China, which has nearly $800 billion of its savings invested in U.S. government securities, has publicly and privately been lecturing Washington on its profligate fiscal policy. So it was no surprise when Tim Geithner made his maiden journey to China as Treasury Secretary that he faced some heat. Yesterday, in fact, Chinese students laughed out loud when Geithner reassured one questioner that their country's investments in the US are "very safe."
Yet, when Geithner today met the two most powerful men in the nation that is the biggest creditor of the United States: President Hu Jintao, and Prime Minister Wen Jiabao, the mood was more conciliatory. The man whose name now graces dollar bills in the United States was, in effect, meeting his bankers. But if those two pressed the Treasury Secretary about whether their government's huge investments in the US are safe -- the way some of their colleagues last week had 'grilled' Richard Fisher, Geithner's former colleague on the Federal Reserve Board -- it's a secret. Indeed, the Treasury Secretary told reporters prior to meeting Hu today that, far from being obsessed about whether the US was going to reflate its way out of trouble (and debase its currency in the process) the Chinese hadn't even raised the issue in his meetings yesterday. "I actually haven't been [asked about it]," Geithner said, perhaps chafing a bit about the presumption that the US needs to reassure the Chinese of its creditworthiness. "The economic leadership here," he continued, "has a very sophisticated understanding about where we are, and what we are doing. We are going to have to bring down our fiscal deficit, and walk back these extraordinary interventions in the financial sector, but we are completely committed to doing that -- and they understand that."
But the concern of the Chinese is not a figment of anyone's imagination. It was just back in March, in fact, that Premier Wen himself bluntly asked Washington for reassurance. At the annual meeting of China's National People's Congress in Bejing, Wen said: "We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries. So I...call on the United States to maintain its creditworthiness, abide by its commitments and ensure the security of China's assets."
As messages go, it doesn't get much clearer than that. But Geithner has known all along that there are two, critical first steps that the United States has to take in order to begin the process of reassuring its creditors. It has to demonstrate that it has a grip on the financial crisis -- that the world wasn't about to end -- and it has to show the world that a broad, macro economic turnaround isn't too far down the road. Geithner is loathe to talk publicly about market behavior, but Treasury officials believe that a tightening of credit spreads shows an improvement in confidence: risk premiums are receding in response to what has been an initial sign of "stabilization," as one official familiar with Treasury's thinking says. And the recent, slight rise in interest rates demonstrates nothing except a market beginning to return to normalcy, not one getting spooked by fears of inflation. Consider that TIPS -- U.S. inflation protected bonds -- trade at 1.5% over five years, and just 1.9% over ten. No sign of incipient inflationary panic there. To China and to everyone else watching, the U.S. can cite that as progress -- and reasonably so.
And just yesterday -- fortuitous timing for the Treasury Secretary -- both the United States and China reported economic data that buoyed equity markets on both sides of the Pacific. In China, the monthly purchasing manager's index for manufacturing was stronger than expected, showing "for the first time that policy is really gaining traction [in China]," says Eric Fishwick, head of economic research at CLSA Asia Pacific Markets in Hong Kong. At the same time, in the U.S., data showed personal income in April rose 0.5 per cent, a surprisingly strong number. On a day when General Motors (GMGMQ), once the world's largest industrial corporation, declared bankruptcy, the Dow Jones Industrial Average rose 2.6 per cent.
Thus, as he headed into his key meetings in China, Geithner actually had an ever so slight wind at his back. He acknowledged as much, in fact, upon greeting Prime Minister Wen: "At the time we met in New York (last autumn)," the Treasury Secretary told him, "it was a time of great panic. But we are happy (now) to see small signs of recovery.''
Wen welcomed Geithner warmly in his public remarks; the aggressiveness in China's rhetoric of just a couple of months ago is now gone, as is any notion that Beijing will stop buying huge amounts of Treasury debt anytime soon. In fact, in March alone, China's direct holdings of US Treasury securities alone (excluding so called Agency debt issued by Fannie and Freddie Mac) rose by $23.7 billion to reach a new record of $768 billion, according to preliminary US data, making it far and away the US's biggest creditor.
Geithner repeats constantly, both in public and in private, that the Obama administration is committed to returning to fiscal responsibility -- pushing deficits down to three per cent of GDP -- in the "medium term.'' On his first visit to Beijing, the young Treasury Secretary could claim to his Chinese hosts that the necessary precondition for that return to fiscal sanity -- a little bit of economic growth -- might possibly be on the horizon. Considering where things were the last time he met China's premier -- in October of last year, when the global economy was, as Geithner says now, "falling off a cliff" -- that's not nothing.
