SHANGHAI, China -- China's path to prosperity lies in opening up its financial sector, US Treasury Secretary Henry Paulson 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," Paulson said in a speech at the Shanghai Futures Exchange, where only a handful of 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," 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 -- 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 investors and wider use of a variety of financial products including financial futures and corporate bonds, Paulson said.
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 are in many ways less open than those of other, smaller countries in Asia.
"Nations that want robust, sustainable, harmonious growth do not impose caps," 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."
Paulson made little mention of China's currency controls, an issue that along with product piracy concerns has long dominated the US trade dialogue with Beijing. But he had been expected to raise the topic during a meeting Wednesday in Beijing with Chinese Vice Premier Wu Yi.
Those talks come amid mounting pressure on the Bush administration from the Democratic-controlled Congress to address the US trade deficit with China, which hit a record $232.5 billion last year.
Loosening currency controls that keep the yuan from rising more quickly against the dollar would give China wider monetary policy options, said Paulson. As treasury secretary he has championed Washington's stance that such limits make Chinese goods relatively cheap, adding to the trade imbalance.
There was no immediate reaction from Paulson's mostly Chinese audience of businessmen and officials. Paulson did not take questions and went immediately into a closed-door meeting with Chinese media after the speech.
China's leaders acknowledge the shortcomings of their developing markets.
Just a week ago, Premier 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 financial systems need more time to develop.
"I would say that it is impossible now for China to completely catch up with the US's calendar," said Yin Xiangshuo, a professor at the Institute of World Economy at Shanghai's Fudan University.
"China can't move too quickly toward transparent, liquid, stable markets as the US expects, because that would cause chaos given the complex situation here," Yin said.
With a Communist Party congress looming in the fall, leaders are focusing on issues such as education, health, and housing rather than placating Washington.
"It certainly is possible China could open even further, but I would be surprised if they did so ahead of next fall's Party Congress," said Nicholas Lardy, a China expert at the Peterson Institute for International Economics, a Washington think tank.
"Even if I am wrong and they do move sooner to open, I don't think it will mitigate problems on the trade and exchange rate front," he said.