UPDATE 1-U.S.'s Paulson praises China on currency progress

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By Glenn Somerville

BEIJING, April 2 (Reuters) - China has made substantial progress toward adopting a more flexible currency that will help it cope with inflation pressures from rising food prices, U.S. Treasury Secretary Henry Paulson said on Wednesday.

After a day of top-level talks with Chinese leaders including President Hu Jintao, Paulson said he felt China lacks adequate capital markets to have a fully market-based currency but that remains the ultimate objective.

"I acknowledged to President Hu the very material progress that they've made with their currency because they have a currency that more accurately reflects underlying economic fundamentals," Paulson said, adding that gives China "a very important tool" in its bid to keep food price rises in check.

Paulson is scheduled to deliver a speech on energy issues on Thursday and to hold more meetings with senior officials including Premier Wen Jiabao, who has expressed his worry about the potential global impact of a steep U.S. economic downturn.

Paulson said he told the officials he met on Wednesday that the United States was in "a sharp slowdown," adding "It's a very difficult corner we're in right now."

In a later interview on Bloomberg television, he took issue with an International Monetary Fund report slashing its 2008 U.S. economic growth forecast to 0.5 percent from 1.5 percent previously and saying the U.S. economy was expected to tip into recession.