U.S. Assures ‘Concerned’ China It Will Shrink Deficit

By Rob Delaney and Rebecca Christie

July 28 (Bloomberg) -- Treasury Secretary Timothy Geithner pledged to rein in the U.S. deficit as China underscored concern about preserving the value of its $801.5 billion of Treasury holdings.

The U.S. will ensure a “sustainable” deficit by 2013, Geithner said at the beginning of the first round of Strategic and Economic Dialogue talks under President Barack Obama in Washington. China is “concerned about the security of our financial assets,” Assistant Finance Minister Zhu Guangyao said.

In a shift from meetings under the Bush administration, officials indicated there were few signs of tension over the value of China’s yuan, which U.S. lawmakers have labeled as artificially cheap and an aid to Chinese exports. That may be because the “best idea is just to keep the yuan-dollar rate stable” given U.S. need for Chinese demand for Treasuries, said Ronald McKinnon, a professor of economics at Stanford University.

“The Chinese are trapped with supporting the value of the dollar,” McKinnon said in a telephone interview from Stanford, California. “If they withdrew from the market, there’s a big appreciation” of the yuan as a result that would send China’s exports down, he said.

China’s Reserves

The new focus on the deficit and Treasuries reflects the legacy of China’s record trade surpluses and its accumulation of dollars as a result of holding down the yuan. Chinese foreign- exchange reserves surpassed $2 trillion for the first time in the second quarter, and its holdings of Treasuries reached $801.5 billion in May, about 100 percent more than at the start of 2007.

Geithner is co-hosting the SED talks with Secretary of State Hillary Clinton. Vice Premier Wang Qishan and Dai Bingguo, a state councilor, are attending for China.

Obama said in a speech opening the meetings he wants to engage China in cooperation on a range of issues, beyond acting together to stimulate a global economic recovery.

“We must also be united in preventing Iran from acquiring a nuclear weapon,” Obama said. He cited nuclear proliferation, terrorism, piracy, global pandemics, climate change and civil war as other common threats facing the two countries. In her sessions, Clinton addressed both the Iranian and North Korean nuclear programs.

‘Fragile’ Recoveries

The Obama administration has expanded the talks that began under President George W. Bush, chaired by then Treasury Secretary Henry Paulson. Paulson, a former Goldman Sachs Group Inc. chief executive officer, pressed for a more market-set exchange rate and greater access for international financial firms to the country.

The two sides agreed yesterday that each nation shouldn’t withdraw economic stimulus measures “too soon because the recoveries are still very fragile,” David Loevinger, the U.S. Treasury’s senior coordinator for China affairs, said on a conference call with reporters.

“We talked about China’s exchange-rate policy” and Chinese officials “talked about their desire to reform the international monetary system,” Loevinger said, without offering specifics. Chinese policy makers have said they favor an eventual shift in the global currency reserve system away from the dollar, suggesting wider use of an International Monetary Fund unit of account.

Currency Policies

Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, told reporters yesterday that “compared with previous meetings” between Chinese and U.S. officials, “the U.S. side doesn’t lay as much emphasis on renminbi exchange-rate reform and opening of capital markets.” The yuan is a denomination of the renminbi.

The yuan will continue to move “according to the will of the Chinese government” and the talks won’t alter existing currency policies, Kirby Daley, a strategist at Newedge Group in Hong Kong told Bloomberg Television today.

The yuan has hovered around 6.83 per dollar since July last year. The currency has gained 21 percent since China lifted a strict peg to the dollar in July 2005.

Zhu, the assistant finance minister, also said China favors a “stable” dollar, indicating one source of concern is any collapse in the value of the U.S. currency. The dollar has dropped about 3.5 percent against the currencies of major trading partners this year, according to a Federal Reserve index, and has depreciated about 18 percent in the past eight years.

Bernanke, Summers

“We hope that the economy and financial markets remain stable and that the exchange rate of the U.S. dollar, which is a major international currency, remains stable,” Zhu said yesterday. “That’s why we’re focusing on the security of China’s investment in the U.S.”

The U.S. delegation included Fed Chairman Ben S. Bernanke, White House National Economic Council Director Lawrence Summers and Peter Orszag, Obama’s budget director.

Obama’s advisers told Chinese officials that the administration’s record $787 billion fiscal stimulus was necessary to get the economy out of its worst recession in half a century. Loevinger added that the deficit, which is on course to reach $1.8 trillion this year, will be made “sustainable” in part through future spending cuts and an overhaul of health care.

Geithner, in his opening remarks, reiterated the U.S. call for China to shift toward relying on domestic demand for growth rather than exports.

“They have to build more of a domestic spending society,” U.S. Trade Representative Ron Kirk said in an interview with Bloomberg Television. If they do, “software, movies and the creative arts will be a great market for the United States.”

To contact the reporter on this story: Rob Delaney in Washington at robdelaney@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net;