China should step up reforms in its financial industry and further deregulate the market to overseas competition as it works to achieve better balance in economic growth, United States Treasury Secretary Henry Paulson said yesterday in Shanghai.

"Well-developed financial markets are a necessary precondition for China's development," Paulson said in a speech at the Shanghai Futures Exchange during a stop on a four-day Asian tour that ended yesterday and included a visit to Beijing.

Observers were at least mildly surprised that he saved discussion of Washington's desire for greater flexibility in the yuan exchange rate until near the end of his speech - and even then gave it scant mention.

Choosing to focus on broader concerns, he said, "The risks for China are greater in moving too slowly than in moving too quickly toward transparent, liquid and stable capital markets."

Financial-sector development is the key to China's transition to an economy that is less reliant on industrial activity and more tuned to high- value-added products whose manufacture is less energy intensive, Paulson said.

"China's economy depends heavily on low-cost manufacturing goods, mainly for export," the US official noted. "Long-term economic strength requires a diverse economy, with high-value-added manufacturing and a provision of services, including financial services."

Paulson said yesterday that a "deep, liquid and efficient" capital market is essential to China's long-term prosperity.

Reforms should include bolstering institutional participation, imposing sound accounting standards and corporate governance as well as setting up a meaningful disclosure regime, he said.

In addition, a stronger capital market needs a larger and more accessible government bond market, a more liquid and transparent corporate bond market and a legal environment in which private equity can flourish, Paulson said.