http://www.cnbc.com/id/31027681

Making his first trip to China as Treasury secretary, Tim Geithner sounded a note of optimism on the U.S. economy and talked tough on deficits.

"No one is going to be more concerned about future deficits than we are," Geithner told reporters en route to meetings with the Chinese president, premier and central banker.

Those remarks seemed aimed equally at the U.S. and China, which is a big holder of U.S. treasury debt.

Chinese officials have expressed doubts recently about the status of the U.S. dollar as a world reserve currency and concern about growing U.S. deficits.

Geithner was more upbeat on the economy but remained cautious, underscoring his oft-repeated worries about ending government programs designed to repair the financial system too quickly.

"We are seeing a more durable stability in economy and the financial system is in substantially better shape," he said. "But we have a ways to go, and we need to keep working in the U.S. and with other major economies to restore conditions for a sustainable recovery."

, officials said the Treasury secretary remained in contact with auto czar Steve Rattner and National Economics Council director Larry Summers. He is expected to remain in contact throughout his trip.

Officials have downplayed the potential for any breakthroughs on issues ranging from the value of the Chinese currency, climate change and the huge U.S./Chinese trade imbalance.

Geithner talked of the need to forge a deeper relationship with Beijing than Washington has so far.

"We would like to build with China the kind of relationship we built with the G-7 over the last several decades," Geithner said.

Current DateTime: 07:23:11 31 May 2009
LinksList Documentid: 31027782

By Wang Xu and Zhang Haizhou (China Daily)
Updated: 2009-06-01 07:25

Visiting US Treasury Secretary Timothy Geithner is expected to reassure China of the safety of its investments in the US and resist the temptation of trade protectionism -- crucial to woo further Chinese lending to the world's largest borrower.

Geithner, who arrived in Beijing Sunday on his first trip as Treasury chief, is expected to meet with President Hu Jintao, Premier Wen Jiabao and Vice-Premier Wang Qishan, as well as deliver a speech at Peking University.

Observers say Geithner's top priority would be to persuade Chinese policymakers to continue the purchase of US Treasuries, vital for Barack Obama's administration to finance its stimulus plan and pull the US economy out of recession.

En route to Beijing, Geithner told reporters that the Obama administration was firmly committed to ratcheting down huge deficits as quickly as it can once economic recovery is assured, Reuters reported

"No one is going to be more concerned about future deficits than we are," he said.

However, Geithner could face a tough task reassuring his hosts that China's huge holdings of Treasury bonds would not lose value and the US dollar would remain stable.

China held $768 billion in Treasury securities as of March, making it the single largest holder of US government debt.

It is estimated about 70 percent of China's $2 trillion foreign exchange reserves are held in US dollar-denominated assets.

Yet, the US government's rising debt and the Federal Reserve's quantitative easing, which in effect means printing money, may dent Chinese investment in the US.

Yu Yongding, an economist and former member of the monetary policy committee of the China central bank, said: "I do not know whether there will be enough demand for new issuances and hence I am worried about the direction of the prices of US government securities."

Wang Jian, secretary-general of the China Society of Macroeconomics, agreed. "Prospects for the US dollar and US Treasuries do not look good at the moment, and even worse in the long run."

On the first day of US treasury secretary Timothy Geithner's visit to China, the Beijing-based Global Times published a survey of 23 famous Chinese economists on Sunday, saying that the majority of them deemed the vast holding of US bonds "risky."

Among the 23 experts polled, 17 said they believed that US equities pose great risks to China's economy.

Geithner will begin his first visit to Beijing as US treasury secretary in an attempt to assure the US' biggest creditor that its large holding of purchased US bonds is safe.

The visit also highlights Geithner's comments made earlier this year alleging that China has manipulated its currency.

Li Wei, an expert with the Institute of Ministry of Commerce, and Tian Yun, a scholar at the China Macro Economics Institute, expressed concerns over the risks, saying that the United States may export its deepening crisis to China "by printing US dollar notes uncontrollably."

But five other experts, including Yi Xianrong, a researcher at the financial research center of the Chinese Academy of Social Sciences (CASS), and Mei Jun, deputy director of the Finance and Securities Institute at Renmin University of China, said they don't believe US equities pose "great risks" to the country's economy.

They said compared with other investment, the investment in US notes are less risky as the US is still the engine of the world economy.

Hu Zhihao, a scholar of the Finance Institute of CASS, said the way China holds US equities poses the risk as almost all the foreign reserves are in the hands of the government, which cannot be sustained and will have to change gradually.

Knowing the potential risks, 15 of the interviewed economists said they were against the idea to quickly offload China's possession of US debt as a means to strengthen the country's financial stability and decrease Beijing's vulnerability to the already ailing world economy.

Song Fengming, director of the Department of Finance in the School of Economics and Management at Tsinghua University, said China has no better option but to buy US Treasury bonds, while other options, such as the Japanese Yen and British pound, are volatile and soft.

Other experts held China should offload the US debt.

Zhou Shijian, senior research fellow of the Center for US-China Relations at Tsinghua University, said the vast holding of US equities can be very dangerous as the Americans are not going "to reduce the speed of printing dollars."

On finding a way out, most experts said China ought to expand its investment on tangible and strategic materials such as grain, energy and mineral resources, and intangible assets such as equities and bonds.

They also believed that Chinese enterprises should conduct overseas mergers and acquisitions, while increasing exports of high technology.

Li Defeng, a professor of the School of Finance at the Central University of Finance and Economics, said China should reform its existing economic growth pattern and rely on expanding domestic demand.

He Weiwen, a director of the American Economic Association of China, said China's neighboring countries, especially in East Asia, can serve as its new investment destination.

(Xinhua News Agency May 31, 2009)