(Bloomberg, Nov 28, 2006) Treasury Secretary Henry Paulson said U.S. trade ties with China have suffered from ``tension'' that must be addressed in part through greater flexibility in the Chinese currency.

Paulson is seeking to start a long-term dialogue with China that helps defuse frictions, and also to engage with members of Congress pressing for measures to reduce the record trade gap with the country. The secretary, Federal Reserve Chairman Ben S. Bernanke and other U.S. officials travel to China next month for the first session of a new biennial forum that includes several members of the Cabinet, Treasury said.

``There has been a fair amount of tension in the economic relationship,'' Paulson said in answering questions at a conference in London sponsored by the Confederation of British Industry. ``For this to be successful,'' issues such as ``greater currency flexibility'' must be addressed, he said.

China pegged the yuan to the dollar until July 2005, a practice that some U.S. legislators said left the currency artificially low, stimulating Chinese exports. The yuan has gained 5.5 percent since China ended the peg, closing at 7.84 today. The government limits the yuan from rising or falling more than 0.3 percent a day.

The trade deficit with China reached a record $23 billion in September, from $22 billion in August, the Commerce Department said Nov. 9.

Democratic Congress

Paulson may face increased pressure from Congress to coax -- or coerce -- policy changes from China after Democrats won a majority in elections on Nov. 7. Many of the winning candidates campaigned with a harder line on trade issues, especially China's exchange-rate regime, which some legislators from both parties already blamed for a record trade gap between the U.S. and China.

The number of House of Representatives lawmakers favoring tougher enforcement of trade laws will increase by 27 after this month's elections, according to Public Citizen, an activist group opposed to further trade liberalization.

``We need a much more vigorous strategy aimed at their currency,'' Democrat Sander Levin of Michigan, the probable chairman of the trade subcommittee in the House Ways and Means Committee, said in an interview on Nov. 14.

There is ``a feeling that's fairly widespread in the U.S. that the benefits of the trade between our two countries aren't being shared evenly or fairly,'' Paulson said in London today. It is in ``China's best interest'' to open up its economy, he said.

Chinese President Hu Jintao called President George W. Bush late yesterday and pledged to seek more ``balanced'' trade relations with the U.S.

Hu Calls Bush

``China is willing to work with the U.S. to make our relations stable, sustainable and healthy,'' Hu told Bush in the telephone call, the Chinese Foreign Ministry said in a statement on its Web site today. Bush called Hu, said Susan N. Stevenson, a spokeswoman for the U.S. Embassy in Beijing.

Senator Charles Schumer, a New York Democrat, and South Carolina Republican Lindsey Graham shelved a bill that would impose tariffs on China after meeting with Paulson in September.

Outgoing Senate Finance Committee Chairman Charles Grassley and ranking Democrat Max Baucus have pushed a separate bill that cuts off U.S. government loan guarantees to countries whose currencies are ``fundamentally misaligned'' with the dollar.

Biennial Talks

Paulson and Wu Yi, China's vice premier, agreed on Sept. 20 in Beijing to meet twice a year for talks on economic relations, the first such arrangement between the two countries. Paulson will bring a delegation of high-level U.S. officials, including five members of Bush's cabinet, to the first meetings, scheduled for Dec. 14 and Dec. 15 in Beijing.

``The approach is to focus on the very important long-term issues that are going to need to be managed over generations,'' Paulson said today.

Paulson said he's looking to broaden the dialogue with China to include issues beyond trade and currency. To that end, he plans to also include Energy Secretary Samuel Bodman, U.S. Environmental Protection Agency Administrator Stephen Johnson, Labor Secretary Elaine Chao, Health and Human Services Secretary Michael Leavitt, Commerce Secretary Carlos Gutierrez and U.S. Trade Representative Susan Schwab in the meetings.

Source:Bloomberg