Paulson tells G7 let markets regulate hedge funds

ESSEN, Germany (Reuters) - U.S. Treasury Secretary Henry Paulson made clear on Saturday that he thinks any risks posed by lightly regulated hedge funds can be handled through market discipline without adding heavy government regulators."Market discipline, focusing on the risk management of regulated counterparties, is the most effective way to address potential systemic risk concerns," Paulson told a news conference at the close of a two-day Group of Seven finance minister's meeting in the German industrial city of Essen.He said a thriving global hedge fund industry "is in the U.S. interest" and adds liquidity to financial markets.The huge pools of lightly regulated capital, estimated to total about $1.5 trillion, cause nervousness in some quarters because of the potential for a collapse to wreak widespread economic havoc as the complicated trades they make unwind.Paulson noted a U.S. inter-agency working group that includes the Treasury and the Securities and Exchange Commission is to issue a report on methods for regulating "in the relatively near future."As the meeting wrapped up, Paulson said the global economy was healthy and predicted U.S. economic expansion will continue at an annual rate around 3 percent in 2007. That meant the U.S. was "doing its part", but he said some other regions could do more to foster growth."Europe's expansion is continuing and Japanese growth is expected to accelerate," Paulson. "But there is still ample scope in both areas to strengthen measures aimed at creating more domestic demand."Paulson continued to focus on the need for China to let its yuan currency appreciate, saying "greater flexibility in China's exchange regime is also needed as part of China's rebalancing of its economy."Later he told reporters that "it's one of my responsibilities to encourage them to move more quickly because it is in their own interest and in the global economy's interest for them to do so."A closing communiqué from the G7 -- the United States, Japan, Germany, Britain, France, Italy and Canada -- said all were committed to pursue policies that "support the orderly adjustment of global imbalances" that include the United States' huge trade deficits and the corresponding surpluses that key emerging market economies, especially China, are piling up.

NO COMMENT ON THE YEN
But Paulson rebuffed repeated efforts to draw him into a discussion whether Japan's yen was unfairly undervalued as some European countries were maintaining in the run-up to the two-day G7 session."As Treasury Secretary, as a general principle, I don't like to comment on currencies that trade in competitive marketplaces," Paulson said, effectively drawing a line between Japan's yen that he previously said was fairly determined in open markets and China's yuan.Paulson is pushing Beijing to move more rapidly toward greater currency flexibility as it develops capital markets and other financial infrastructure to support an eventual market-based currency exchange system.Paulson, who took over as Treasury Secretary last July, used the G7 to make the case that other industrial countries need to do more to clamp down financially on regimes like Iran and North Korea -- nations that the Bush administration regards as prime threats to global security."I emphasized that, to be effective, finance ministries must develop legal authorities and invest resources to apply targeted economic and financial measures against a broad range of international threats," Paulson said, citing the need to apply existing sanctions agreed in United Nations resolutions.