- The Washington Times - Thursday, March 8, 2007

SHANGHAI (AP) — China’s path to prosperity lies in opening up its financial sector, U.S. Treasury Secretary Henry M. Paulson Jr. said yesterday in a speech urging the country’s business leaders to embrace Wall Street-style capital markets.

“While China’s people work every bit as hard — if not harder — than people in other economies, they are not yet as well off,” Mr. Paulson said in a speech at the Shanghai Futures Exchange, where a few commodities are traded by local brokers.

“People in many other parts of the world have more choices of where and how to save and routinely earn a much better return,” Mr. Paulson said of the limited investment options open to Chinese citizens.

The worldwide jolt to financial markets last week triggered by a 9 percent tumble in Shanghai shares reflected China’s growing sway in international financial markets — as well as rising volatility in markets bloated with funds chasing too few investment opportunities.

Such volatility could be blunted by greater openness to international institutional investors and wider use of a variety of financial products including financial futures and corporate bonds, Mr. Paulson said.

“China’s markets lack these important elements,” he said. “Without a meaningful institutional investor base, the market relies too much on retail investors. The result can be a more speculative environment and more volatile equity market.”

Mr. Paulson, a former head of investment powerhouse Goldman Sachs, chastised China for capping foreign investment in local banks, securities firms, insurers and other industries, saying its markets in many ways are less open than those of other, smaller countries in Asia.

“Nations that want robust, sustainable, harmonious growth do not impose caps,” Mr. Paulson said. “China is a large and powerful country, and you should not limit your own potential by restricting your access to world-class financial expertise that can enhance your capital markets.”

He made little mention of China’s currency controls.

No official word was issued on the outcome of those talks, held in preparation for a second round of “Strategic Economic Dialogue” to be held in Washington in May.

The Democrat-controlled Congress is pressuring the Bush administration to address the U.S. trade deficit with China, which hit a record $232.5 billion last year.

Loosening currency controls that keep the yuan from rising more quickly in value against the dollar would give China wider monetary policy options, Mr. Paulson said.

China’s leaders acknowledge the shortcomings of their developing financial markets. Just a week ago, Prime Minister Wen Jiabao rued the “many problems” needed to build up the industry. But they have balked at calls for faster reforms, saying the country’s developing financial systems need more time to adapt.

Also yesterday, Chinese lawmakers introduced hotly debated legislation that marks one of the most explicit attempts to legally protect personal wealth.

Explaining the proposed private property law to the national legislature, Vice Chairman Wang Zhaoguo, a member of the Communist Party’s powerful Politburo, said the country’s economic and social changes made the law necessary.

The 40-page bill with 247 articles strikes a balance between state and private interests, laying out definitions of both and also clearly defining private wealth including income, houses, investments and other personal assets.

At the same time, the bill repeatedly attaches the modifier “lawful” to property — a nod to criticisms by conservatives that it would accelerate a decadelong campaign to privatize state businesses that they say has enriched officials and entrepreneurs at the expense of workers and farmers.

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