American manufacturers contend that China's undervalued currency, the yuan, gives Chinese companies an unfair edge and is a key reason for the record trade gap between the two countries. A cheaper yuan makes Chinese goods less expensive for American consumers and U.S. products more expensive in China.
Paulson also said he was not concerned that China, now the largest foreign holder of U.S. government bonds, will start selling that debt to try to lower its level of dollar-denominated investments.
Answering questions after a speech on China, Paulson said the Chinese had been "very responsible partners and stakeholders and have continued to stand by us and stand by our debt."
The Treasury Department announced last month that China has surpassed Japan to become the largest foreign holder of U.S. Treasury securities - owning nearly $1 of every $10 in U.S. public debt.
Paulson's remarks came before his departure for the fifth round of high-level talks known as the Strategic Economic Dialogue, to take place Thursday and Friday in Beijing. The discussions will cover a range of issues, from China's currency to expanding a 10-year plan for a cooperative effort on energy and pollution control in the two countries.
Paulson praised the Chinese for allowing their currency to rise in value by more than 20 percent against the dollar since July 2005. But he said it was critical that the currency reforms be allowed to continue. The U.S. trade deficit with China widened in October to $27.8 billion. It was the largest monthly trade gap ever recorded with a single country.
Frank Vargo, a vice president of the National Association of Manufacturers, said his group is upset that the movement toward a stronger yuan relative to the dollar has stalled as the Chinese respond to pressure from their own manufacturers. Chinese manufacturers are facing declining export sales in the midst of the global slowdown.
"We are quite distressed about the movement of the yuan. It has been flat for a number of months, and now it is going the wrong way," Vargo said.
Though the yuan has risen 20 percent against the dollar since July 2005, the Bush administration has complained that the revaluation has not occurred quickly enough or gone far enough.
Chinese officials insist they are moving as fast as their economy allows. But as global demand has slowed, conditions have become more uncertain.
In trading Tuesday, the Chinese yuan fell to its lowest against the U.S. dollar in more than five months. That raised fears that the Chinese may let their currency weaken against the dollar in the current global slowdown as a way to support their own manufacturers. The drop Tuesday followed a record one-day decline against the dollar Monday.
Paulson did not specifically mention recent movements in the yuan. But he said it was important China not falter in its push to reform its currency, and to rely more on domestic demand than on exports to support Chinese economic growth.
"Making this shift will take bold leadership and decisive structural reforms to boost demand among households," Paulson said in a speech to the Word Affairs Council of Washington. "As I have said in the past, continued reform of China's exchange-rate policies is an integral part of this broader reform process."
In his remarks, Paulson said another major topic for this week's talks will be energy use and the environment. The U.S. hopes to sign an agreement for an environmental partnership between the town of , which was nearly destroyed by a tornado in May 2007, and a town in China's Sichuan province that suffered massive damage from an earthquake in May.
The goal of the partnership, Paulson said, would be to encourage the rebuilding of both towns in environmentally sustainable ways.
In the leadup to the talks, which will include secretaries of Cabinet agencies from Agriculture to Labor, there was little expectation for breakthroughs in such key areas as currency rates or U.S. efforts to get the Chinese to allow more American financial firms to set up operations in China.
The strategic economic talks with China, which began two years ago, have been one of Paulson's key initiatives. High-level delegations from the two countries have met every six months for discussions on economic issues.
Paulson insisted in his comments that the talks have worked at bridging differences between the two countries. Still, they have failed to yield the major successes he had expected when they began in 2006.
Paulson, however, is hopeful that the new administration will continue the dialogue. He has discussed the issue with Treasury Secretary-designate Timothy Geithner, Paulson's aides said.
President-elect Barack Obama has not said whether he favors continuing the current format for discussions. But in a Sept. 15 letter discussing U.S.-China relations, Obama said he believed "high-level dialogue among economic leaders in both countries" was important to achieve success on issues that divide the two nations.
Chinese officials have said they expect the dialogue to continue in an Obama administration.