US Treasury Secretary Timothy Geithner’s first trip to China in his official capacity comes at a vulnerable time for the administration of US President Barack Obama.
Mired in a brutal recession, the US needs Beijing to buy more US goods, allow its currency rise and make other moves to narrow an enormous trade gap. The US also needs China’s help to confront any military threat from North Korea.
Yet Washington’s leverage has waned just as China’s power over the US has grown.
PHOTO: AP
China is now the US’ biggest creditor. As of March, it held US$768 billion of Treasury securities — about 10 percent of publicly traded debt.
The US needs China’s money to finance US budget deficits, which are soaring as Washington tries to end the recession and bolster the banking system. The administration estimates the budget deficit will hit US$1.84 trillion this year. That’s four times last year’s deficit.
Geithner, who left on Saturday for meetings today and tomorrow with Chinese leaders, carried an ambitious US goal of persuading the Chinese government to adopt policies that would transform its nation of savers into spenders.
Geithner spent the long flight to Beijing working on a speech he planned to give at Peking University that was expected to lay out the administration’s recovery program and its current progress. He was also expected to talk about the administration’s determination to deal with the government’s soaring expenditures once the US economy is recovering.
The current US administration, just like the administrations of former US presidents Bill Clinton and George W. Bush, is convinced that the key to a prosperous global economy rests heavily with China. The US wants Beijing to rely more on domestic spending and less on its exports to power its own economy — and the world’s.
That shift would uncork enormous buying power and help rebalance world trade. It could hasten an end to the global recession and narrow the US’ huge trade gap because the Chinese would buy more US products.
China would benefit, too.
“Beijing really wants Washington to be successful in bringing the US economy out of this recession as fast as it can because it is critical to Beijing’s own economic growth,” said Kenneth Lieberthal, a China expert at the Brookings Institution.
For the Chinese, there is growing nervousness about the explosion of US borrowing. Like any bank worried about its loans, the Chinese have fretted over the US’ budget gap.
In March, Chinese Premier Wen Jiabao (溫家寶) said: “We’ve lent a huge amount of money to the US. Of course, we are concerned about the safety of our assets.”
Those comments, plus remarks by the head of China’s central bank about whether the world needs a new top reserve currency to replace the US dollar, jolted financial markets.
The administration insists it isn’t worried that the mound of debt it’s creating will jeopardize the US’ sterling AAA bond rating. But treasury officials said Geithner still intends to reassure the Chinese.
Geithner plans to stress that the administration sees the US$1 trillion-plus deficits for this and next year as temporary. The deficits are necessary to fund a stimulus plan to help lift the US out of recession and invigorate a wobbly US banking system, officials say. Once those needs are met, the administration says it will prioritize deficit reduction.
Security tensions in Asia have flared since North Korea’s recent nuclear weapons tests and missile firings. Because China is viewed as a critical player in any successful resolution of a North Korea standoff, Geithner is expected to address the topic with Chinese leaders.
In addition to talks with Chinese President Hu Jintao (胡錦濤) and other leaders, Geithner plans a speech today at Peking University, where he studied Mandarin Chinese during two summers when he was in college.
Geithner will hold an event at a Ford Foundation program in Beijing to support the study of economics in the US. The program was started by his father when the elder Geithner was based in Asia as a foundation official.
That the chief US economic policymaker is going hat-in-hand to the Chinese to explain the soaring deficits shows how much has changed since Bush’s treasury secretary, Henry Paulson, met with the Chinese in 2006.
Paulson managed to arm-twist China into agreeing to a new round of economic talks aimed at prodding Beijing to move faster to let its currency, the yuan, rise in value against the dollar. Doing so would make US exports cheaper for the Chinese to buy.
But this time, Geithner is expected to adopt a softer tone even though some US lawmakers want tough penalties on China and other countries deemed to manipulate currencies to gain trade advantages.
US manufacturers see the undervalued yuan as the major culprit in the trade deficit with the Chinese, which last year hit US$266 billion, the highest recorded with one country.
The Chinese agreed in 2005 to begin letting their currency rise against the dollar, and it has risen about 20 percent. But those gains stopped last summer. China had begun to fear that a stronger yuan was reducing its export sales, already hurt by the global downturn.
Though the crisis has given Geithner a weak hand, officials said he will seek to push this bargain.
The US will work to reduce its budget deficits once the crisis ends, urge Americans to save more and shrink the trade deficits. To replace diminished US spending, the Chinese will be asked to step up spending and stop saving so much. The administration says this can be done if Beijing improves pensions and health insurance so Chinese households don’t feel pressured to save so much.
Geithner is expected to point out that US consumers already are rebuilding their retirement savings. The Chinese have pledged to redirect their economy to boost domestic growth. But many private economists question how serious China is about it.
Analysts said they expect Geithner and the Chinese to pledge to do all it takes to end the recession. Both sides know any hint of discord between the world’s largest and third-largest economies probably will unsettle financial markets.
That’s one reason analysts don’t expect the administration to press hard on currency. As a candidate, US President Barack Obama pledged to crack down on countries seen as cheating on global trade rules, but last month chose not to cite China as a currency manipulator.. That disappointed US manufacturers and labor unions.
But Frank Vargo, vice president for international affairs at the National Association of Manufacturers, said he understood the change in tone.
“They talked a tougher line during the campaign, but the world changed,” Vargo said. “It is a much more delicate time now.”
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