Geithner to talk trade, Treasuries in Beijing

When Treasury Secretary Timothy F. Geithner arrives Sunday in Beijing, he will have to begin assuring the Chinese that their vast holdings in federal bonds are safe and that the Obama administration is doing everything it can to preserve the value of the American dollar.

But Geithner, the former Peking University student who is now entrusted with laying the groundwork for arguably the world’s most important economic relationship, will also use the three-day trip to pitch Beijing on long-term economic reforms that will reduce the trade imbalance between the two nations and wean the U.S. off easy Chinese loans.

In meetings with President Hu Jintao and Premier Wen Jiabao, Geithner will encourage the Chinese to rely less on exports and to develop a broad-based domestic consumer market, said a senior Treasury official who briefed reporters on the visit’s goals.

“One of the objectives of the trip . . . is the importance of laying the foundations for balanced, sustained growth in the future,” the official said. “For China this involves stronger domestic demand growth. It involves shifting the structure of the Chinese economy to [spur] domestic demand.”

One reason for the approach: The trade deficit between the United States and China -- which reached $288 billion last year -- has long been a political flash point. Beijing has been accused of artificially devaluing its currency, the yuan, to make exports more affordable at the expense of American manufacturers.

Geithner alluded to the practice during his Senate confirmation hearing in January by saying President Obama “believes China is manipulating its currency.”

The remark was later described as a mistake and the administration has since stayed away from highlighting the issue of currency manipulation, which has become a surefire way to raise tensions with America’s largest creditor. China holds more than $1 trillion of U.S. Treasury bonds and other government securities.

Though Geithner got off to a rocky start in the eyes of the Chinese, it is unlikely to hinder progress, said Andy Rothman, an economist at brokerage and investment group CLSA Asia-Pacific Markets.

“He’s going to be well-received in China,” Rothman said. “It’s unusual for Hu and Wen to meet a Cabinet officer. Obviously the relationship is that important.”

The U.S. needs China to continue buying federal securities until it can crawl out of the recession. And China, which owned $768 billion in Treasuries as of March, cannot afford to see the dollar devalue.

This has not prevented Chinese officials from making their discomfort known -- some say to appease a domestic audience that thinks lending billions of dollars to the U.S. over the years has diverted money that could have bolstered China’s social development and standard of living.

In a meeting with reporters in March, Wen said, “To be honest, we are a little bit worried. We have loaned huge amounts of money to the United States, so of course, we have to be concerned. We hope the United States honors its word and ensures the safety of Chinese assets.”

Ten days later, the head of China’s central bank, Zhou Xiaochuan, floated the idea of creating an alternative to the U.S. dollar as the world’s reserve currency.

The Obama administration, by comparison, has stressed cooperation over confrontation. A visit by House Speaker Nancy Pelosi (D-San Francisco) this week did not produce headlines on human rights, a subject the Chinese have been loath to address.

Pelosi, who traveled to Beijing with a bipartisan congressional delegation, and Sen. John Kerry (D-Mass.), who was also in China this week, instead were focused on reducing greenhouse gas emissions. Geithner is expected to continue that tone.

“Geithner will want to encourage China to keep buying” Treasuries, said Shi Yinhong, professor of international relations at People’s Universty in Beijing. “The Chinese leadership will want to know that U.S. policies are protecting their financial assets.”

Persuading China to take fundamental steps to increase its domestic consumption is crucial for the U.S. and world economies, said Frank Vargo, vice president for international economic affairs at the National Assn. of Manufacturers in Washington.

The Bush administration tried unsuccessfully to get China to make changes to shift its production away from export products, such as flat-panel TVs, and to improve the social safety net and access to credit so that Chinese citizens wouldn’t feel compelled to save at such a high rate, Vargo said. But the Obama administration should have an easier time making the case after China’s exports have dropped with the global economic downturn.

“They can leverage the current global financial crisis because I think China is frightened by it,” Vargo said. “It really demonstrates to them in a very stark way that they cannot be so dependent on foreign markets over which they have no control.”

If China funnels more of its economic output into its own economy, it would boost manufacturing in the United States because Chinese consumers would begin importing U.S. goods, Vargo said.

To be sure, China’s leadership has acknowledged the importance of fostering a domestic market to lessen its reliance on exports. But the task has been made difficult by the global crisis.

Beijing worries that rising unemployment may destabilize the country. Lawmakers are offering tax breaks to producers and subsidies to Chinese consumers to buy appliances and cars. Whether the policy can sustain employment or merely delays bankruptcies is yet to be seen.

“China will need domestic consumption growth more than ever, and this . . . cannot be the best time for China to try to revive the production-enhancing model in a way that may limit future domestic consumption growth,” wrote Michael Pettis, a Peking University professor of finance, on his blog called China Financial Markets.

Geithner on Monday will deliver a speech at Peking University, where he once studied Chinese. It is unclear whether he still speaks the language. But a Treasury official said he will meet with students and former professors at the school.

On Tuesday, he’ll head to the Beijing Capital Museum for an exhibit on solar panels before meeting with Wen and Hu.

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david.pierson@latimes.com

jim.puzzanghera@latimes.com

Nicole Liu in The Times’ Beijing Bureau contributed to this report.