Ace investment banker from the Wall Street Henry M. Paulson has visited China in his capacity as the US treasury secretary. During his recent trip, he talked a lot about the reform in banking sector and confused differences in the basic concepts of the reform and opening-up. In his speech at Shanghai futures exchange, he said China needs to quicken reforms of financial sector, and the faster the reforms the better. And greater risks will be incurred if the reforms are postponed. In dealing with challenges facing China's banking sector, he also set forth three proposals, namely, "allowing Chinese banks to sell controlling stakes to foreign investors, increasing QFII quotas and loosening restrictions on the participation of foreign banks in the domestic capital market and health insurance sector.

People here cannot but ask what his real intention is?

Obviously, as the treasury secretary of the United States, he came to prepare for the Second Sino-US Strategic Dialogues to be held in Washington D.C. in May. The First Sino-US strategic Dialogue was held in Beijing in September 2006. As is known to all that the most vital and crucial topics at the Sino-US strategic dialogue are none other than "disequilibrium of Sino-US trade" and "Renminbi"(RMB) exchange rate". But during his recent trip to China, however, Paulson deliberately and intentionally shunned or avoided these two sensitive issues and instead talked at length and most emphatically about the reform and opening of its financial sector, asserting that "it would be better if it is done faster."

Paulson is worthy of a qualified, well-trained and astute investment banker, and his speech is demagogic and imbued with emotions. He noted that China is on a right track and further reform lies ahead, and the time is pressing so the opportunity should not be let to go by. The three reform-related proposals appear very sincere and friendly. But is this really the case?

First, as the US treasury secretary, Paulson surely did not forget the mission of his recent trip to China. Second, it would be unwise and unworkable for him to talk bluntly and straight-forwardly about the disequilibrium of Sino-US trade and RMB exchange rate, as the people of China have long had a tradition of never submitting themselves to the carping of foreigners. Third, as an old hand with the global capital market, Paulson holds that once China opens wide the door of its banking industry, relevant knotty financial problems can be readily dealt with. This is because, as a matter of fact, the United States is the top global financier and its dollar is a global currency. At present, China's entire holding of one trillion US dollar reserve represents the equivalent of only two days' trading in the US bond market, and that is really insignificant.

Furthermore, once China's financial market is wide open, the RMB exchange rate will be determined by the market, and what is more, some US financial institutions enjoy unmatchable advantages in this respect. Therefore, Paulson knows more clearly than anyone else that the current Sino-US dialogue should be focused more on how to spur the further opening of China's financial market.

Nevertheless, when a reporter asked him on the apparent "Paulson effect", that is to say, there is often a new high with the exchange rate of RMB to the US dollar around his trip to China, he could not help holding back his laughter, saying that he should then come to visit China every week.

While notifying a speedy progress in China's financial sector, he also spoke highly of Chinese leaders who once work out a decision on any given plan, the efficiency for its implementation is very high, with an intrinsic implication and innuendo involved.

Paulson, nevertheless, here made a conceptual error by equating China's financial reform with the country's opening to the outside world. Reform of cause contains contents of the "opening-up" but it can never be equated to the "opening-up". China's financial reform is aimed to renovate or renew various regulations, further improve its mechanism and proceed to raise the efficiency of the country's setup under the precondition of ensuring the national financial stability. And there would surely be extremely grave hidden risks by equating the reform solely to the opening of the financial sector to the outside world.

General speaking, it often tends to be correct when people say faster China's financial reform the better the results but, as far as Paulson's specific proposals are concerned, if the reform is carried out faster, it would serve the United States better still. Conventional practice has shown that to a new emerging nation like China during its transitional period, it should be very careful and prudent to open its capital account due to the weak and fragile nature of its financial setup. In the course of opening China's banking sector, it is vital to keep firmly to the correct leadership and correct orientation and, otherwise, there might be immense risks that would result in. Latin American and Southeast Asian countries have already paid heavy prices in this regard, and China should learn from their lessons, which were tragic and extremely painful.

"It is imperative to step up and further improve the leadership of the Party and government over the financial work," says Premier Wen Jiabao in an article carried in the recent issue of the Seeking Truth (or Qiu Shi) Journal. Indeed, the leadership over financial sector pertains to the independence and integrity of a sovereign nation, and it is too important to be tackled casually. China's reform in the banking sector should first of all be based on the country's own needs or requirements. Hence, the logic that "the faster the (financial) reform, the better its outcome" may not be entirely correct.

By People's Daily Online and its author Xu Hongcai, director general of the securities & Futures Research Center with the prestigious Capital University of Economics and Business in Beijing