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WikiLeaks: China, Paulson at odds over threat from subprime crisis

CHARLOTTE, N.C. — On the eve of the U.S. financial crisis, Bush administration Treasury Secretary Henry Paulson was urging more financial innovation on his Chinese counterparts, even as the Chinese were calling for stricter regulation, U.S. diplomatic memos show.

At a December 2007 meeting in Beijing, amid growing turbulence in U.S. financial markets, Chinese officials expressed concern that the U.S. subprime mortgage crisis would harm the Chinese economy, according to a cable obtained by McClatchy through WikiLeaks.

China Banking Regulatory Commission Chair Liu Mingkang also urged the U.S. to prevent future crises through enhanced information-sharing and strengthened supervision of financial institutions.

Paulson "underscored U.S efforts to address the subprime crisis and assured his counterparts that the U.S. economy would continue to serve as an engine for growth," according to the cable.

In closing the discussion, part of the U.S.-China Strategic Economic Dialogue, the treasury secretary encouraged China to move forward quickly with economic reforms.

"If regulation had preceded innovation in the United States , it would have had a negative impact on the development of the U.S. economy," Paulson stressed, according to the cable.

At a meeting a day earlier, Paulson and Shang Fulin, chairman of the China Securities Regulatory Commission, used a basketball analogy to debate the opening of the Chinese financial sector to foreign investors.

"Shang said that domestic financial services firms are like high school athletes, whereas American firms are NBA players," the cable said. "Though he agrees that it would be ideal to invite more NBA players to join the team, detractors say the highly skilled NBA players would relegate the high school students to the bench."

That's why China 's financial services sector should be opened gradually to help Chinese firms build their capacity, Shang explained.

Paulson stuck with the analogy in his response, saying foreign firms would hire Chinese staff, developing NBA-level Chinese players, creating more jobs and benefiting the entire country, according to the cable.

"The Chinese government would also set the rules and determine when there was a foul," Paulson explained, according to the cable.

(Rothacker reports for The Charlotte Observer.)

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