By Ariana Eunjung Cha and Annys Shin
Washington Post Foreign Service
Tuesday, June 2, 2009
BEIJING, June 1 -- U.S. Treasury Secretary Timothy F. Geithner on Monday sought to reassure China, America's biggest creditor, that its hundreds of billions of dollars of holdings in U.S. government debt remain safe, even as investors dumped Treasurys amid signs that the global recession is easing.
In recent months, Chinese officials have worried publicly that massive U.S. spending could undermine the value of Treasury securities. Geithner, on a two-day visit to China, responded Monday by pledging to reduce the U.S. budget deficit and gradually eliminate "the extraordinary government support" the Obama administration has put in place.
"The United States is committed to a strong and stable international financial system," Geithner said in a speech at Peking University, where he studied Chinese as an undergraduate in the 1980s. "The Obama administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home."
China is by far the largest purchaser of U.S. Treasurys, and about 82 percent of its $2 trillion of foreign reserves are estimated to be in dollars. In March, Chinese Prime Minister Wen Jiabao said he was "concerned about the safety of our assets," and since then other high-level Chinese officials have been pushing for alternatives to the dollar as a reserve currency.
Such comments have made investors around the world nervous about whether there will continue to be sufficient demand for U.S. debt at a time when the federal government needs to sell record amounts of it to finance itself. Under President Obama's budget, the U.S. government would have to borrow more than $4 trillion over the next five years.
So far, the government has had no trouble finding buyers. Central banks around the world continue to snap up Treasurys. The Federal Reserve has also said it will buy up to $300 billion in long-term Treasury notes to help keep consumer borrowing costs down.
But as the economy recovers, investors could abandon the safety of U.S. Treasurys for the bigger returns -- and risks -- of the stock market. That would make it more expensive for the U.S. government to borrow money.
Yesterday's sell-off stemmed from better-than-expected economic data on U.S. and Chinese manufacturing and U.S. personal income. Treasury prices plummeted, boosting yields on 10-year bonds by the highest margin in eight months.
Meanwhile, improving global economic conditions have sparked fears of inflation. Some economists and investors warn that government spending and the Federal Reserve's creation of up to $1 trillion in new money to thaw credit markets could cause prices to rise in a few years, leading investors to offload Treasurys.
Geithner's remarks on the need for fiscal discipline were designed to allay fears of inflation.
In meetings with Chinese government officials and in his public remarks, the Treasury secretary was careful to characterize China as a partner rather than a country that needs to be lectured. He called for a greater role for China in international financial institutions and for China to continue to collaborate with the United States to lead the world out of recession.
"The world is going through an exceptionally challenging period now, and I think the world has a huge stake in our two countries working closely together to lay a foundation for recovery," Geithner said in introductory remarks during a meeting with Vice Premier Wang Qishan.
Geithner's choice of language during his two-day visit highlights just how much things have changed since Henry M. Paulson Jr.'s trip to China as Treasury secretary in 2006.
Back then, the main issue dominating U.S.-Chinese economic relations was Beijing's strict control over the exchange rate for its currency, the yuan. Members of Congress and industry lobbying groups accused China of keeping the exchange rate artificially low, giving its industries a boost at the expense of U.S. companies and jobs. Paulson had been lobbying the Chinese to allow the yuan to rise against the dollar, and until last fall it had been.
During his Senate confirmation hearings in January, Geithner said the Obama administration "believes that China is manipulating its currency," a statement so strong that it prompted a conciliatory phone call from Obama to his Chinese counterpart, Hu Jintao.
On Monday, however, the yuan exchange issue was just a footnote. In his university speech, Geithner did not address the issue directly, noting only that "greater exchange-rate flexibility will help reinforce the shift in the composition of growth."
Instead, Geithner focused on other topics, including steps the U.S. government is taking to stabilize its economy and what it will do once the economy recovers. He said the United States will "have to bring our fiscal deficit down to a level that is sustainable over the medium term," calling for gradual reduction of the budget deficit to about 3 percent of gross domestic product, down from a projected level of nearly 13 percent this year. Under current projections by the Obama administration, that level should be attained by 2013.
Shin reported from Washington. Staff writer Lori Montgomery in Washington contributed to this report.