Paulson Says Time of `Essence' in China's Shift Toward Markets

U.S. Treasury Secretary Henry Paulson challenged China to speed its drive toward unfettered capital markets, as delay risks trillions of dollars in lost potential and higher volatility in the nation's stocks.

``An open, competitive and liberalized financial market can effectively allocate scarcer resources in a manner that promotes stability and prosperity far better than government intervention,'' Paulson said in the text of a speech today at the Shanghai Futures Exchange. ``Time is of the essence.''

Paulson said China's economic development is ``increasingly unbalanced'' between regions, households and industries and a freer and more developed financial system would do a better job of allocating capital. The stock market's reliance on small, ``retail'' investors makes it more volatile, he said after last week's slump in China's stocks, the worst in a decade.

In a speech that dissects and critiques China's financial industry, Paulson issued recommendations from allowing limited- liability corporations and freeing controls on interest rates to accelerating sales of state-owned banks and reducing control of the exchange rate.

Paulson, who took over at the Treasury in July, now has made three trips to China, emphasizing that a stronger financial industry is necessary to allow the yuan to trade freely and to stoke the domestic demand that would allow the country to end its reliance on exports.

The Treasury chief warned China that ``some industries that seek protection from competition will grow more politically powerful as they grow more economically powerful.'' China's rising role in the world means increased responsibility, he said.