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Geithner's Rebalancing Bid

Author: Lee Hudson Teslik
June 1, 2009

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Timothy Geithner, in his first trip to China as U.S. treasury secretary, presented a plan for the United States and China to work together in a speech at Peking University. Geithner called for China to make its currency more flexible (FT) in exchange for fiscal reforms in the United States; he also said China would need to diversify its economy (NYT) beyond relying so heavily on exports for growth, and that Washington, in return, would focus on mitigating its ballooning deficit to protect massive Chinese investments in U.S. government debt. In short, the Wall Street Journal reports, Geithner's speech was an appeal for both countries to "overhaul their economies" and establish a rebalanced global economic order.

Chinese media focused on Geithner's implication that Beijing should play a more substantial role (CCTV) in global economic policymaking. China Daily says the primary goal of Geithner's trip, which has included meetings with several leading Chinese economic policymakers, has been to reaffirm Beijing's faith in U.S. dollar-backed assets and allay concerns that Washington's budget deficit and loose monetary policy will prompt inflation, undermining Chinese holdings of both the U.S. dollar and U.S. Treasury bonds. Reuters reports, however, that Geithner has encountered some skepticism from the Chinese--and indeed that some students listening to his speech laughed at his assertion that Chinese holdings of U.S. assets are "very safe."

Bloomberg notes that despite "hand-wringing," demand for U.S. financial assets is in fact as high as ever.

The economic backdrop in Washington is somewhat gloomier today, however, given the bankruptcy filing of General Motors, the U.S. automaker. The Washington Post reports that under the proposed restructuring the U.S. government will take a 60 percent stake in the company, a plan some investors say unfairly favors the United Auto Workers union.

In separate auto industry news, a judge cleared Chrysler (Reuters) to sell nearly all of its assets to a group led by the Italian automaker Fiat. The Journal reports Ford is hoping to gain from its rivals' pain.

Essential Document:

- Here is the text of Geithner's speech.

Analysis:

- "The Chinese authorities are aware that significant changes in policies are imperative to sustaining rapid growth over the medium term. They have publicly stated that the economy needs to be rebalanced away from its heavy dependence on investment and exports toward consumption." -- CFR's Steven Dunaway, from a recent Council Special Report on global financial imbalances.

Related:

- In an op-ed, CFR's Sebastian Mallaby says China has rapidly shifted from a "diffident player in international finance" to an "impatient table-banger"--and that rhetoric thus far reflects poorly on Beijing's leadership.

- In a recent blog post, CFR's Brad Setser argues China may have even more currency holdings than is commonly thought.

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