“Financial sector reforms are critical to China’s continued growth -- and that growth in turn represents tremendous opportunity for American companies and workers,” Geithner said in a speech in San Francisco today. “Financial reform in China will help reduce one of the main advantages China’s state-owned enterprises have in competing with U.S. companies.”

Geithner, 50, was speaking ahead of his trip to China next week to meet with officials of the world’s second-largest economy. The U.S. will raise longstanding issues from the value of China’s currency to intellectual property protection.

Geithner said the U.S. has made “significant progress” on its objectives in China, including almost doubling exports of U.S. goods since early 2009. He praised China for actions such as committing to improving protection and enforcement of U.S. intellectual property rights.

China also has opened up to foreign industries including auto-liability insurance and bond underwriting, he said.

“Despite this important progress, we have unfinished business and new challenges ahead,” said Geithner, who has studied Chinese and lived in China.

‘Save Excessively’

“China’s financial system is still dominated by large state-owned banks, who favor lending to large state enterprises, with comprehensive controls on deposit interest rates,” Geithner said. That system limits the returns of consumers to below inflation, “forcing them to save excessively” and restricting consumption, he said.

“Raising the ceiling on deposit rates will also allow Chinese households to earn a higher return on their savings, both increasing their income and reducing their need to save, thus increasing their ability to consume goods and services, including from the United States,” Geithner said at the Commonwealth Club of California.

Geithner also said that while he welcomes China’s moves to make the currency more flexible, “the process of correcting the misalignment of the exchange rate remains incomplete, and the Chinese currency needs to appreciate further against the dollar and the other major currencies.”

China said April 14 it will increase the yuan’s trading band to 1 percent from 0.5 percent, the first widening since 2007.

Geithner also said China’s state-owned enterprises “still compete with a range of unfair advantages in the Chinese and global markets. They have privileged access to cheap land, resources and credit.” Putting resources into the state companies “while many of China’s most dynamic private firms are starved for credit, ultimately hurts China’s economy.”

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

http://www.bloomberg.com/news/2012-04-26/geithner-urges-china-to-loosen-hold-on-finance-system.html

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