U.S. won't say China 'manipulates' currency

LONG BEACH, Calif. -- The U.S. Treasury Department warned Wednesday "the substantial undervaluation" of China's currency poses a risk to the world economy. However, it again said China was not manipulating its currency for trade gains.

U.S. Treasury Secretary Henry Paulson, attending an event in Long Beach, California, with the state's governor, Arnold Schwarzenegger, said that if his department labeled China a currency manipulator, the remedy required by the law is to begin consultations with the Chinese government -- something he said he's been doing since he joined government in July 2006.

"We have been making the case as strongly as we know how," Paulson said. "The Chinese government should be moving to appreciate their currency more rapidly. It needs to recognize economic fundamentals."

While in California, Paulson also urged Congress to resist "protectionist" sentiment and "quickly" approve free trade agreements with South Korea, Colombia and Panama.

Paulson said it is "becoming fashionable to recant economic principles" such as the benefits of the free movement of goods.

"Trust me," Paulson said. "Isolationism doesn't work."

The Treasury chief repeated his call for China to allow its currency to appreciate faster. China, the world's fastest growing major economy, has become a "symbol" of the concern about globalization, Paulson said.

At a news conference after the speech, Paulson addressed the Treasury's latest report on global currency policies. The semiannual study has been a lightning rod for critics such as Senator Charles Schumer, the New York Democrat who argues the Bush administration should label China a "manipulator" of its currency to increase pressure on the country to change its policy.

"China should significantly accelerate the appreciation of the (currency's) exchange rate in order to minimize the risks that are being created for China itself as well as the world economy, of which China is an increasingly critical part," the report says.

The report also said it was vital the International Monetary Fund vigorously implement the new exchange rate surveillance framework it announced in June "to maintain its relevance in the international financial system."

Many experts believe a hard-hitting IMF report would help prod China to let its currency rise more quickly in value. Although Beijing opposed the changes announced in June, the IMF has denied they were aimed at any one country.

Paulson, who visited cities in Florida, Missouri and California this week to discuss the government's plan to avoid a wave of foreclosures, said the collapse of the housing market will be a drag on the U.S. economy for "some time." Still, the overall economy remains "healthy," getting a lift from exports, he said.