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Paulson Says China’s Currency ‘Doesn’t Reflect Reality’

Interviewee: Henry M. Paulson
Interviewer: Lee Hudson Teslik
June 14, 2007

A June 13 report from the U.S. Treasury Department criticized China for having a “severely unbalanced” currency, but stopped short of using the term “manipulation,” which implies intent to gain an edge in international trade. Frustrated by what it sees as Bush administration inaction, a bipartisan group of U.S. senators has introduced legislation calling for a tougher U.S. line against China.

In an interview with, U.S. Treasury Secretary Henry M. Paulson says U.S. policymakers will push China for more flexibility in taking steps in the short term that will allow its currency to appreciate, with an eye toward the currency having a market-determined valuation in the “intermediate term.” Paulson says there is a greater need for currency adjustment now than in 2005, when China took steps to reform its currency and loosen its peg to the U.S. dollar.

I wanted to start with China, which obviously is an area of particular expertise for you. During the Asian financial crises in the late 1990s, Congress and President Clinton heaped praise on China for not devaluing its currency. Now, of course, China is criticized with equal intensity for doing precisely the same thing—for not changing the value of its currency. Is this criticism fair?

China needs a currency that reflects underlying economic fundamentals. This is going to be the key to the future development of the Chinese economy, toward more balanced economic growth, and it’s going to be the key to further reform. It’s important for all of China’s trading partners and for China. Their currency does not reflect fundamental economic reality and it’s very difficult to have a country that’s such a key part of the global financial system have a currency that doesn’t reflect reality.

In the short term, how much of an adjustment is in fact possible, and how can we push for an adjustment in a way that doesn’t shock markets?

In the short term, we’re pressing for more flexibility. The currency needs to appreciate, and it needs to appreciate faster. That’s as far as we’re prepared to go. As you probably know, in July 2005 they took a step to reform their currency, to set up the trading ban they have, and they adopted the proper principle. But when you look at where their currency is trading right now, or value it on a trade-weighted basis, particularly after productivity gains, and you look at the size of their imbalances and reserves, there’s a greater need now to move their currency than there was in 2005.

They need to move it quicker, but what we’re really pressing for is for them to move forward with some of the economic reforms—opening up their capital markets to competition, developing capital markets—that will let them in the intermediate term have a market-determined currency. Then we won’t be debating how much it needs to move, we’ll know because it’s determined in the marketplace.

The Princeton economist Alan S. Blinder wrote in Foreign Affairs last year that the number of American jobs that might be lost to what he calls “offshore outsourcing” is much higher than many economists had previously thought. Blinder says thirty million to forty million American jobs are potentially offshorable. What do you make of those numbers?   

I read the article. When I talked with other economists, I couldn’t find any others, at least of the people I talked to, who support them [the numbers]. Again, I believe globalization is here to stay. This country has over the years benefited, and we can continue to benefit. I believe we can outcompete any country in the world and we don’t need to be afraid of competition.

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