Geithner Tells China U.S. to Tackle Deficit as Economy Recovers

By Rebecca Christie

June 1 (Bloomberg) -- Treasury Secretary Timothy Geithner told China that the U.S. wants to shrink its budget gap as soon as an economic recovery takes hold, reassuring the nation that is the biggest holder of U.S. government debt.

The U.S. goal is a deficit of “roughly 3 percent” of gross domestic product, Geithner reaffirmed today in a speech to be delivered at Peking University in Beijing.

The treasury secretary’s two-day visit is to meet with Premier Wen Jiabao, President Hu Jintao and Vice Premier Wang Qishan, cementing the Obama administration’s relationship with China. U.S. government debt has this year handed investors the worst loss since at least 1977 on forecasts for ballooning deficits and Wen has expressed concern about the “safety” of China’s dollar assets.

“I hope Geithner’s visit can soothe our nerves,” said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “The Chinese public is worried about the safety of its foreign- exchange reserves,” Yu said in an e-mail.

China held about $768 billion of Treasuries as of March. For the fiscal year that ends Sept. 30, the U.S. deficit is projected to reach a record $1.75 trillion from last year’s $455 billion shortfall, according to the Congressional Budget Office.

‘Sustainable’ Deficit

“We are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term,” Geithner said. “This will mean bringing the imbalance between our fiscal resources and our expenditures down to the point -- roughly 3 percent of GDP -- where the overall level of public debt to GDP is definitely on a downward path.”

That would be a reduction from a projected 12.9 percent this year.

The U.S. will need to phase out the tax cuts and bank rescue programs set up to help the economy recover from a deep recession, Geithner said. Spending cuts also will be needed, along with health care reform and new budget constraints like pay-as-you-go rules.

The global economic recession “seems to be losing force” although recovery will be a long and slow process, he said, acknowledging General Motors Corp. factory closures and its corporate reorganization being announced today in Washington.

“The plant closures, and company restructurings that the recession is causing are painful, and this process is not yet over,” Geithner said. “The fallout from these events has been brutally indiscriminant.”

Avoiding Showdown

In his prepared remarks, Geithner repeated the U.S. desire for a more flexible yuan. He has avoided a showdown on the issue, declining to repeat comments he made in written remarks to lawmakers after his Senate confirmation hearing in January that China was “manipulating” its currency.

In his remarks today, Geithner said China needs to shift its economy to rely more on domestic demand than exports.

“Allowing the market, interest rates and other prices to function to encourage the shift in production will be particularly important,” he said. “An important part of this strategy is the government’s commitment to move toward a more flexible exchange-rate regime.”

Geithner will meet tomorrow with Wen, who in March called for the U.S. to “guarantee the safety of China’s assets.”

To contact the reporter on this story: Rebecca Christie in Beijing at Rchristie4@bloomberg.net