May 2 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said it will take more than a stronger Chinese currency to reduce the record trade deficit between the U.S. and China.

``I don't think there is much they can do with the currency that would make a big difference in the trade balance,'' Paulson said while taking questions at an event hosted by the Peterson Institute for International Economics today in Washington. He said his main focus is on persuading China to reduce its reliance on exports and increase the role of domestic demand.

Paulson reiterated that the yuan is gaining ``very slowly'' against the dollar, and that it's a ``bit of an unnatural act'' for an economy the size of China's to function without a flexible exchange rate. ``We need a flexible currency in the short term and need to get to a point where the currency is market- determined,'' Paulson said.

Since taking over at the Treasury in July, Paulson has sought to defuse focus on the currency, arguing that the causes of the U.S. trade gap with China are more complex than the Chinese government's efforts to restrain the yuan's value. The U.S. posted a $232.5 billion deficit with the country last year.

Paulson, who will host a delegation of Chinese officials led by Vice Premier Wu Yi in Washington later this month, repeated that China will continue to run a trade surplus with the U.S. and other large trading partners until it boosts domestic demand.

``I'm focused on increasing exports and reducing barriers and increasing competition in China and structural reform in China and seeing some signposts along the way,'' Paulson said. ``That will get to the deficit.''

Preparing for Talks

Today's remarks were one of a series of speeches on China that Paulson is making in the run-up to the second gathering of the Strategic Economic Dialogue that Paulson and Wu established last year.

Paulson, 61, delivered a speech to a group of prominent Chinese Americans in New York on April 20, and spoke at length on China with Charlie Rose on PBS television the same day. The Treasury chief is scheduled to speak about China again at Harvard University tomorrow.

The Treasury chief has defended the twice-annual dialogue as the best chance to convince the Chinese to implement more market- based policies in repeated visits to Congress, where legislators have introduced at least a half-dozen measures aimed at China's currency and trade practices.

``I've got a lot of convincing to do but people are still open minded'' toward the talks with China, Paulson said. ``I may be inexperienced in Washington but I'm not naïve,'' he added, declining to speculate about what type of legislation may emerge from Congress on China.

Skeptical on Progress

Morris Goldstein, a senior fellow at the Peterson Institute, said Paulson should be careful about minimizing the Chinese currency's role in the trade deficit, and was skeptical much would be achieved when Wu's delegation arrives for the May 22-24 meetings.

``I'd certainly give exchange rates a big role in China's current-account surplus and reducing the size of it,'' Goldstein said after Paulson's remarks. ``If you say these are all long- term goals, then you don't set yourself up for much progress at the upcoming meetings.''

In his 45-minute talk at the Peterson Institute, Paulson repeated that he's concerned about a ``clear sense of frustration'' with China in Congress and that he appreciates that the dialogue must produce ``tangible'' results to be considered legitimate.

Rebalancing Growth

Paulson didn't say what those might be. He said the talks will cover trade in services, energy, the environment and ways to ``rebalance'' China's economic growth to reduce the country's dependence on exports.

The Treasury secretary said China's goals from the discussions include obtaining ``market economy status,'' a Commerce Department distinction that could lower anti-dumping duties.

The Chinese also are seeking to loosen U.S. export controls on technology, exploring what it will take for their banks to set up branches in the U.S. and looking at boosting investment in the world's largest economy, Paulson said.

He also said ``time is of the essence'' for the Chinese government to overhaul its economic policies because the effort will only become more difficult if its economy slows.

China has amassed more than $1 trillion of foreign-exchange reserves in managing the yuan's exchange rate. The currency has advanced 7.4 percent against the dollar since the government loosened its peg to the dollar. By contrast, the euro and South Korea's won have gained 12 percent in that time.

There ``hasn't been much movement'' in the yuan compared with the currencies of China's major trading partners, Paulson said.

To contact the reporters on this story: Kevin Carmichael in Washington at kcarmichael@bloomberg.net

Last Updated: May 2, 2007 17:11 EDT