updated 4/2/2008 10:43:50 AM ET 2008-04-02T14:43:50

U.S. Treasury Secretary Henry Paulson urged Chinese leaders Wednesday to press ahead with financial market reforms but acknowledged the American credit crisis might make them hesitant.

Paulson met with Chinese President Hu Jintao and Beijing's new point man on trade ties with Washington, Wang Qishan. Paulson said he assured them Washington is resolving its credit crisis but cautioned it was no finished and there would be "more bumps in the road."

"There is no doubt that what is happening in the U.S. markets clearly has to give the Chinese pause," Paulson told reporters. "They may be too polite to say that directly. But it clearly has to be giving them pause."

Paulson, who was in Beijing as part of a U.S.-Chinese dialogue on trade and other contentious issues, said the two sides discussed financial reform, though he declined to say what Chinese officials said.

He said Beijing must open its financial markets wider to competition if it wants to continue to develop.

"They have headed down the path to a market economy, and capital markets are a very powerful force for good," he said. "Until they have efficient, competitive capital markets, their people will not receive adequate returns on their savings."

Premier Wen Jiabao, China's top economic official, declared himself "deeply worried" last month about the market turmoil, the decline of the dollar and the direction of the U.S. economy.

Paulson said he told Chinese officials the United States was going through a "period of turmoil" but is fundamentally strong.

However, he said, "I continue to think there will be some more bumps in the road."

Chinese banks hold risky U.S. mortgage-backed securities and have set aside reserves to cover losses. Economists have cut growth forecasts for China due to slumping American demand for imports.

Washington's interest rate cuts have complicated Beijing's effort to cool its fast-growing economy by raising its own rates.

Economists say that if the gap between rates in the two countries grows too large, it could draw foreign money into China, fueling inflation that is heading toward 12-year highs.

Paulson was due to meet Wen on Thursday, a reflection of the importance that Beijing places on access to American markets.

Paulson, the highest-ranking U.S. official to visit Beijing since violent protests in Tibet and China's crackdown there, said he appealed for a peaceful resolution.

"I expressed our concerns about the violence and urged a peaceful resolution through dialogue," he said.

Paulson was in Beijing to prepare for the next meeting in June of the U.S.-Chinese Strategic Economic Dialogue. The process was launched in 2006 to address tensions over China's soaring trade surplus and currency controls and to deflect pressure from American critics for punitive action. It has been broadened to include talks on cooperation on energy and the environment.

Paulson and his new counterpart, Wang, first met in the 1980s when the American worked for Goldman Sachs Group Inc. and Wang was president of China Construction Bank, a major state-owned lender.

Paulson said he considers Wang a friend, a relationship that he said would help in making a smooth transition from his predecessor, retired Vice Premier Wu Yi.

"We know each other very well," he said. "When the inevitable tensions arrive, we can get on the phone and talk."

Wang helped transform China's state-run banking and finance system.

Paulson said he acknowledged to Hu the "very material progress" Beijing has made in easing exchange rate controls _ a key demand by the United States and other trading partners. They say China's currency, the yuan, is kept undervalued, giving exporters an unfair price advantage and adding to its huge trade surpluses.

China has allowed the yuan to rise by nearly 18 percent against the U.S. dollar since mid-2005. Washington wants faster action but Beijing says moving too quickly could damage China's frail financial industries and disrupt the economy.

"I won't be satisfied until there is a market-determined currency. The Chinese aren't ready to have a market-determined currency yet," Paulson said. "I believe they've got a ways to go."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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