US promises tight rein on deficit

Treasury Secretary Timothy Geithner pledged to rein in the United States deficit as China underscored its concern about preserving the value of US$801.5 billion ($1.2 trillion) of Treasury holdings.

The US will ensure a "sustainable" deficit by 2013, Geithner said at the beginning 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 Bush administration meetings, officials indicated little sign of tension over the value of China's yuan, which US lawmakers have labelled 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 US 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. "If they withdrew from the market, there's a big appreciation" of the yuan which would send China's exports down, he said.

The 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 US$2 trillion for the first time in the second quarter, and its holdings of Treasuries reached US$801.5 billion in May, about 100 per cent more than at the start of 2007.

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

In a speech opening the meetings Obama said he wants to engage China in co-operation 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 the Iranian and North Korean nuclear programmes.

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 chief executive, pressed for a more market-set exchange rate and greater access for international financial firms to the country.

The two sides agreed yesterday that neither nation should withdraw economic stimulus measures "too soon because the recoveries are still very fragile", David Loevinger, the US Treasury's senior co-ordinator for China affairs, said.

"We talked about China's exchange-rate policy" and Chinese officials "talked about their desire to reform the international monetary system", Loevinger said.

Chinese policy makers have said they favour a shift in the global currency reserve system away from the dollar, suggesting wider use of an International Monetary Fund unit of account.

Zhang Xiaoqiang, vice-chairman of the National Development and Reform Commission, said yesterday that "compared with previous meetings" between Chinese and US officials, "the US side doesn't lay as much emphasis on renminbi exchange-rate reform and opening of capital markets".

The yuan, a denomination of the renminbi, has hovered around 6.83 per dollar this year after advancing for four years after China lifted a strict peg to the dollar in July 2005.

Zhu, the assistant finance minister, said China favours a "stable" dollar, indicating one source of concern is any collapse in the value of the US currency.

- BLOOMBERG