Sec'y Paulson at the G-7-- Forging an alliance with China

September 20, 2006

U.S. Treasury Secretary Henry Paulson stated the new U.S. position towards China during last week's trip to the G-7 Finance Minsters meeting in Singapore. While he continues to encourage China to allow its currency to rise against the dollar, he strongly urges it to allow more foreign investment, particularly in the financial services sector, and to develop its domestic demand in an effort to rely less on exports.

What It Means:
Secretary Paulson’s biggest challenge is reducing $800 billion U.S. current account deficit without inciting a dollar panic. Allowing China’s currency to slowly rise will allow the dollar to slowly decline as well as the value of the deficit with it. Since the Chinese own a large piece of the deficit, Paulson must retain good relations with them so that they don’t sell off quickly, and spark a dollar crash.

On the other hand, he must fend off protectionist forces within Congress who wish to impose stiff trade penalties on China, whom they blame for a loss of U.S. jobs.

Paulson is obviously the Administration’s point man for China, and his experience as CEO of Goldman Sachs, and his 70 prior trips to China, prepare him well for working with China to open their financial services sector. If he successfully walks the tightrope over the next two years, he will have lowered the current account deficit, increased global trade opportunities, and forged a working partnership with the world’s other major world power.

Action Steps:
Protect your portfolio against a certain, though gradual, dollar decline by making sure you have a good portion of U.S. large cap, especially financial services, and emerging markets funds.

Source: U.S. Treasury Dept. web site