China, U.S. pledge cooperation after "robust" talks

By Glenn Somerville

BEIJING (Reuters) - China and the United States pledged on Friday to boost efforts to tackle the turmoil engulfing global markets and to continue high-level cooperation when President-elect Barack Obama takes office.

Among the few concrete results of the two-day meeting, the governments agreed to make an extra $20 billion of credit available to finance U.S. and Chinese exports to developing countries that are struggling to get access to trade credit.

U.S. Treasury Secretary Henry Paulson, who led the U.S. delegation, described the talks as productive and said he was proud that the "Strategic Economic Dialogue" he had instituted had strengthened bilateral relations.

But there were tell-tale signs that the two sides had not seen eye-to-eye, with the United States worried that China might be losing the stomach to let its currency keep rising and China anxious over Washington's management of the U.S. economy.

In a closing statement, Paulson described the cabinet-level talks as "robust," while a senior Chinese official urged the United States not to neglect its biggest creditor as it strives to stabilize its banking system and revive growth.

"We hope the U.S. side will seriously consider the Chinese side's concern and protect the interests of Chinese investors," Assistant Chinese Finance Minister Zhu Guangyao told reporters.

Beijing holds more than 60 percent of its $2 trillion of reserves in dollar assets, with a big chunk in debt issued by the Treasury and troubled mortgage lenders Fannie Mae and Freddie Mac, which have effectively been taken over by the government.

Worried that the value of China's bonds are vulnerable to a sharp sell-off in the dollar, academics and some policy makers in Beijing say China should not put so many eggs in one basket.

But Paulson played down the risk that China might diversify its bond portfolio. "It is a fact that China is an investor in U.S. securities," he said. "I don't see any countries with holdings so large that I view as a threat."

FRICTION

Paulson, on his last official visit to Beijing, praised China for its responsible stance during the crisis, including its plans to spend 4 trillion yuan ($586 billion) over two years to prop up growth in the world's fourth-largest economy.

"The Chinese government is prepared to work with the U.S. government and the international community to play a useful and constructive role in the face of the crisis," Premier Wen Jiabao told Paulson in talks that followed the formal meetings.

But friction over exchange rate policy was not far from the surface after China's central bank startled markets this week by letting the yuan, also known as the renminbi (RMB), fall modestly against the dollar after engineering a steady 20.3 percent rise since July 2005.

Some economists read the central bank's action as a warning to Washington -- and to the Obama administration in particular -- not to press Beijing too hard on currency policy given the dire straits of many Chinese exporters.

But Paulson stood his ground, singling out the importance of a market-driven currency in promoting domestic demand-led growth in China that would contribute to a healthy global economy.