Paulson to make his currency case to China's Hu

Paulson and other top Bush aides are trying to head off several trade-focused bills that are aimed at ratcheting up pressure on Beijing to allow the yuan to appreciate more quickly to ease trade imbalances.

"At a time when U.S. exports are growing globally, such legislation also exposes the United States to the risk of 'mirror legislation' abroad and could trigger a global cycle of protectionist legislation," Paulson, U.S. Trade Representative Susan Schwab and Commerce Secretary Carlos Gutierrez said in a joint letter to senior senators.

The letter was released after Paulson met Chinese Vice Premier Wu Yi on Tuesday and urged her to make faster and bolder currency and economic reforms.

After a closed-door meeting, Wu lectured Paulson in front of reporters on China's economic challenges, saying that the country was still too poor to pose an economic threat to anyone.

"China still has 23 million people living in poverty. China's very goal in its development is so that its 1.3 billion people can eat their fill, dress warmly and live well," Wu said. "Who could we threaten? We don't have the ability. China does not and will never threaten anyone."

Her comments went to the heart of Beijing's refusal to permit a more rapid rise in the yuan: officials fear a stronger currency could not only destroy millions of export-orientated jobs but would also make it tough for peasants who make up over 60 percent of its population to compete against cheaper food imports.

On the U.S. side, many lawmakers and manufacturing firms feel the yuan is deliberately undervalued, keeping Chinese goods cheap in U.S. stores and driving American competitors out of business.

MEETING "CONSTRUCTIVE"

In an interview with China's Xinhua news agency on Tuesday, Paulson said the meeting with Wu was "very constructive" and sought to downplay the trade tensions.

"I will not say anything other than the Treasury's view that legislation is not the proper way to proceed and deal with the currency issue," Paulson told Xinhua.

"I believe it is much more productive to have bilateral talks and engagement."

Wu is Paulson's counterpart in a twice-yearly "strategic economic dialogue" (SED) that Paulson has instituted to try to persuade China that difficult reforms are in its own interest.

"Both sides agreed the SED is important and that we need to work and achieve positive outcomes for both countries," he said.

Paulson said the two sides had drafted "an ambitious work schedule" that will focus on a smaller number of issues deemed the most important. He did not identify the topics.

Paulson would meet Hu on Wednesday afternoon and also planned a second round of talks with Wu, Treasury officials said.

He will also have meetings with the China Securities Regulatory Commission, the National Development and Reform Commission, the main planning agency, and the State Forestry Administration.

He is expected to brief reporters before flying back to Washington on Wednesday evening.