Dec. 14 (Bloomberg) -- U.S. Treasury Henry Paulson, facing pressure from Congress for trade sanctions against China, urged the nation to relax currency controls and better protect property rights to help close a record trade gap.

Talks in Beijing must produce ``tangible results'' to prevent protectionist elements in both nations damaging their trade partnership, Paulson, leading one of the biggest U.S. economic delegations to China, said in the Chinese capital today.

China should move toward a regime where ``currency values are determined in a competitive open marketplace based upon economic fundamentals,'' Paulson said at the inaugural meeting of the so- called Strategic Economic Dialogue between China and the U.S. ``In the meantime more currency flexibility is necessary.''

Vice Premier Wu Yi, who leads the Chinese delegation, today said China must move gradually on reforms, underscoring the challenge Paulson faces as the U.S. Congress prepares to consider as many as 27 bills aimed at curbing a trade gap totaling almost $800 million a day.

``We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China,'' Wu said in a 20- page statement released by the Chinese government. ``This is not conducive to the sound development of our bilateral relations.''

Still, Wu pledged to boost imports and take other steps toward a free-market economy over time.

`Rule of Law'

The yuan climbed to its highest since the end of a dollar link in July 2005, rising 0.07 percent to 7.8213 against the dollar. A 3.6 percent gain in the yuan since the peg ended has failed to satisfy some U.S. lawmakers, who say China manipulates the currency to gain an export advantage.

``As you know, there is resistance in both our countries to greater integration into the global economy,'' Paulson said. ``Therefore it is incumbent upon us, not only to have frank and energetic discussions, but also to produce tangible results.''

Paulson said he plans to discuss ways in which China can spur its economic development by pursing ``transparency, rule of law and property rights.''

``The best way that governments can serve the economic interests of its citizens is by welcoming healthy competition in all areas including service,'' he said.

``By continuing to pursue economic reform, opening its markets further, and rebalancing its growth to allow for increased domestic consumption, China will be sustaining its own growth while contributing even more to the global economy,'' he said, adding that the two nations have accounted for about half of global expansion in ``recent years.''

The group, which includes Federal Reserve Chairman Ben S. Bernanke and six other U.S. cabinet ministers, will discuss broader economic issues such as China's development strategy and energy security in sessions today and tomorrow.

To contact the reporter responsible for this story: Kevin Carmichael in Beijing at kcarmichael@bloomberg.net

Last Updated: December 13, 2006 21:38 EST