China receives assurance US will cut record budget deficit

Business Times - 30 Jul 2009

Beijing concerned over value of its Treasury securities

(WASHINGTON) China sought and received assurances from the Obama administration that the US would reduce its budget deficit once an economic recovery was under way, a senior Chinese official said on Tuesday at the end of two days of high-level talks between the countries.

'Attention should be given to the fiscal deficit,' said Finance Minister Xie Xuren. He said Treasury Secretary Timothy Geithner had assured the Chinese that once the economy rebounded, the deficit would gradually come down from its current record levels.

Mr Geithner confirmed that, saying, 'As we put in place conditions for a durable recovery led by private demand, we will bring our fiscal position down to a more sustainable level over time.'

For China, the rising US deficit is a concern because it could weaken the dollar and put at risk China's vast holdings of Treasury securities and other dollar-based assets. China holds an estimated US$1.5 trillion in such securities, making it the US' largest foreign creditor.

The unusual exchange between US and Chinese officials, in consecutive news conferences at the conclusion of the so-called Strategic and Economic Dialogue, underscored a subtle shift in power between China and the United States, one in which the Chinese are showing a new assertiveness as they seek to protect their huge investment.

The two-day talks, co-chaired by Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton, produced little in the way of substantive agreements.

Instead, officials from both countries outlined common concerns that they said they would continue to address: the trade imbalance, financial regulatory reform, protectionism and climate change. They also said they would work to reform the governance of the International Monetary Fund and the World Bank to better reflect China's status as the world's third largest economy.

President Barack Obama's decision to combine the longstanding economic dialogue between the countries with a strategic one meant that while finance officials tried to get their economic policies in line, diplomats were doing the same, especially on the North Korean nuclear programme.

China's Vice-Foreign Minister, Wang Guangya, was unusually strong in condemning North Korea for conducting a nuclear test in May, and said Beijing would 'seriously and faithfully implement' a series of sanctions enacted by the UN Security Council.

His bluntness was striking; even two years ago, China was circumspect about publicly criticizing North Korea.

But Mr Wang was not specific about what steps China had taken to crack down on financial transactions, or to inspect North Korean cargo transshipped through China's ports, and he talked about coming up with a new series of incentives for the North to return to negotiations.

In closing statements, Mr Geithner called cooperation between the United States and China 'vital not only to the well-being of our two nations but also the health of the global economy.' Mr Geithner assembled a team of senior US economic officials for the meetings, including Federal Reserve chairman Ben Bernanke and White House economic adviser Lawrence Summers, in part to reassure the Chinese about the safety of their US investments.

Separately, officials from China and the United States signed a memorandum of understanding reaffirming their commitment to cooperation on climate change without agreeing to specific emissions targets.

The agreement was yet another step in slow-moving negotiations seen as vital to the effort to produce a global pact on greenhouse gases. -- NYT, LAT-WP