China on Tuesday deflected U.S. pressure for a faster rise in the yuan and bolder economic reforms by telling visiting Treasury Secretary Henry Paulson that it is still poor and poses no threat to anyone.

Paulson's visit coincides with a drive by U.S. lawmakers, frustrated by America's record trade deficit with China, to press Beijing upon pain of sanctions to allow open markets to set the yuan's value.

Vice Premier Wu Yi said at the start of her talks with Paulson that she was happy he had first visited poor Qinghai province in western China and had seen for himself the big difference with rich cities such as Beijing and Shanghai.

In making this contrast, you can understand -- who could China threaten? China still has areas as developmentally backward as Qinghai, Wu told Paulson while reporters were in the room.

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. 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.

Wu said she hoped Paulson's visit to Qinghai would enrich his testimony to Congress, where anti-China sentiment runs high.

A bill passed by the U.S. Senate Finance Committee last week -- one of several measures targeting China -- would allow firms to seek anti-dumping duties against countries that have fundamentally misaligned currencies.

Media were ushered out of the room before Paulson made any remarks and he made no other public comments on Tuesday.

He expressed concern before he arrived in Beijing about the pending legislation, saying he preferred to secure currency and economic reforms through dialogue.

YUAN STRAINS

Paulson, who also met central bank governor Zhou Xiaochuan and China Banking Regulatory Commission chairman Liu Mingkang, has said he understands the motivation behind the various bills and why Americans are frustrated by the imbalance in trade with China, which has cost manufacturing jobs.

But he told reporters on Monday: I don't want China to become an increasingly big political issue in the U.S.

As well as pressing for faster appreciation of the yuan, Paulson has said he will urge China to wean its red-hot economy off exports and permit greater foreign access to the country's financial services sector.

Paulson said on Monday that China President Hu Jintao will do exactly what he feels is in the best interest of China on currency policy. But he said he believes faster reform will do to more to promote security and stability in China than moving more slowly.

Paulson is scheduled to meet Hu on Wednesday.

But he is aware that China does not like to be lectured by outsiders and has instituted a high-level strategic economic dialogue to try to persuade China that politically difficult reforms are first and foremost in its own self-interest.

Wu, Paulson's counterpart in this twice-yearly forum, said the latest session in Washington in May had been very significant in promoting China-U.S. economic and trade relations and overall bilateral ties.

Paulson, who has made it a priority to strengthen economic relations with China, is on his fourth trip in just over a year as Treasury secretary. He also visited the country some 70 times when he ran investment bank Goldman Sachs.

Despite his courtship of China's leaders, the yuan remains a major irritant in relations.

The currency has risen 9 percent against the dollar in the two years since China stopped pegging it against the U.S. currency. Critics say that is far from enough.

They point to China's record stash of $1.33 trillion in foreign exchange reserves and big balance-of-payments surplus as evidence that, if market forces and not the central bank were to determine the yuan's rate, the currency would be worth much more.

But John Frisbie, president of the U.S.-China Business Council, said a revaluation would not be a magic cure because a lot of China's exports to the United States are assembled from imported components.

The exchange rate is not going to solve the deficit issue, he told reporters in Shanghai.

(Additional reporting by Chris Buckley in Beijing and Charlie Zhu in Shanghai)

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