US Treasury Secretary Henry Paulson delivers a speech to business leaders at Shanghai Futures Exchange today in Shanghai Mar 8, 2007. In the speech, he urged China to move faster in opening its financial markets for the sake of its economic growth and stability in the long run. [Shanghai Daily]

"Well-developed financial markets are a necessary precondition for China's development," Paulson said in a speech at the Shanghai Futures Exchange during a stop in his four-day Asian tour which ends today.

"The risks for China are greater in moving too slowly than in moving too quickly toward transparent, liquid and stable capital markets."

Financial sector development is the key to China's transition into an economy that is less reliant on industrial activity, producing high value-added products and reducing the intensity of natural resource consumption, Paulson said.

Related readings:  Paulson warms up for Sino-US dialogue  Wu Yi meets Paulson in Beijing  Paulson: US trade barriers 'a worrisome trend'  Paulson: China should not be made an enemy

"China's economy depends heavily on low-cost manufacturing goods, mainly for export,"' said Paulson. "Long-term economic strength requires a diverse economy, with high-value-added manufacturing and a provision of services, including financial services."

Paulson's Asian tour also came on the heels of a sharp correction in the Chinese mainland stocks last week, which were believed to have triggered a sell-off across the emerging markets.

The US Treasury Secretary said yesterday that a "deep, liquid and efficient" capital market is essential to China's long-term prosperity.

Reforms will include bolstering institutional participation, imposing sound accounting standards and corporate governance as well as setting up a meaningful disclosure regime, he said.

In addition, a stronger capital market needs a larger and more accessible government bond market, a more liquid and transparent corporate bond market and a legal construct in which private equity can flourish, Paulson said.

The Secretary also urged Chinese regulators to open markets to global competition and participation, which could "improve market practices and infrastructure and enhance financial stability."

"Allowing much more foreign participation in China's financial markets would speed up reform, as well as the stability and prosperity it will bring," Paulson said. "Opening to international competition does not mean compromising your own rules or identity."

Paulson also encouraged Chinese authorities to let domestic banks sell controlling stakes to foreign investors instead of capping their ownership at 25 percent of a single lender.

The initiative "can promote China's efforts to strengthen risk management and internal controls in small and medium sized banks," he said.

(For more biz stories, please visit Industry Updates)