Chinese officials are giving U.S. efforts to pump up its ailing economy a vote of confidence and understand why higher budget deficits are a temporary necessity, U.S. Treasury Secretary Timothy Geithner said on Tuesday.
Geithner, on his first visit to China as Treasury chief, gave fresh assurances that Beijing can sleep easy over its huge holdings of U.S. Treasury debt because Washington is committed to keeping the dollar strong and inflation low.
President Barack Obama's administration, moreover, is determined to get back to living within its means as soon as the crisis has passed, Geithner said in a trio of interviews ahead of meetings with President Hu Jintao and Premier Wen Jiabao.
I've actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy, he said.
China is the single-biggest holder of U.S. government debt -- it held $768 billion in Treasuries as of March -- and has watched uneasily as Washington has spent lavishly to try to haul the U.S. economy out of its deepest recession in 80 years.
Obama is budgeting for a deficit of 12.3 percent of national output this year -- four times China's shortfall -- while the Fed has resorted to unorthodox policies, including purchasing hundreds of billions of dollars worth of U.S. Treasury debt, to unclog the arteries of the banking system.
The risk that this will spark inflation, eroding the value of China's holdings, has caused unease in Beijing, where leaders are conscious of public criticism that they should be spending more money at home instead of lending it to America.
But Geithner gave a staunch defense of America's expansive policy, describing it as the fiscally conservative option.
If we had not acted aggressively, our deficits would have been higher in the future, he said.
We are very committed to make sure that when recovery is established that we go back to living within our means; that we bring our fiscal deficits down to a sustainable level; that we unwind and reverse these exceptional measures we've taken in the financial sector, he added.
Geithner spoke to Chinese state television, the CNBC business channel and, in a webchat, to the English-language China Daily.
WELL DONE, BEN
The Treasury chief heaped praise on Fed Chairman Ben Bernanke, who he said had done an enormously impressive job in the worst financial crisis in decades.
The Fed's cooperation with other central banks in ensuring ample levels of cash in global money markets had been critical to helping stabilize the crisis.
But I am completely confident, as should you be, that he will have not just the will but the ability to bring this down so that we achieve the obligation of making sure that inflation is low and stable in the United States going forward, he said.
We will do everything that is necessary to try to make sure we're sustaining confidence in U.S. financial markets, not just in the United States but around the world, Geithner added.
China has reacted to the risk of inflation leading to losses on its bond portfolio by buying more short-term Treasury bills.
The nagging inflation worries and general market shift toward shorter-dated debt have driven up 10-year note yields and pushed the yield gap between two-year and 10-year notes near record highs on Monday.
Premier Wen reminded Geithner of his concerns about the safety of China's dollar assets by saying there was a need to tighten oversight of international reserve currencies so as to ensure the stability and growth of China, Xinhua reported.
Analysts assume that Beijing is already hedging its bets by switching at the margin from the dollar into other currencies.
Central bank governor Zhou Xiaochuan unsettled markets in March by floating the long-term possibility of even replacing the dollar as the world's main reserve currency with the Special Drawing Right, the International Monetary Fund's unit of account.
Russia said on Tuesday that it might discuss the idea of such a super-sovereign currency when the leaders of Brazil, India, Russia and China meet later this month.
But Geithner was unruffled by all the talk.
I believe the Chinese expect the dollar to be the principal reserve currency for a long period of time, as do we, he said.
Geithner, eschewing confrontation as he seeks to build trust, was gentle in encouraging China to let the yuan's exchange rate rise, something that would help to reduce the country's big trade surplus by making its exports more expensive and imports cheaper.
The Chinese currency climbed 21 percent against the dollar between July 2005 and last summer. But since then, to shield China's exporters, Beijing has kept the exchange rate on hold.
They have committed publicly to continue to move over time toward a more flexible exchange rate system because I think they recognize that is essential to their broader strategy of rebalancing sources of growth, Geithner said.
Turning to the global economy, he said there had been early signs of stabilization, and he was very encouraged by signs that confidence was returning to markets. What had been a real risk of financial collapse had receded to a significant degree.
But it's early, and this is still a very powerful storm. It's causing enormous pressures and damage, uncertainty, not just across our economy but in economies around the world, he said.
As Geithner flew out of Beijing, the U.S. government announced that the United States and China would inaugurate their cabinet-level Strategic and Economic Dialogue in Washington in the last week of July.
(Reporting by Glenn Somerville; Editing by Alan Wheatley)