By Bloomberg News
July 27 (Bloomberg) -- The dollar may be the focus of Chinese-U.S. talks starting in Washington today as China presses the Obama administration on how it will tame the fiscal deficit and protect the U.S. currency’s value, Morgan Stanley said.
Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton will host two days of meetings spanning topics from the economic crisis to North Korea. The Strategic and Economic Dialogue is the Obama administration’s first with China.
“If the key issue in the past was the renminbi’s exchange rate, now it’s the U.S. dollar,” said Wang Qing, an economist at Morgan Stanley in Hong Kong. The yuan is a denomination of the renminbi. “What China cares about the most is the stability of the dollar and the stability of U.S. policy.”
The global slump has highlighted the common interests of the economies, ranked first and third largest in the world, as Vice Premier Wang Qishan seeks to preserve the value of the world’s biggest Treasury holdings and the U.S. pushes China to rely more on domestic demand and not exports for growth.
“Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth,” Geithner and Clinton wrote in a joint article published in today’s Wall Street Journal.
The talks this week will move beyond economic matters for the first time.
‘Fragile States’
Few global problems “can be solved without the U.S. and China together,” Geithner and Clinton wrote. “The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the U.S. and China.”
The two sides will probably discuss ways to revive the dormant six-party negotiations aimed at persuading North Korea to give up its nuclear program, a U.S. official said last week.
“From the provocative actions of North Korea, to stability in Afghanistan and Pakistan, to the economic possibilities in Africa, the U.S. and China must work together to reach solutions to these urgent challenges,” Geithner and Clinton wrote.
China’s exchange-rate policy will be discussed, an Obama administration official said at a press briefing last week. The U.S. wants a more flexible yuan, though Geithner 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.
‘Unfortunate Timing’
“This was a most unfortunate thing to say publicly,” said Donald Straszheim, managing principal of Straszheim Global Advisors in Los Angeles. “They think the playing field is basically tilted by China managing its currency.”
Both nations are pumping cash into their economies to revive growth in the face of the worst financial crisis since the Great Depression. Though Premier Wen Jiabao said in March he was worried about the safety of the nation’s U.S. assets, China bought $38 billion of U.S. notes and bonds in May, taking its holdings to $801.5 billion.
The U.S. deficit may reach a record $1.85 trillion for the fiscal year ending Sept. 30, almost four times the previous fiscal year’s $455 billion shortfall, according to the Congressional Budget Office.
Federal Reserve Chairman Ben S. Bernanke will brief Chinese officials about how the U.S. plans to keep inflation in check over the next few years, people advised of the plan said this month. In June, Geithner told China that the U.S. wants to shrink its budget gap as soon as an economic recovery takes hold.
“Both nations must avoid the temptation to close off our respective markets to trade and investment,” Geithner and Clinton wrote. “Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding U.S.-China economic relationship.”
To contact the reporter on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net
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