China must speed reforms despite potential fallout, says Lew

WASHINGTON (Reuters) - China needs to speed progress towards a more open economy despite potential fallout from needed reforms, U.S. Treasury Secretary Jack Lew said on Wednesday.

The U.S. will urge China to accelerate progress towards a market economy at high-level talks scheduled between the two countries in July, he said.

Lew said he was confident Chinese officials understood the need to reduce the country's reliance on exports, abandon controversial practices like managing the value of its currency, and encourage local consumption.

"But it probably will frustrate us how slow the progress is and they are going to need to speed it up," Lew said. "We are going to continue to try and make progress on the economic side, on exchange rate reform, on market access and on having the reforms that make their economy more market-oriented generally."

Meanwhile, the U.S. economy was gaining traction but lack of progress on wages and employment remained disappointing, Lew said at the Economic Club of New York.

For the many people who were unemployed and those whose wages have stagnated, "this hardly feels like a recovery," Lew said.

"The ultimate test for all of us will be how inclusive tomorrow?s economy becomes and how widely our economic gains flow," he said. "The crisis we face today is the need to make sure the economy is expanding fast enough to support a growing middle class."

A dismal start to 2014, with businesses hampered by a harsh winter, has given way to optimism about the course of growth for the rest of this year. Lew noted, as well, that political feuding in Washington over health care, the debt ceiling and budget issues had receded.

That, he said, should pave the way for a broader discussion on how to tackle structural economic issues: How to revise a corporate tax system that was distorting economic decisions, to spur more investment infrastructure, and overhaul immigration rules to boost the labor force.

The drop in labor force participation rates has been one of the more perplexing economic issues since the recent crisis and recession. Though the decline was partly the result of an aging U.S. population, some of it remained unexplained.

"We cannot repeal the Baby Boom," Lew said of the large cohort of Americans who were reaching retirement age, "but we can address the resulting decline in the labor force by addressing our outdated, economically backwards immigration system."

He said businesses also needed to "come off the sidelines" and start putting the record stocks of cash held in corporate coffers to work.

(Reporting by Howard Schneider; Editing by Bernadette Baum)