Geithner Takes New China Tack

Geithner visit marks new U.S.-China approach.
By Michael Lelyveld
2009-06-08
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BOSTON--Treasury Secretary Timothy Geithner's visit to China has signaled a new U.S. approach to Beijing, downplaying currency conflicts that have divided the two economic powers, experts say.

During his three-day trip that began on May 31, Geithner focused on ways for China and the United States to achieve economic goals instead of on the monetary policy differences that have marked the dialogue over the past several years.

Speaking at Peking University, where he once studied, Geithner made only a brief reference to China's exchange rate policy, although Washington has argued since 2003 that the country's currency, the yuan, is greatly undervalued.

Critics have charged that China keeps the yuan as much as 40 percent below its real worth to give its exports an unfair price advantage abroad.

In April, the Treasury declined to cite China as a currency manipulator in a required report to Congress, despite Geithner's indication in January that he would.

Treasury officials say his comments on manipulation during confirmation hearings came in response to written questions from Senate Finance Committee members and were not meant to signal a confrontational stand, The New York Times reported on May 27.

Although China has allowed the yuan to rise against the dollar by some 20 percent since a currency reform in 2005, it has kept the value virtually fixed since mid-2008 with the onset of the economic crisis in order to favor its exports.

U.S. hopes

But instead of criticizing the currency policy, Geithner's speech stressed U.S. hopes that China would help restore trade balance by boosting domestic consumption rather than relying on export-led growth.

"The structure of the Chinese economy will shift as domestic demand grows in importance, with a larger service sector, more emphasis on light industry and less emphasis on heavy, capital intensive export and import-competing industries," said Geithner.

"The resulting growth will generate greater employment and be less energy-intensive than the current structure of Chinese industry," he said.

Geithner also argued that China should boost consumption by extending social security systems and health care reforms, easing burdens on families to maintain high saving rates and freeing them to spend more.

In interviews with Radio Free Asia, experts said that President Barack Obama's administration is trying to deal with a familiar set of issues in new ways.

New approach

"In reality, we have the same economic and trade problems that we have always had with China, but the approach is different in this new administration," said Patricia Mears, director of international commercial affairs at the National Association of Manufacturers in Washington.

Mears said the administration is trying to tackle the old problem of China's trade surplus by starting with the structure of its economy rather than the currency conflict, where there has been little progress. In part, the reason is that little change is expected on the currency issue when the economies in both countries are under pressure.

"Even those who are very concerned about the currency issue, which is still a very serious issue, recognize that we have to be very careful right now," said Mears. "We can't be doing dramatic, heavy-handed things in the shaky economic and financial situation that we have."

The economic crisis has also raised the risks of escalating bilateral disputes.

"There's recognition that the way out of this has to be working together in a cooperative fashion. It can't be throwing stones," Mears said.

The approach appears to be taking a more positive tone by encouraging China to take steps that it is already trying to pursue.

On the day of Geithner's speech, for example, the state-controlled China Daily published an analysis by the National Bureau of Statistics (NBS), showing that domestic consumer spending is already rising to fill the gap from weaker exports.

According to the NBS, consumption accounted for 4.3 percent out of China's 6.1-percent GDP growth in the first quarter, while net exports represented only 0.2 percent.

'A different world'

While the data is hard to verify, the trend may reflect China's steep drop in exports, said Mears. According to the NBS, the country's exports plunged 19.7 percent in the first quarter from a year before.

Gary Jefferson, a professor of international trade and finance at Brandeis University, said that Geithner's message represents more than just a change in approach.

"I think it is a change in goal and content, and recognition that we're in a different world now than we were a year ago," Jefferson told RFA.

Geithner realizes that the United States needs economic partners with "deep pockets," said Jefferson. Traditional partners like Germany have held back from huge financial commitments, while Japan has run up high debts relative to GDP, he said.

Geithner faced some concern during his visit on the safety of China's investments in the United States. As of March, China held $768 billion in U.S. Treasury securities, a major share of its nearly $2 trillion in hard currency reserves.

Assurances sought

Chinese officials have reportedly sought assurances that the United States will curb its budget deficits when the current crisis is over. The cost of government bailouts and emergency measures may push this year's deficit as high as 12.9 percent of GDP, but the administration plans to cut the figure to 3 percent in future years, Geithner said.

He assured his audience at Peking University that China's assets in the United States are "very safe," drawing some skeptical responses from students, Reuters reported.

"I think there is some real concern," said Jefferson, but he added that "some of this may be a sort of finger in the ribs coming from the Chinese" after years of U.S. pressure on China to reform its economy.

During meetings with President Hu Jintao and Prime Minister Wen Jiabao, Geithner won expressions of confidence.

"You have established good working relationships with your Chinese colleagues and you are committed to enhancing China- U.S. economic cooperation in tackling the international financial crisis," said Hu, according to AFP News.

The meetings paved the way for the first session of the new U.S.-China Strategic and Economic Dialogue, to be held in Washington in late July.

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