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U.S., China to talk money

| Monday, July 27, 2009

WASHINGTON — The United States and China today kick off talks here that are expected to highlight Beijing's unease about its huge holdings in federal bonds, Washington's desire to reduce China's reliance on exports and the need for both sides to reach consensus on tackling climate change.

Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy F. Geithner will lead the American side in the two-day U.S.-China Strategic and Economic Dialogue. It's the latest in an increasingly high-level series of meetings between the two countries this year that could have significant bearing on the global economy and international environmental policy.

A week after Federal Reserve Chairman Ben S. Bernanke outlined strategies to stave off inflation, Chinese State Councilor Dai Bingguo and Vice Premier Wang Qishan are expected to seek assurances that the dollar will remain strong and thus protect China's holdings in U.S. treasuries.

"As an important investor, China is deeply concerned about the U.S. economic situation and hopes the U.S. stimulus policy could make effective progress," said Zhu Guangyao, China's assistant finance minister, at a recent news conference.

China's foreign reserves increased in the second quarter to an all-time high of $2.13 trillion. About 65 percent of that amount is estimated to be in U.S. dollars. The bump has been credited not to a rebound in exports but to the increased value of China's non-dollar holdings and more incoming investment.

China has attracted more capital because of robust growth in the face of the current global downturn. Massive government stimulus and record bank lending expanded China's economy by 7.9 percent in the last quarter.

But while Washington welcomes China's recent success, there's concern that it cannot be sustained unless Beijing reforms its economy toward more domestic consumption.

For years, China's treasury purchases financed America's buying binge, which included Chinese exports. Beijing also helped make possible the low interest rates and loose credit that paved the way for the U.S. housing bubble.

Now that the United States has been hit by the worst economic crisis since the Great Depression, American households are increasing their savings rates. The U.S. trade gap has narrowed to its lowest level since 1999. China can no longer rely on American consumers to buy enough Chinese exports to keep the Asian nation's economy growing, officials say.

"Our message to the Chinese is going to be, 'If you want to achieve your growth objectives, you're going to have to find a different way of doing it than through export-led growth,' " said a senior Obama administration official briefing reporters about the talks.

This is not news to Chinese policymakers, who have tried to stimulate consumption through modest health-care reforms and purchasing programs for autos and household appliances. Creating a social safety net is widely agreed to be one of the best ways to make ordinary Chinese secure enough to spend some of their savings.

But countering the progress is the fear of destabilizing unemployment. Beijing will not sacrifice its export sector, because no better alternative has been identified to keep millions of migrant workers employed.

Although leaders on both sides have been stressing the importance of cooperation, Chinese leaders have not been shy lately about expressing concern about the dollar's dominance. China has introduced about $95 billion in currency swaps with other countries since December and floated the idea of an international currency for trade. The moves signal a sharper tone out of Beijing.

Nicholas R. Lardy, a China expert at the Peterson Institute for International Economics in Washington, said American officials used to lecture the Chinese on how things ought to be and what they should do to open up financial markets.

But with U.S. economic power damaged by the financial crisis, Lardy said the Chinese "are taking a more aggressive posture and are not willing to be lectured to. ... Now they are emboldened to do some lecturing."

The two sides still appear to be at loggerheads on what to do about climate change. China recently surpassed the United States as the world's chief polluter, but together, the two countries are responsible for 42 percent of emissions.

A climate change bill calling for caps on pollution has stalled in the Senate, probably awaiting a sign of a similar commitment on the part of Beijing. The Chinese are reluctant to do so for fear of limiting their economic growth. They also believe that America should commit to greater reductions in emissions than those outlined in the bill.

An agreement between the two sides is essential, experts say, if there's to be any hope for an international climate change treaty in Copenhagen in December.

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