The Real Point of Geithner’s Visit

On May 31, U.S. Secretary of the Treasury Timothy Geithner visited China as scheduled. Many people have speculated that the purpose of the visit is not only to placate China, but to persuade China to continue to buy up American government debt.

According to Geither himself, before the news of his trip was publicly released, there were four main reasons for his trip to China: first, to advance a “positive, cooperative and comprehensive” relationship in order to strive to restore the global economy; second, to work with China to explore long-term ways to ensure a “balanced” global economic growth; third, to investigate the future of the global banking framework, in the hopes that China might become an independent member of the Financial Stability Board (FSB); fourth, to further promote China-U.S. all-around cooperation in the area of energy.

On the surface, Geithner did not respond directly to China’s demands. At most he harped on the compromise that “a strong dollar is in the U.S. interest,” which expresses a verbal promise that “as soon as recovery is firmly established, tax incentives we put in place…will have to expire.” According to media’s interpretation of goodwill, this is tantamount to indirectly providing a so-called “guarantee,” apparently satisfying China’s long-standing desire that the US make this sort of promise.

However, judging from history and experience, Geithner’s empty promise will actually prove quite worthless. When the American dollar devalues it will do so naturally; it will not require anyone’s determination. First of all, as the global economy starts to show signs of recovery, the dollar’s status as a reserve currency will weaken. Secondly, the U.S. Federal Reserve withstanding inflation is a myth fabricated as early as 2008, not in September as the world economy was undergoing rapid deterioration. Even now the U.S. perhaps has still not been able to extricate itself from the nightmare of inflation. Finally, hoping for an end to the crisis, it is exceedingly naïve to think that the U.S. will rapidly reduce its financial deficit. According to the Obama administration economic stimulus plan, the 2009 financial deficit is estimated to exceed 1.84 trillion dollars; in the next 10 years the deficit will surpass 7.1 trillion dollars. This being the case, beating around the bush with “guarantees” is basically not credible. Why should we again let Geithner tell us falsehoods?

Furthermore, is the U.S. is worried that China will massively decrease its holdings of U.S. bonds? Of course not. The U.S. knows very well that in addition to U.S. bonds and agency bonds, China currently cannot come up with an alternative investment tool. No matter whether they are Euro bonds, Yen bonds, or even the legendary IMF bonds, China cannot afford to undertake such a huge responsibility. As for the short term, concentrating on investing foreign currency in crude oil, gold, or mineral resources is even more difficult to imagine – the only results of this kind of action would be to once again trigger global inflation, if nothing else.

Similarly, with regard to the issue of the RMB exchange rate, it is not possible for Geithner’s trip to constitute a credible guarantee that the U.S. will henceforth no longer blame China. The reason is simple. The United States Congress has constantly been entangled in this, and sending Geithner, who is an administration official, is not an adequate substitute for the legislative branch issuing a certificate of guarantee.

Of course, Geithner also understands that having China now give up a “managed floating exchange rate system” is also unrealistic. If his predecessor, Henry Paulson, was not able to accomplish this, he will not succeed any better.

This being said, does Geithner’s current trip to China still have any practical significance? The answer is yes.

As noted by “The Wall Street Journal,” Geithner’s short three-day visit should not be used to squander valuable time on the fact that neither side has wanted to concede over the past few years - one could, of course, go on about this all day – but in order to really make a substantive breakthrough, from now on adequate time and space to slowly talk things over should be retained. In fact, Geithner’s core mission is the same as Paulson’s during his visit to China in September 2006; namely, that China and the United States prepare to launch high-level dialogue a few months from now.

In Bush's second term, the China-U.S. Strategic Economic Dialogue (SED) mechanism allowed for the regular exchange of high-level policy-makers to get together and lay all the key issues on the table. They obtained a series of tangible results in areas such as the opening up of bilateral access to financial markets, energy cooperation, and food safety supervision. Owing to this, economic and trade relations between China and the United States were also greatly enhanced.

Therefore, the main point of Geithner's visit is to implement the consensus reached by President Hu Jintao and President Obama this April at the summit in London. We are on the verge of a Strategic Economic Dialogue mechanism merged with a high-level Strategic Dialogue mechanism, which will be further upgraded to “Strategic and Economic Dialogue mechanism.” If the building of a bilateral dialogue platform goes smoothly, for the next four or even eight years of stability and healthy development of China-U.S. political, economic and trade relations will have the effect of a ballast stone. Clearly, this is the real point of concern.

Although China does not acknowledge the so-called “China-U.S. co-op” (G2) proposal wording, there is no doubt that it points to the “benefits of cooperation” and the global influence of China and the U.S. In the long run, when China and the U.S. strengthen communication and cooperation out of mutual respect based on mutual concern, only then can the core interests of both sides be safeguarded and the elimination of potential conflicts fundamentally guaranteed.