Why Geithner Went to China

Treasury Secretary Timothy Geithner arrived in China this week to continue the ongoing dialogue between the world's two largest economies, and definitely avoid talk about political reform. But democracy of a sort was on his agenda: The Chinese public doesn't trust its government's investments in American dollars, and the popular pressure is forcing Chinese officials to criticize America's economic policies. That gave Geithner a two-fold task this week: placating Chinese officials nervous that the Obama administration's spending plans could undermine the value of the dollar, and, more important, urging China to adopt new policies to dramatically change the focus of its economy.

Geithner was at pains to assure his Chinese counterparts that the Obama administration has the fiscal situation well in hand, even going so far as to promise a budget deficit of 3 percent of gross domestic product after the recession. It's not a new or unwelcome projection, though it is rare to hear such a specific target cited on foreign shores.

But outside of the political sideshow, the much-hyped Chinese ownership of U.S. debt and the controversy over exchange rates (which has led some Americans to accuse the Chinese of currency manipulation) isn't likely to change in the near future.

"The truth is … China really has no choice," Michael Pettis, a professor at the Guanghua School of Management in Beijing, says in an e-mail. "China does not want to hurt its export sector (on the contrary, it is trying to prop it up), and since no one else besides the United States can run such large trade deficits, China has no choice but to keep buying dollars."

If exchange rates and international reserves are something of a settled -- albeit controversial -- issue in both countries, the actual discussions are about changing the relationship of the two economies. For several years now, both China and the U.S. have been contemplating a kind of economic balancing act designed to provide long-term growth for both countries, and, incidentally, remove the incentives that lead to the stalemate over exchange rates and foreign reserves. (Tim Fernholz, American Prospect)