US Treasury Secretary Henry Paulson arrived in Xining in northwest China last night, kicking off a four-day visit to China.

US Treasury Secretary Henry Paulson, pictured June 2007, arrived in China on Sunday. [AFP]

He is due to visit local environmental protection programs in Qinghai Province, home to Qinghai Lake, the largest salt water lake in China.

He will also visit rural households in the remote province on the Qinghai-Tibet Plateau, dubbed the "roof of the world."

Paulson, who heads to Beijing on Monday, will meet with government officials to discuss the US-China Strategic Economic Dialogue (SED) launched last year.

The forum covers a range of economic and environmental issues, but the issue at the forefront is China's yuan, which is seen by lawmakers in the United States as grossly undervalued.

Last week the Senate Finance Committee overwhelmingly approved a bill requiring the Treasury to identify nations with "fundamentally misaligned" currencies, potentially opening the door to economic sanctions against Beijing.

But Paulson said Friday that lawmakers were sending the wrong message by threatening to punish Beijing.

"We would like to see the Chinese move and show more flexibility," he said.

Paulson will also hold talks with President Hu over tensions arising from China's swollen trade surplus and other issues. The secretary also is to meet Vice Premier Wu Yi, who leads the Chinese side of the dialogue.

The last formal meeting of the economic dialogue in May ended with no progress.

Since then, China has announced measures to rein in surging export growth. It repealed rebates of value-added taxes on more than 2,000 types of goods ranging from cement to plastic products in June.

Last week, the government said it would limit the growth of its "processing trade," a big but low-profit segment of the economy that imports components and exports finished goods.

Paulson was due to leave China on Wednesday.

Some successes claimed

Paulson sought to rebut criticism that the strategic dialogue with China, launched in December 2006 to link top officials, had achieved little so far, citing a more than 9 percent appreciation in the yuan against the dollar since July 2005 and increased access to China for US airlines.

"We are getting results through this process we wouldn't have achieved without it," he said.

But he reiterated that the Chinese needed to allow the yuan to appreciate more quickly and said tensions over trade and currencies were likely to continue, adding that the dialogue "wouldn't make the problems go away."

Chinese officials "may not be pleased" about the US currency legislation but should not be surprised after receiving warnings from lawmakers since the last dialogue meeting in May, Paulson said.

Environmental and energy issues were among the most productive areas of the May meeting. The two sides agreed to further talks on eliminating tariffs on environmental goods and services and announced clean coal technology projects.

China's booming economy has put a severe strain on its environment, with air and water pollution reaching critical levels in some heavily populated areas.

Paulson said "air and water don't know national boundaries" and added that he believes Hu wants to address China's environmental problems.

In Qinghai province, Paulson saw an opportunity to keep the dialogue going on the environmental front in the hopes of solidifying his relationship with Chinese officials.

"Do I think that working together on the environment is going to make it easier to work together on the currency and other things? Not necessarily," Paulson said.

"What's important to making progress on all of them is building the relationships, the trust that lets us manage our discussions, a respectful and a mature and a professional manner to keep the relationship on an even keel."

Paulson said the Qinghai lake region illustrated the problems of greenhouse gas emissions and climate change because rising temperatures are causing the lake to shrink and glaciers to melt, which could threaten the source of several major rivers in Asia.