Paulson Urges China To Take Controls Off

SHANGHAI, March 8 -- U.S. Treasury Secretary Henry M. Paulson Jr. said China risks wasting trillions of dollars in resources and economic potential unless it rapidly opens its capital markets.

"An open, competitive and liberalized financial market can effectively allocate scarcer resources in a manner that promotes stability and prosperity far better than government intervention," Paulson said in a speech Thursday at the Shanghai Futures Exchange. "Time is of the essence."

He outlined a series of steps he said Chinese authorities should take, including freeing controls on interest rates, accelerating sales of state-owned banks and allowing the exchange rate to fluctuate more freely.

China's economic development is "increasingly unbalanced" between regions, households and industries, the secretary said; a freer and more developed financial system would do a better job of allocating capital.

A rebalancing of China's economy away from its reliance on exports would help Paulson head off what he calls a "worrisome" trend among some Republicans and Democrats in Congress to embrace protectionism. The U.S. trade deficit climbed to a record last year.

China's authorities are moving to liberalize markets. Premier Wen Jiabao this week outlined a plan to the National People's Congress that pledged to "vigorously" develop capital markets and open the financial sector to foreign competition.

"I am all for Paulson's argument that China should improve efficiency by deregulation," said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. "But it's about the timing. China's financial markets, after all, have a shorter history than the U.S. and Europe."

Paulson has made three trips to China since taking over as Treasury secretary in July. In total, he's made more than 70 trips here, mostly as chief executive of Goldman Sachs.

The Treasury chief warned China that "some industries that seek protection from competition will grow more politically powerful as they grow more economically powerful." China's rising role in the world means increased responsibility, he said.

Paulson recommended China let insurance companies and other institutional investors buy a greater variety of assets. That would diminish the clout of small retail investors and reduce volatility in China's equity market, he said. The Shanghai Composite Index plunged 8.8 percent on Feb. 27, triggering a global sell-off that erased $3.3 trillion from stocks worldwide.

"Institutional investors are the most rigorous in their analysis and innovative in developing new securities and investment strategies," Paulson said. "A broader base of institutional investors and asset managers will lead to a wider array of market strategies, reducing volatility and the risk of 'herd mentalities.' "

Shang Fulin, chairman of the China Securities Regulatory Commission, said March 7 that China might set up a second exchange for trading the stocks of start-up companies and expand corporate bond trading this year to provide more investment options.

Shanghai Futures Exchange Chairman Zhu Yuchen the same day called for more financial products including futures, options and yuan derivatives.