(AP)
Updated: 2007-08-02 19:00

Paulson, a former Goldman Sachs chief executive, says Beijing's currency policies are less significant than barriers to foreign competition in its financial industries and other structural factors in driving the trade surplus.

But critics have focused on the yuan, accusing China of keeping it undervalued by up to 40 percent. They say that gives Chinese exporters an unfair price advantage and widens its yawning trade gap. Last year, the US trade deficit with China reached a record $235 billion.

Chinese leaders say they plan eventually to let the yuan trade freely on world markets. But they say acting too abruptly will hurt China's frail banks and cause financial turmoil.

China revalued the yuan by 2.1 percent against the dollar in July 2005 and has allowed it to rise by about 7.2 percent since then. The rate of increase has speeded up in recent months, but analysts expect Beijing to restrain the yuan's rise to about 5 percent annually over the next few years - far less than critics want.

The Senate also is considering a second bill aimed at Beijing that would require Treasury to identify and punish currency manipulators.

Paulson rejected such measures, saying they would harm Washington's efforts to encourage Beijing to reform.

"Legislation would be counterproductive and would undermine what we're trying to do here," he said.

Paulson has pleaded with Congress for time to let the dialogue work. But China's supercharged growth is fueling arguments that it can afford to move faster.

China's economy expanded 11.9 percent last quarter - the fastest quarterly growth in 12 years - and the trade surplus jumped by 85 percent in June to $26.9 billion.

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