Geithner to China: U.S. is OK

BEIJING — As the federal budget deficit soars into the stratosphere, Treasury Secretary Timothy Geithner is reassuring the Chinese — the largest holders of U.S. government debt — that the Obama administration is serious about restoring fiscal discipline once the current economic crisis is resolved.

Geithner, making his first trip to China as Treasury secretary, used a major economic-policy address Monday as well as separate meetings with top Chinese officials to deliver that message.

"As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary government support that we have put in place to overcome the crisis," Geithner said in a speech to students at Peking University, which Geithner attended as a young college student learning Chinese nearly three decades ago.

The Chinese officials did not comment publicly on Geithner's reassurances, but judging from the reaction of the college students, Geithner may still have some explaining to do.

The students peppered the Treasury secretary with questions about the debt, the administration's massive amounts of support to the banks and U.S. auto companies and the recent rise in interest rates on Treasury securities.

Some students wanted to know whether China's holdings of $768 billion of U.S. Treasury securities — which makes China America's biggest creditor — were safe, given projections by the Obama administration that the deficit for this year will soar to an astronomical $1.84 trillion, four times the previous single-year record.

Some students wondered whether the recent rise in interest rates was a signal that investors are beginning to worry that U.S. budget deficits will weaken the dollar and reduce the value of the Chinese holdings.

China's investments in the United States "are very safe," Geithner told the students. "We have the deepest, most liquid financial markets in the world."

He said the recent rise in long-term rates for Treasury securities was not a reflection of worries about rising U.S. budget deficits, but a reflection of the view by investors that the global economy is improving, which lessens demand for U.S. Treasurys as a safe haven.

As far as spending large amounts of money to support Chrysler and General Motors as they go through bankruptcy filings, Geithner said the administration was optimistic that government support would only be temporary. "We want to have a quick, clean exit," he said.

Geithner also stressed to the students that the administration would soon unveil a comprehensive overhaul of financial-system regulations designed to fix the flaws exposed by the current crisis, the worst to hit the U.S. economy since the Great Depression.

"We have a lot to do, but we are going to fix this," he pledged.

Later, Geithner and other Treasury officials met at the Great Hall of the People with a team of economic officials from China led by Vice Premier Wang Qishan for discussions about the upcoming high-level talks in Washington this summer between the two nations.

At the start of the session, Geithner said, "The world has a huge stake in our two countries working closely together to lay a foundation for recovery."

Wang called the upcoming talks, which will replace the Strategic Economic Dialogue begun in the Bush administration, an "important initiative in growing the China-U.S. relationship."

Geithner was scheduled to wrap up his visit today with meetings with Chinese President Hu Jintao and Premier Wen Jiaboa.

Wen sent shock waves through global financial markets in March when he publicly expressed worries about the soaring U.S. budget deficits and what that meant "about the safety of our assets."

China's huge holdings of Treasury debt represent the billions of dollars that have been transferred over the years into Chinese hands to pay for America's soaring trade deficits.

Geithner praised the role China is playing in stimulating the global economy. It has unveiled a sizable economic-stimulus program, second only to the U.S. program.

Manufacturing

in China

expands in May

China's manufacturing expanded in May, adding to signs the world's third-largest economy might be recovering from its slump, but growth was weak despite huge stimulus spending, according to two surveys released Monday.

Brokerage CLSA Asia-Pacific Markets said its purchasing managers index rose to 51.2 from April's 50.1 on a 100-point scale. Numbers above 50 show an expansion.

The state-sanctioned China Federation of Logistics and Purchasing said its own PMI eased slightly to 53.1 from April's 53.5 but still showed activity expanding.

Economists see the PMI as a better indicator of China's economic outlook than measures such as gross domestic product growth because it includes forward-looking elements such as new and export orders.

The figures add to mounting signs that Beijing's $586 billion) stimulus is starting to show results, boosting domestic demand to offset lackluster exports. Consumer spending, auto sales, bank lending and investment also are up.

Beijing is trying to shield China from the global downturn by pumping money into the economy through spending on building highways and other public works.

Consumer spending in April rose 14.8 percent from a year earlier.

Also in April, auto sales rose for a fifth straight month, jumping 25 percent from a year earlier to a record high of 1.15 million units.