, March 2, 2007 Despite the recent slide in its growing market, China needs to pursue reforms to open up its economy as quickly as possible, says United States Treasury Secretary Henry Paulson. On the eve of his trip to China, Japan and South Korea, Paulson says he's more concerned about the broader Chinese economy than the tumultuous week in global stock markets.
As Paulson prepares for his third trip to China in the eight months he's been secretary, the Dow Jones Industrial Average lost more than 100 points today mdash; capping the worst week on Wall Street in more than four years.

Still, Paulson says, the U.S. economy is executing a "successful transition from a level of growth that was unsustainable to one that's quite sustainable.

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The Treasury secretary says that China's markets don't yet reflect the country's economy mdash; a situation which he says increasingly flexible currency and trade policies would improve.
And in terms of the U.S.

trade imbalance with China, Paulson notes that America's trade deficit with all of Southeast Asia is shrinking mdash; but its deficit with China is growing.
Still, as he referred to a speech he delivered yesterday, Paulson said that the United States must remain committed in its support for open markets and free trade. "Let's not trade away the benefits of the future," he says, "to deal with short-term problems.

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Melissa Block talks with Paulson. A transcript of the interview follows:
MELISSA BLOCK: Secretary Paulson, welcome to the program.
SECRETARY HENRY PAULSON: Melissa, it is great to be here.

BLOCK: We have just seen a week of major volatility on world markets. What are the lessons that you take away from this week?
PAULSON: Well, I begin by looking at the underlying economies.

And we are looking at a global economy now, and it's actually been strong now for two or three years, and it's as strong as I've seen it any time during my business career. In the U.S.

, we are in the process of making what I believe is going to be a successful transition from a level of growth which was unsustainable to one that's quite sustainable. And growth is slowing a bit. There is some weakness in the manufacturing area, some weakness in housing, but some real bright spots: The consumer is strong; exports are strong; we added about a percentage point to GDP growth; labor markets are in fine shape; low unemployment levels, adding a lot of new jobs.

So, the economy is strong.
BLOCK: Is there a lesson, though, that the world economy is a more dangerous, more volatile place than it used to be?
PAULSON: I wouldn't use those words.

What I would, you know, for at least as long as I've been looking at markets, there is volatility in markets. Markets at any one point in time don't necessarily reflect the economic fundamentals, and markets certainly don't move in a straight line one way or the other forever. So as long as you have markets, you're going to have volatility.

BLOCK: The downslide this week started with a big drop on the Chinese market. As you are heading out to Asia and to meetings in China, how worried are you about China's stock exchange being overheated, perhaps getting set up for some kind of crash?
PAULSON: Well, their capital markets are not yet very reflective of their overall economy.

Their economy is still developing. And, so the things that I will be talking about are, if you open up the competition in your capital markets, you develop a strong institutional market. There will be less volatility.

I also see the development of the Chinese capital markets as a way to help them get where they need to get with regard to their currency. They need more currency flexibility in the short term, but they need to get to the point where they have a market-determined currency, and that'll be easier to get there if they have capital markets that work. And the of course, lastly, strong capital markets will very much help the Chinese economy develop in a way in which our balance of trade improves with China.

BLOCK: There is a lot to follow up on there. Let me start with this: One of your main criticisms of China has been that it manipulates its currency, keeps the yuan artificially low so that Chinese products cost less.