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Geithner discounts safety fears over China's massive US assets

US Treasury Secretary Timothy Geithner reassured the Chinese government yesterday that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong US currency.

A major goal of Geithner's maiden visit to China as Treasury chief is to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and US bonds.

China is the biggest foreign owner of US Treasury bonds. US data show that China held US$768 billion in Treasuries as of March, but some analysts believe China's total US dollar-denominated investments could be twice as high.

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

But later in the day, Chinese Vice Premier Wang Qishan said it was important for the two nations to show the world they were working together.

"We must through our dialogue send a clear signal that China and the US are engaged in practical cooperation to address the economic crisis," Wang told Geithner, according to the Chinese Foreign Ministry.

In his speech at Peking University, Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised "very disciplined" future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing.

He also offered strong backing for a bigger Chinese role in international policy making.

Geithner, who is due to meet President Hu Jintao and Premier Wen Jiabao during two days of talks, described the recession as still "powerful and dangerous" in much of the world.

Recent signs of improvement were not enough to change an International Monetary Fund prediction that world output would shrink this year for the first time in 60 years. And credit was likely to be tight for some time, Geithner said.

But, he added, "The global recession seems to be losing force." Moreover, the US financial system was healing and it now seemed assured that the world would avoid financial collapse and deflation.

Geithner warned, however, that there could be no return to business as usual either for the United States or China: Both must change their growth strategies as US consumers pay down debt after years of living beyond their means.

"In China ... growth that is sustainable will require a very substantial shift from external to domestic demand," he said.

To that end, Geithner said a more flexible exchange-rate regime for the yuan, which would almost certainly see the value of the Chinese currency rise against the dollar, was particularly important because it would spur more Chinese demand.


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