By Glenn Somerville and Simon Rabinovitch
U.S. Treasury Secretary Timothy Geithner has a chance next week to persuade anxious Chinese authorities their investments in huge and growing volumes of U.S. debt securities are safe and sound.
His visit to Beijing must deal with tough economic realities: the United States is issuing new debt in record volumes as it seeks to finance an array of programs to right its economy, while China is growing nervous about whether its U.S. "nest egg" is secure.
The two nations are too tightly bound — by trade and markets and China's position as the biggest holder of U.S. government debt — to do anything but try to closely manage their mutual interests while a credit crisis ravages demand and growth around the world.
Geithner departs on Saturday on his first trip to China as Treasury chief and will meet top officials, including President Hu Jintao, Premier Wen Jiabao and Vice Premier Wang Qishan, on Monday and Tuesday.
Wen fired a warning shot over mounting U.S. debt in March when he advised the Obama administration to guard the nation's creditworthiness.
"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets," Wen said. "I do indeed have some worries."
There is evidence China has acted on its worry, shifting investment of its foreign exchange reserves more toward the shorter end of the U.S. debt spectrum — a defensive move against the possibility the United States will have to boost interest rates to control inflation when recovery begins.
A senior Chinese official, Guan Tao from the State Administration of Foreign Exchange, said in published remarks on Wednesday that the financial crisis had "struck a heavy blow to the international prestige of the dollar." Guan's comments were particularly notable since he is in charge of investing China's $1.95 trillion in currency reserves.
MAINTAINING CONFIDENCE
China's concerns have been heard in Washington.
Geithner used a congressional appearance last week to state his commitment to support the currency. "My basic obligation is to make sure that we put in place policies that sustain confidence in this economy, in our currency, that we support a strong U.S. dollar, that we retain … the most deep and liquid markets for Treasury securities in the world," he said.
But in recent days, investor anxiety that buyer demand will falter for record volumes of U.S. debt has driven Treasury debt prices down sharply and yields up, threatening to snuff out an economic recovery before it gets started.
That anxiety raises the stakes as Washington seeks to assuage Beijing's worries, and it pushes to the back burner long-standing U.S. concerns over the value of China's yuan. Washington has long argued an undervalued yuan was giving Chinese producers an advantage in global markets.
"I don't have any indication that currency is going to be a major topic there," said Frank Vargo, vice president for international affairs with the National Association of Manufacturers. "Treasury's top concern is with getting the global economy going again and so is China's."
GEITHNER AS CHINA'S ALLY
Beijing may well cite its fear that surging U.S. debt risks devastating the value of its estimated $1.5 trillion in dollar-denominated investments. But Geithner's visit is shaping up as more of a confidence-building exercise than a forum for hashing out concrete plans to address the many thorny issues in the Sino-U.S. economic relationship.
"China may again raise concerns about the safety of its assets in the United States, but it will probably not issue any detailed proposals or to-do lists," said Xi Junyang, a professor at the Shanghai University of Finance and Economics.
"Its messages are more more likely to be diplomatic and friendly," he said. One reason that Chinese leaders may be wary of pressing Geithner too hard is because they see him as a crucial ally in Washington.
Beijing worries that the Democrat-dominated U.S. Congress may turn to protectionism against Chinese-made goods. Experience has taught China that the most effective way to make its voice heard in Washington is to go to straight to the top.
"It is better for the Chinese leadership to talk with Geithner and (President Barack) Obama than to lobby the House or the Senate," said Tao Xie, an expert on Sino-U.S. relations at Beijing Foreign Studies University.
Geithner has a tough act to follow. Henry Paulson, his predecessor, made China the center of his international focus, repeatedly visiting Beijing and launching regular cabinet-level meetings.
For his part, Geithner, a Mandarin speaker, has taken pains to make amends after an early misstep in January in which he called China a currency manipulator, a label Treasury declined to apply in a report to Congress in April.
He has succeeded in putting this early slip-up behind him, and his eagerness to mend fences has cemented Beijing's belief that the Obama administration will treat China as an equal, not as a country it can lecture.
"They are getting on to better terms as they get to know each other better," Tao said. "The Chinese leadership has very high expectations for President Obama."
