E. Schumer (D-N.Y.), who has co-sponsored legislation that would impose punitive tariffs on Chinese goods if Beijing fails to let the yuan rise significantly. The Treasury chief has maintained the department's staunch opposition to Schumer's bill. But the threat of congressional passage has helped prod the Chinese toward concessions, some analysts assert.

"When I spoke to Hank Paulson last night, we discussed how important his trip is in the fight to get China to play fair," Schumer said in a statement. "Today in his speech, he said if China does not move, it does so at its own peril. No truer words were spoken. I hope the Chinese were listening."