Ahead of a meeting with Chinese leaders, Treasury Secretary Timothy Geithner is urging the Asian nation to let its currency strengthen and move forward with economic reforms.
The treasury secretary said Thursday that the Obama administration welcomes recent changes to China's exchange rate system but believes the Chinese renminbi needs to appreciate further against the dollar.
"It will provide China the independence and flexibility to respond to future changes in growth and inflation," Geithner said. "And it will help the world economy, reducing a source of unfair competition with China's trading partners."
He and Secretary of State Hillary Clinton are traveling to Beijing next week for the fourth round of the U.S.-China Strategic and Economic Dialogue.
Geithner spoke about the state of China-U.S. relations and a host of other economic issues during a San Francisco event hosted by the Commonwealth Club of California.
He urged China to continue reforming its financial system, which is dominated by state-owned banks that channel resources to state enterprises at the expense of private companies.
Geithner said it was unclear whether China's economic reforms would be affected by a political crisis triggered by the fall of former Chongqing Mayor Bo Xilai, a rising politician toppled over a scandal involving his wife's alleged participation in the murder of a British businessman.
The treasury secretary said he was encouraged by China's recent decisions to widen the trading range of its currency and move forward with a pilot financial reform program in the city of Wenzhou.
Geithner said many Americans overestimate China's strengths, and the country faces formidable challenges, including an aging population, rising labor costs and an inefficient banking system.
"The challenges they face looking forward are really, really tough," Geithner said. "What looks strong in China is not as strong as it seems."
During the question-and-answer session, Geithner defended the administration's decision to bail out this nation's largest banks and said the U.S. banking system is stronger than it was before the financial crisis.
He said the U.S. faces a lot of challenges and the housing market still has a long way to go before returning to normal. But he expressed confidence in the future.
"Americans should feel more confident than they did at any time in the last three, four or five years," he said. "Americans are understandably worried about our country, but our challenges are much more manageable challenges than what countries face around the world today."