Geithner calms Chinese fears - for now

Business Times - 03 Jun 2009

TIMOTHY Geithner's maiden visit to China as US treasury secretary appears to have, for now, calmed some of the fears surrounding one of the world's most important bilateral economic relationships. However, the Obama administration will have to be seen to deliver on some of Mr Geithner's ambitious-sounding promises.

On the eve of his visit to Beijing, the US treasury secretary was faced with a delicate challenge. During his confirmation hearings in January, he had labelled China a 'currency manipulator', which had riled the Chinese establishment. Subsequently, as the US financial crisis deepened, Chinese Premier Wen Jiabao openly voiced concerns about the vulnerability of the US dollar in which the bulk of China's reserves are denominated, and hinted at the need for an alternative reserve currency.

Mr Geithner's priority was clearly to reassure the Chinese that the US dollar would remain a safe bet and that China had no cause to worry about its holdings of US Treasuries, amounting to US$768 billion as at the end of March.

But at the same time, he had to get the message across that China, too, has its part to play: it needs to make its currency more flexible and shift its economy away from export-led to domestic demand-led growth, to both help reduce its oversized trade surplus and to augment global reflation.

While in Beijing, Mr Geithner said all the right things: the US is committed to a 'strong dollar', China's investments in US financial assets are very safe, and the Obama administration is committed to reducing the US fiscal deficit over the medium term to a sustainable level. He also reiterated - more diplomatically than during his confirmation hearings - the US desire for a more flexible (read 'stronger') yuan and the need for Beijing to boost domestic demand.

But the promises will have to be backed up with meaningful action. Mr Geithner suggested, for instance, that the US aims to bring its fiscal deficit down to 'roughly 3 per cent' of GDP over the medium term, from close to 13 per cent at present. There are no credible policies in place to achieve this; much would depend on how the Obama administration proceeds with tax and spending measures, and particularly, healthcare reform, in the months to come.

Absent effective fiscal policies, the dollar, as well as US Treasury yields, would remain vulnerable. For its part, China, while professing to keep the yuan 'stable', did not oblige with any promises to appreciate its currency. And while it has put in place an aggressive economic stimulus package, the extent to which this will boost domestic consumption (as opposed to investment) demand remains to be seen.

Thus while the rhetoric on the US-China economic relationship might have helped calm nerves following Mr Geithner's visit to Beijing, what matters will be delivery on promises made - and the markets will be watching.