Earlier today, I attended a speech and Q&A held at the Heritage Foundation featuring Treasury Secretary Henry Paulson, who focused on ongoing economic talks between the U.S. and China. Much of his discussion revolved around currency valuation and intellectual property rights, with Paulson making the argument that "we agree on principles" with the Chinese, but they are "proponents of gradualism" while the U.S. wants to see China make changes more rapidly. "A big part of our discussion really centers around timing," he said.
Paulson touted some progress the U.S. has made with China, including a commercial air agreement that will lead to more flights between the two countries, an increase in quotas on American businesses, and a removal of caps on investment.
One of the major causes of the widening trade deficit between the U.S. and China (other than the undervalued Yuan) is the relatively high savings rate of the Chinese people, and relatively low rate of consumption. The problem, Paulson said, is that because China has a limited financial services sector, the Chinese put their money in banks for virtually no interest (actually negative interest if you factor in inflation). If more financial isntruments were available, it would help reduce "precautionary savings" and increase consumption.
Paulson said when U.S. negotiators make the case to their Chinese counterparts to allow the nation's currency to reflect its actual value, they tell the Chinese, "It's very difficult to have a market economy without market price signals." He said the Chinese understand this in principle, but feel they need to maintain more control over their currency.
Asked about intellectual property, Paulson said, "I very much believe that they take it seriously" and that they were putting the legal infrastructure in place to deal with the problem. But again, it's a matter of timing.
Overall, I thought Paulson's presentation was worthwhile, but I remain much more skeptical about Chinese intentions. What he calls gradualism, I call intransigence.