Treasury's Geithner Faces an Assertive China

Trade, yuan strength, and Chinese consumption will be key topics on Geithner's visit to Beijing

By Dexter Roberts and Jane Sasseen

One might think China's top leaders would warmly welcome Timothy Geithner in his May 31-June 2 visit to Beijing. After all, Geithner, who once studied Chinese at Peking University and speaks Mandarin, is considered something of an old China hand. So he is attuned to Beijing's financial and economic concerns, not just Washington's. It is also becoming painfully clear to both sides how mutually dependent China and the U.S. are: China still needs U.S. demand for its exports, while the U. S. needs China to buy its mounting debt. But beneath the usual diplomatic niceties, there's likely to be real friction and little substantive progress in sorting out the thorny differences between the two countries during Geithner's first visit to China as Treasury Secretary.

When Geithner meets with top officials, including Chinese President Hu Jintao, Premier Wen Jiabao, and Wang Qishan, vic-premier in charge of finance, he is likely to press for a more freely tradable yuan. (After taking a tough line on China's currency manipulation during his confirmation hearings early this year, Geithner and other U.S. officials have softened their tone in recent months but still are pressing for change.) The hope is that a strengthened yuan would help narrow the massive U.S. trade deficit with China by making Chinese exports less competitive. Equally important, of course, is that the Chinese begin to break their frugal habits, start spending more, and so pick up some of the slack left by the collapse in U.S. spending, a topic Geithner will probably raise when he speaks to students at Peking University on June 1. China must initiate "stronger domestic demand growth. It involves shifting the structure of the Chinese economy" to stimulate greater demand, a Treasury official said shortly before Geithner headed to China.

In this visit, however, Geithner will also get an earful about what Beijing wants. As China's economy shows signs of picking up and even growing 8% this year, Beijing is feeling no inclination to accept criticism from the beleaguered West. An assertive China will tell the U.S. to control the growth of its rapidly swelling budget deficit. Beijing is worried that Washington's spending policies will lead to inflation and further depreciation of the U.S. dollar. That would be bad news for China, the world's largest holder of U.S. Treasury bills, with an estimated $1.45 trillion in U.S. denominated-assets at the end of 2008.

The Chinese have already put their concerns front and center. At a nationally broadcast press conference held in Beijing's Great Hall of the People on Mar. 13, China's premier said he was worried by the situation. "We have lent a huge amount of money to the United States" Wen said. "I request the U.S. to maintain its good credit, to honor its promises, and to guarantee the safety of China's assets." Notes Chang Chun, a professor of finance and associate dean at Shanghai's China Europe International Business School: "Most of China's foreign currency reserves are in U.S. dollars—and the reserves are huge. This is not sustainable. We cannot rely on U.S. dollars for all of our trade and finance."

stepping up pressure on the dollar

China is also pushing for a larger international role for its currency, which would by necessity weaken the leading global role the U.S. dollar now plays. After central bank governor Zhou Xiaochuan called for a new "super-sovereign reserve currency" to replace the U.S. dollar in March, Geithner, as well as Federal Reserve Chairman Ben Bernanke, said they categorically opposed the change. Nonetheless, in recent months, Beijing has signed a series of currency-swap agreements with trading partners, including Malaysia, South Korea, and Argentina. Although still limited in scale, these moves allow the countries to trade in their own currencies rather than with the U.S. dollar as an intermediate currency. "This is the beginning of the end for the U.S. dollar if you look at the bigger historical trend," says Wenran Jiang, a professor of political science at the University of Alberta, who concedes that it could take years for the yuan to become fully convertible and really rival the dollar. "There will be resistance from the U.S., of course. The U.S. doesn't want to give up the special role for the dollar."

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