Geithner reassures Chinese their dollar assets are safe

US Treasury Secretary politely asks rulers to devalue nation's currency

The American Treasury Secretary, Timothy Geithner, has sought to reassure the Chinese government that their dollar-denominated assets are secure.

Mr Geithner, during his first official visit to China, told an audience at Peking University in Beijing yesterday that "Chinese financial assets are very safe", despite widespread concerns that the scale of US government borrowing and the massive programme of "quantitative easing" now under way will lead eventually a burst of inflation and downward pressure on the US currency. Those concerns were highlighted yesterday when benchmark US Treasury 10-year yields surged by their highest margins in four months. Reports suggested that US manufacturing shrank in May at the slowest pace in eight months and spending on construction unexpectedly rose in April.

The Chinese government holds about $700bn of US Treasury securities, part of a total official holding of about $1.5trillion in dollar-denominated assets, including private-sector debts. Such vast national capital derives principally from China's correspondingly large trade surpluses with the US, running at $200bn-plus in each of the past five years.

A number of senior Chinese officials have voiced concerns about the dollar. In March, the governor of the central bank of China, Zhou Xiaochuan, suggested the US dollar should be relieved of its role as the world's reserve currency and be replaced by the special drawing rights issued by the IMF. Wen Jiabao, the Chinese Prime Minister, recently declared: "We have lent a huge amount of money to the United States. Of course we are concerned about the safety of our assets."

America's budget deficit, said the Treasury Secretary, would have to come down to about 3 per cent of GDP for it to be put on a "definitely downward path", though it is likely to be more than four times that figure over the next year.

Mr Geithner also took the opportunity to tell his hosts what the Obama administration "expected" of them – a rebalancing of Chinese growth away from exports and towards domestic consumption, a revaluation of the renminbi, and improved opportunities for Western firms to invest in and trade with the Chinese economy.

The Treasury Secretary caused a diplomatic frisson in March when he stated, during his confirmation hearings to the Senate, that President Barack Obama "believes that China is manipulating its currency". Yesterday he was more polite, saying: "Greater exchange rate flexibility will help reinforce the shift in the composition of growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth and low inflation in the future."

In return, Mr Geithner once again expressed America's keenness to see China play an enhanced role in international financial affairs, including a louder voice at the IMF, where Chinese representation is far lower than the size of her economy would warrant; she has roughly the same say as Italy. Despite broad agreement that both countries need to address the so-called "global imbalances" that, many believe, are the root cause of the current financial crisis and recession, there seems little the "G2" can do to engineer a radical recasting of their economic relations in the short term.

The US needs China to continue purchasing its government debt. Meanwhile, the Chinese will continue to depend on exports to fuel her growth; the average Chinese citizen still has only the fraction of the purchasing power of a typical Westerner. Though slower, Chinese growth is still projected by the IMF to be as high as 6.5 per cent this year.