(Adds quotes from Wen and Chinese finance official in paragraphs 11 and 17-19)

By Glenn Somerville and Eadie Chen

XIANGHE, China, Dec 13 (Reuters) - U.S. Treasury Secretary Henry Paulson came away from two days of talks on Thursday convinced China sees the need for a stronger yuan and with a promise that Beijing will open its financial markets a little wider.

The grand-sounding "strategic economic dialogue" produced only modest immediate gains but Paulson said it provided a foundation on which to expand cooperation between two nations whose ties he deems vital to global economic prosperity.

The exchange rate was a major focus of the meetings because, as Paulson put it, the pace of the yuan's rise had effectively become a proxy for China's willingness to permit market forces to play a greater role in its economic development.

Paulson sought no specific commitments from Beijing on the yuan, but he said Chinese policy makers now knew that a stronger exchange rate would help them to fight inflation.

"The Chinese recognise growing inflationary pressures in their economy and that a more flexible currency expands their ability to use monetary policy to stabilize their economy," Paulson said at a closing news conference.

China's central bank, which keeps the currency on a tight leash, let the yuan rise on Thursday to its highest level since it was revalued and depegged from the dollar in July 2005. The bank is battling inflation of 6.9 percent, an 11-year high.

The yuan has climbed about 6 percent against the dollar in the past year, but some U.S. lawmakers say it remains grossly undervalued and are preparing legislation to force China's hand.

YUAN'S RISE

Paulson declined to say how much more quickly Beijing needed to let the currency climb. "The pace of appreciation has increased over the past year," he said. "I've talked to the Chinese enough that we've agreed we don't talk about how fast is fast. We agree with the principle (of appreciation)."

The U.S. Treasury chief later held separate meetings with Chinese President Hu Jintao and with Premier Wen Jiabao.

Wen congratulated Paulson and Chinese Vice Premier Wu Yi, who led the Chinese delegation, saying they had helped reach "common understanding" on product safety.

"China takes seriously the imbalance in China-U.S. trade," Wen told Paulson, the Chinese Foreign Ministry spokesman Liu Jianchao told reporters. But Wen "also hoped that the U.S. would heed China's concerns and implement open trade and investment policies", Liu said.

A highlight of the talks was an agreement to increase safety standards for Chinese food and product exports to U.S. markets -- a highly sensitive topic after millions of Chinese-made toys were recalled and American indignity over tainted food and pharmaceuticals from China ran high.

Paulson cited other progress, including a Chinese commitment to let banks and other foreign companies doing business in China issue yuan-denominated debt and equity securities.

"MODEST PROGRESS"

"I would also note we have made modest progress in the financial services area, expanding opportunities for global financial services companies to do business in China," he said.

Paulson said Beijing would end a two-year freeze on foreign securities joint ventures in China, an especially sensitive issue for the influential U.S. financial services industry, and expressed confidence that the permitted business scope of such ventures would be expanded.

"We want them to do more and to move faster," he said.

Chinese Assistant Finance Minister Zhu Guangyao told reporters that his government would implement the changes speedily but would not give a precise time, only saying plans would be developed by the relevant agencies.

Zhu also suggested that the pace of opening could be linked to Chinese financial institutions' greater access to U.S. financial markets.

"We hope the United States will truly abide by its commitments ... and agree to foreign businesses participating in U.S. financial activities", he told a press conference.

But it was clear U.S. negotiators did not get all they sought.

U.S. Trade Representative Susan Schwab, answering reporters' questions, said one troubling issue related to China's Xinhua News Agency which she said operated as "both the regulator as well as the competitor" in its line of business.

She said the Xinhua issue was one of "a series of financial issues raised with various ministries" but not resolved.

Throughout the talks, Chinese officials made sure their views were heard and sometimes pushed back against U.S. calls for China to speed up economic reforms.

Beijing declined to lift foreign-ownership caps in Chinese banks and brokerages and left U.S. officials fuming over an apparent ban on U.S.-made movies.

Commerce Secretary Carlos Gutierrez said the United States was still trying to get clarification from China about the film ban and to have it lifted. "We are all over it," he said.

The next instalment of the dialogue would take place in Washington in June, Chinese Vice Premier Wu said. (Reporting by Glenn Somerville, Eadie Chen and Chris Buckley; writing by Alan Wheatley; editing by Mike Peacock)

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