By Vicki Needham - 05/09/14 06:19 PM EDT
Treasury Secretary Jack Lew said currency flexibility and the ability of U.S. firms to compete will be a focus of his trip to China next week.
Lew is heading for Beijing on Sunday with meetings set for Tuesday with Chinese government officials about a wide range of issues, including the implementation of economic reforms that would boost long-term growth.
“We want there to be a market that U.S. firms, financial firms and manufacturing firms, service firms, can compete in.”
Central to that goal is an improvement in China's exchange rate policies.
While China has made moves toward more market-determined rates, such as widening their trading band, the Chinese currency, the yuan, remains undervalued, Lew said.
“We've seen some very negative movement in the exchange rate in recent months,” he said.
“One of the issues that I'm going to bring to them is if your policy says that the exchange rate can go up and down, you need to have market signals determining whether it's going up or down.”
He said it will be a “serious conversation, because it has to do with U.S. competitiveness in China.
Lew said it is imperative that China make the right economic policy decisions to keep growing and that includes allowing their currency to rise in value.
“I’m certainly going to encourage them to stay on a reform agenda. They need to open their markets,” he said.
“They need to have a level playing field so that their markets determine prices and so there can be competition between domestic and international goods and services.”
Treasury Department officials made similar statements in a conference call with reporters on Friday previewing the trip.
"Currency policy remains a priority for the Treasury,” one official said.
“It is important that they continue to move toward a market-determined exchange rate,” they said.
The Treasury officials said China needs to move toward a domestic consumption-driven economy and that can be bolstered with currency policy changes.
“There’s still substantial adjustments to take place," one official said about the value of the yuan.
In a semi-annual report sent to Congress in April, the Obama administration stopped short of deeming China a currency manipulator but expressed serious concerns about the value of the yuan and the lack of policies in place to strengthen it.
Lawmakers and some business groups have argued that the weak yuan is the primary reason for the $20 billion trade deficit between the two countries and is giving China an unfair advantage in the global market, making their products cheaper.
Lew's meeting is expected to follow up on the bilateral meetings between President Obama and Chinese Prime Minister Xi Jinping in March, as well as provide a preparation session for the next U.S.-China Strategic Economic Dialogue in Beijing this year.
Chinese growth has slowed to about 7.4 percent from 10 and could stall further without more government intervention.
The challenge they face is reforming their economy or short-term growth, Lew said.
“They obviously have to worry about their short-term economic situation. We all have to balance short- and long-term decisions we make,” he said.
"The Chinese government needs to be serious about boosting their growth, too."
Lew argues that China has the tools in place to deal with their economic challenges.
“So I think that the question is whether they manage some of the things going on in their economy, whether it's some price fluctuations in housing or whether it's shadow banking or state and local their local provincial finance,” he said.
They have the capacity to deal with it. They need to deal with it.”
Among those issues China needs to focus on is job creation, Lew said.
"I think that if they're staying on a path where they're creating jobs, they have more license to do the reforms that they need to do, which is what is needed for China to grow and for it to be a level playing field so that U.S. companies can compete in China."