U.S. Treasury Secretary Timothy Geithner arrived in China this weekend, where he will meet Monday and Tuesday with some of China’s highest officials, including President Hu Jintao and Premier Wen Jiabao. These are unusually high-level talks, according to Business Week:
Geithner travels to China for the first time this weekend. He’s scheduled to visit with a string of Beijing leaders, including President Hu Jintao. As a reality check for the significance of this reception, imagine that Wang Quishan visited Washington next week. Wang, who as China’s vice premier is Geithner’s counterpart, would certainly see Geithner, and doubtlessly Larry Summers, head of President Barack Obama’s National Economic Council. But would he get a meeting with Vice President Joe Biden? How about Obama himself? Probably not. Yet in addition to Hu and Wang, Geithner is scheduled to meet with Chinese Premier Wen Jiaboa.
The Chinese will have to explain why they are so interested in Geithner. But an interesting subtext is that it is Geithner who delivered the administration’s most stinging, high-level remark aimed at China. In his Senate confirmation hearing in January, Geithner said in reply to a written question that China is deliberately suppressing the value of the renminbi, the country’s currency. Geithner’s staff later said the reply was a mistake, yet it attracted much attention, and he had much explaining to do for weeks after – China is by far the largest international holder of U.S. debt, and may be relied on to finance much of Washington’s deficit for years to come.
In contrast to his combative tone during his confirmation hearings, analysts expect that Geithner will not raise the issue of currency revaluation on this trip. Instead, he will encourage China’s leadership to transition its export-led economy to one supported by domestic consumption. From The Wall Street Journal:
[…]That means encouraging Beijing to offer more generous health-care, retirement, welfare, educational and other benefits in order to persuade the average Chinese citizen that spending now doesn’t mean starving later.
[…]That will also require, in the U.S. view, allowing China’s currency to move more freely against the dollar. But Mr. Geithner is unlikely to hector Beijing about the yuan very much during this visit.
Read more about the expected agenda for Geithner’s China talks on The Wall Street Journal’s China Journal blog.
Greg Robb at MarketWatch reports in-depth on the political backdrop for Geithner’s visit – the complicated and often uncomfortable relationship between the world’s two largest economies in the current global recession:
The theory went that with the U.S. consumer tapped out, China would focus on building up its own domestic consumer market. But experts say this hasn’t happened, at least to the extent required.
Instead, Chinese exporters have doubled down on the return of the U.S. consumer and have increased their capacity. Exporters appear to have political muscle in China to block meaningful reform.
At the same time, the U.S. budget deficit is projected to reach record levels for the next several years.
“We’ve got to hope China still has an appetite for our debt,” given the “ocean of red ink” coming down the road, said [Timothy Adams, who also served in the Bush Treasury].
See also the Telegraph for an editorial on the inevitable growing pains of restructuring the China-U.S. economic relationship.
Update #1: This article from The China Post offers more in-depth analysis of the strength of Geithner’s bargaining position and the deal he intends to push:
Though the crisis has given Geithner a weak hand, treasury officials said he will seek to push this bargain:
The U.S. will work to reduce its budget deficits once the crisis ends, urge Americans to save more and shrink the trade deficits. To replace diminished U.S. spending, the Chinese will be asked to step up spending and stop saving so much. The administration says this can be done if Beijing improves pensions and health insurance so Chinese households don’t feel pressured to save so much.
Geithner is expected to point out that U.S. consumers already are rebuilding their retirement savings. The Chinese have pledged to redirect their economy to boost domestic growth. But many private economists question how serious China is about it.
Analysts said they expect Geithner and the Chinese to pledge to do all it takes to end the recession. Both sides know any hint of discord between the world’s largest and third-largest economies probably will unsettled [sic] financial markets.