U.S. softens tone to improve China relations

U.S. Treasury Secretary Timothy Geithner briefs the news media on U.S. objectives for the G20 Summit at the start of the Summit in the Pittsburgh Convention Center in Pittsburgh, Pennsylvania, September 24, 2009.

WASHINGTON (Reuters) - The United States is going out of its way to build a warmer economic relationship with China and the strategy seems to be paying early dividends.

In the past two weeks, China has endorsed a U.S.-backed commitment to rebalance the global economy, and impressed some European officials by backing up the pledge with specific steps it planned to take to reconfigure its own economy.

In addition, what looked like it could have been the start of a trade war when the United States imposed tariffs on Chinese tires fizzled out with minimal drama.

French Finance Minister Christine Lagarde said China had delivered a surprisingly forthright speech at an International Monetary Fund meeting in Istanbul this past week.

"What really hit me was the change of speech, and I suppose of economic policy of China," she said, adding that China had spelled out policy goals on improving social security, pensions, infrastructure and other areas that "correspond to calls to rectify imbalances."

Some officials and private analysts credit a change in tone out of Washington for helping build credibility in Beijing.

U.S. Treasury Secretary Timothy Geithner held a series of phone conversations with Chinese finance officials within weeks of taking office in late January, and visited Beijing in June.

He has fought for greater representation for China on the international economic stage, even though it put him in direct conflict with some European allies who saw it as a threat to their own global influence.

Last week, President Barack Obama broke with tradition when he declined to meet with the Dalai Lama who was visiting Washington, opting instead to delay the meeting until after his official trip to China in mid-November.

And at bilateral talks in Washington in July, the United States downplayed the touchiest issues including human rights violations and whether China's yuan currency is undervalued. Obama sought common ground over a non-controversial topic -- basketball. He referenced Chinese star Yao Ming and presented the Chinese delegation with a signed basketball.

ECONOMIC REALITIES

The strategy is aimed at showing that the United States is not simply trying to impose its will on China. Both sides have something to gain -- and lose -- from the relationship.

For the United States, China remains a critically important buyer of U.S. government debt, holding some $800 billion as of July, according to Treasury Department data.

For China, which relies on exports to generate jobs for the millions of workers migrating to urban areas, the United States is still the most reliable customer, although the recession has clearly put a dent in demand.

The U.S. trade deficit with China stood at $143.7 billion for the year through August, government data shows. While that still makes China easily the largest single contributor to the trade gap, it is down 15 percent from the $169.2 billion recorded in the same period a year ago.

Those figures are at the center of the global rebalancing equation. Economists have warned for years that U.S. debt and Chinese surpluses could not keep growing indefinitely, yet it took a global recession to begin reversing them.

The United States wants China to do more to shift its economic focus to its own consumers rather than exports, which involves allowing the yuan to rise more rapidly and building a stronger social safety net so that households won't need to save as much for retirement or health care expenses.

But until recently, Washington had little success in prodding China to alter its policies. Geithner, who has a master's degree in east Asian studies and once lived in China, seems to have found the right touch.

"He's recognized that just bashing them on the exchange rate is not as productive as putting it into a broader context," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. "There's a distinct change in approach compared with the past administration."

FRICTIONS ON DISPLAY

There is also a distinct change from the earliest days of President Barack Obama's administration.

The relationship got off to a rocky start in January when Geithner wrote to a congressional committee that Obama believed China was manipulating its currency. U.S. officials later backpedaled, saying Geithner was merely repeating comments Obama had made on the presidential campaign trail.

For former Treasury Secretary Henry Paulson, urging China to let the yuan rise more quickly was a focal point of his talks with Beijing on how to reduce imbalances.

Geithner has taken a more circuitous route, stressing that this is a shared problem and the United States has its own issues to address -- particularly boosting savings and paring the mountain of public and private debt.

The gentler strategy has yet to yield success in other areas such as climate change or security threats from North Korea and Iran, and it is not without political risk at home.

U.S. unemployment is nearing 10 percent and some of Obama's staunchest supporters -- manufacturing trade unions -- blame China in part for contributing to job losses here.

Those frictions may be on display next week, when Treasury is scheduled to release a semi-annual report on currency practices of key trading partners. Some labor and manufacturing groups want Washington to formally label China a currency manipulator, which looks highly unlikely.

"Failing to act on currency leaves in place ongoing pressure and complaints about the trade relationship with China," said Thea Lee, policy director for the AFL-CIO. "You can't do anything until you admit you have a problem."

(Additional reporting by Reuters IMF and G20 teams)