China, U.S. to Counter Financial Crisis as ‘Most Pressing Task’

By Li Yanping and Dune Lawrence

Dec. 4 (Bloomberg) -- China and the U.S. must work to counter the global financial crisis as their “most pressing task,” Chinese Vice Premier Wang Qishan said as the nations started talks in Beijing today.

“We hope that the U.S. can take all necessary measures to stabilize its financial markets and economy as soon as possible and ensure the safety of China’s assets and investments in the U.S.,” Wang said. “To work together to tackle the financial crisis is the most pressing task that we are facing.”

Treasury Secretary Henry Paulson and Wang began the fifth round of the Strategic Economic Dialogue against the backdrop of a U.S. recession and waning demand for exports that is deepening China’s economic slowdown. The focus on the crisis switches attention from U.S. claims that China has an undervalued currency.

“Their growing interdependence means both sides see more reasons to talk in a less emotional manner,” said Willy Wo-Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong. “The U.S. has a good realization that the Chinese economy is in real trouble.”

Paulson didn’t refer to the yuan in his opening remarks and praised China for playing “a responsible role” in efforts to combat the crisis. A U.S. official later said China remained committed to the appreciation of its currency over the medium to long term. The official couldn’t be identified under the rules of a briefing.

The two nations need to counter protectionism and cooperate in “reforming the global financial system,” restoring investor confidence and preventing a global recession, Wang said. China’s contribution includes maintaining its own growth, he said.

Paulson’s Swan Song

The two-day talks are a swan song for Paulson, who initiated the dialogue and will exit with the Bush administration.

China threw “a spanner in the works” on Dec. 1 by allowing the yuan’s biggest drop against the dollar since the end of a fixed exchange rate in 2005, said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong.

“It may mean a more heated debate on the currency,” Evans added.

Today, the two sides highlighted areas of agreement. The discussions will yield “substantive agreements” on electricity generation, transportation, and environmental cooperation, Paulson said. China is seeking more energy- efficient technology.

Wang said there had been “positive progress” on an accord to facilitate investment by Chinese and U.S. companies in each other’s assets.

Melamine, Toys

Discussions will also continue on food safety after a series of Chinese scandals from lead in toys to melamine in milk. The U.S. Food and Drug Administration opened three offices in China last month to try to make exports safer.

The talks’ effectiveness is limited because President- elect Barack Obama is taking office in less than two months, said Sun Zhe, a Beijing academic who advises the Chinese government. Obama’s transition team is not taking part, U.S. Agricultural Secretary Ed Schafer said yesterday.

Wang said he was pushing for the dialogue to continue. Paulson, who may be casting an eye to his legacy, said the talks had helped in managing complex issues, such as the global turmoil, and he was committed to “a strong finish.”

The U.S. is China’s second-largest export market after Europe. China, with the world’s largest currency reserves -- poised to top $2 trillion -- surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries.

Buying U.S. Debt

Its role as a buyer of U.S. debt may only become more important as the U.S. spends to revive its economy and thaw credit markets.

The 0.7 percent drop by the yuan against the dollar on Dec. 1 triggered speculation that China had switched to favoring a depreciating currency, which would help exporters by pulling down prices in overseas markets.

The plunge may instead have been a message to Obama, who has called China a currency manipulator and “is taking a much harder line on trade issues,” said Frank Gong, head of China research at JPMorgan Chase & Co. in Hong Kong.

China wants to highlight both the urgency of the nation’s own economic problems and the importance of continuing the Strategic Economic Dialogue, the economist said.

“We believe China likes the SED platform very much,” said Gong. “However, U.S. President-elect Obama has so far never indicated that he would want to continue the dialogue.”

The yuan was trading at 6.8839 against the U.S. dollar as of 1:10 p.m. today, close to five-month low.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net; Dune Lawrence in Beijing at dlawrence6@bloomberg.net