He said in a statement prepared for the start of the talks on Thursday that the two sides would "discuss ways to achieve balanced growth, and talk about the importance of currency flexibility in the short term and a path to freely tradable currency in the medium term".
Economists say the yuan is substantially undervalued given China’s large balance of payments surplus, which is about 10 per cent of its national output.
Beijing revalued the yuan by 2.1 per cent in July 2005 and has since allowed it to rise 3.7 per cent more. It is currently trading at 7.8197 to the US dollar.
Beijing fears that allowing the yuan to float freely could affect export-related jobs that millions of rural migrant workers have come to depend on.
Paulson said he would also emphasise the importance of China continuing to open markets to trade, competition, investment and transparency in regulations.
He said China must try to maintain sustainable growth without relying on large trade surpluses. The US trade deficit with China is running at an annual rate of $229bn, up from $83bn in 2001.
Paulson, who is leading a delegation that will include Ben Bernanke, the US federal reserve chairman, and four cabinet secretaries, said tangible results at the dialogue were needed to counter scepticism in the US about the usefulness of the dialogue.
The US says China's reforms are slowing
u Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing, said Wu Yi, China's vice-premier, does not seem sympathetic to American demands.
Wu has said the talks are of "critical" importance and says she is optimistic the talks would "help us enhance mutual trust and remove misgivings".
Susan Schwab, the US trade representative, said on Monday that Washington was interested in the same, "but that depends on China’s continued reform, and on a commitment to expand free and fair trade based on decisions by the actors in the markets — not by bureaucrats".
She said the pace of reform in China was slowing, putting bilateral relations and the global economy at risk.
Paulson said energy and the environment will be discussed. The issue of piracy is also expected to be on the table.
An annual report to the US congress on Monday, issued on the fifth anniversary of China’s entry to the World Trade Organisation, shows that the US may file formal complaints with the WTO if Beijing does not take tougher action against rampant piracy and counterfeiting.