China changes economic tune during Geithner’s visit

China, which was only recently criticising the US for the likely impact of its huge budget deficits on its treasury notes in which China has invested $768 billion, is now singing a different tune during the US treasury secretary, Timothy Geithner's visit to China, saying that it has full confidence in the US economy and understands why the temporary higher budget deficits are necessary.

Geithner's first visit to China as the US treasury secretary, is being seen to placate the disturbed Chinese sentiments over the investments and and win their confidence, which he seems to have done in good measure, assuring his hosts that their investments in the US were rock solid.

''I've actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy,'' Geithner said in two separate interviews to the Chinese state media yesterday in Beijing.

"China, I think has a very sophisticated understanding ... of the steps we're taking and why they're so important, not just to the US but to China and the rest of the world," he told state television.

Geithner spent the whole day yesterday in a series of meetings with China's top economic team, chiefs of finance, commerce, banking and securities as well as vice premier Wang Qishan.

Wang said in a statement issued by the Chinese foreign ministry, "The major task of the dialogue is to address the global economic slowdown. Through the dialogue, we will send a message that China and the US are cooperating substantively to get over the difficult times, which will help boost the confidence, promote global financial stability and world economic recovery."

Geithner, in  in a speech titled, "The US and China, Cooperating for Recovery and Growth," delivered at Peking University, where he studied Mandarin in the early '80s, said that both countries had pumped in a huge amount of money in their respective economies to battle the global economic downturn.

The students questioned him about the debt, the huge injection of funds into the US banks and the two auto companies as well as the recent rise in interest rates on US treasury securities.

When asked by the students as to whether the Chinese investments in the US were safe, he replied by saying ''Chinese financial assets are very safe.''

China's foreign financial assets rose 23 per cent in 2008 to reach a total of $2.92 trillion. China had nearly $2 trillion in foreign exchange and gold reserves accounting for 67 per cent of its overseas assets. (See: China's foreign assets jump to $2.92 trillion in 2008)

Many Chinese economist are alarmed at the rise in interest rates, which is a big worry for investors in US bonds since the US budget deficit is forecast to rise to a record $1.84 trillion this year, four times the previous single-year record, which in turn could weaken the dollar and reduce the value of the Chinese holdings substantially.

Geithner said that with the massive injection of funds into the US economy, the "financial system is starting to heal."

Federal Reserve Chairman Ben Bernanke had said in May that there were signs that the US economic contraction was slowing with the housing market showing signs of a bottoming out after a three-year slump. (See: Bernanke sees signs of recovery amid positive cues)

Geithner's conciliatory tone in China is a far cry from the earlier confrontationist approach last month, when he aid  that the new US administration was of the opinion that Beijing is "manipulating" its currency, and therefore the US will act "aggressively" using "all the diplomatic avenues" to change the China's currency practices. (See: Obama team toughens stance on China)

The US has been for long stating that China has artificially depressed the value of its currency to boost exports which is detrimental to business in the US. China is the largest foreign holder of US Treasuries after Japan.

China's control of the value of the yuan has been a sticking point with the US for years. A number of economists have been reported as saying that China artificially kept its currency low to make its goods cheap and generate trade surpluses, leading to a global capital imbalance with American consumers borrowing to spend, and China attaining the position of the largest foreign creditor of the US.

Last month, data released by the US commerce department showed that the US trade deficit in March 2009 widened to $27.6 billion as the global recession affected America's exports, while imports, mainly from China, increased. (See: US trade deficit in March zooms to $27.6 billion)

US trade deficit with China rose 10 per cent to $15.6 billion in March, the highest since January.