17 February 2009

China's image improves as world economy slumps

ROME: As the world lurches ever deeper into economic distress, China's image is changing from that of currency manipulator to a source of badly needed consumer demand.

At the Group of 7 conference here over the weekend, finance ministers extended a friendly hand to the country many have criticized.

Veering sharply from his past testimony before the U.S. Congress, where he used harsh language in criticizing China's reluctance to let its currency, the yuan, appreciate, the new U.S. Treasury secretary, Timothy Geithner, was quick to commend China for its 4 trillion yuan, or $585 billion, stimulus package.

"We very much welcome the steps China has taken to strengthen domestic demand and its commitment to further exchange rate reform," he said during a news conference Saturday.

This view was echoed by the Group of 7's communiqué, which added that the yuan was "expected to appreciate in effective terms."

The quick shift in the G-7's stance toward China underscores how sharply policy positions are changing as the world economy continues to struggle.

It also is further proof of the diminishing stature of this once august group as it has become clear that large growing economies like China, India, Brazil and South Korea, which are part of the Group of 20 but not the G-7, will play defining roles in generating the purchasing power the global economy so desperately needs.

The G-7 session was Geithner's first official trip abroad as Treasury secretary. After the withering reception that his bank rescue plan received in Washington, he could be excused for seeing the event as a well-timed respite.

Geithner, whose previous job was president of the Federal Reserve Bank of New York, has spent his academic and professional life studying and implementing international financial policy. So, two days spent in Rome brainstorming with finance ministers from the Group of 7 industrialized nations about fixing the global economy plays to his specialty.

As one might expect in a gathering of diverse economies, there were differences of opinion.

Amid signs that Europe's worsening economic slump has created fissures among G-7 leaders about how to deal with the crisis, Geithner fielded questions from his peers about provisions viewed as protectionist in the stimulus package of the administration of President Barack Obama, as well as the debt needed to pay for it and the lack of detail in his bank rescue plan.

When it came to concrete measures to address the world slump, there was little offered, although the final statement did point to increased steps to inject liquidity and strengthen bank balance sheets.

"There are no quick fixes," said Alistair Darling, the British chancellor of the Exchequer.

As for how Geithner was received, the Treasury secretary said that while participants were happy that the United States was stepping forward, more was expected. "We all understand that the U.S. needs to be an influence for good," he added.

Geithner's trip to Rome - like much of his recent experience following his protracted confirmation process - was a whirlwind, crammed tight with meetings, dinners and, when he could squeeze it in, a trip to the gym.

In theory, there has never been a Treasury secretary more qualified to be America's lead spokesman on international financial affairs. Geithner, unlike virtually all of his predecessors, has an orientation - personal, academic and professional - that is rooted outside his native country's borders.

At one dinner, Geithner, a veteran of untold previous international talking shops, gave an emotional speech outlining his respect for the consultative process.

"It was very heartfelt," said a Treasury official, who added that Geithner relied on notes he had taken minutes before speaking instead of his prepared presentation. "You could tell it was a homecoming."

But when it came to underlining the importance of a coordinated approach to stimulating economies, Geithner was all business. And while most leaders agreed on the need to bolster government spending, the question of how to finance it remained a contentious one here as well as in the United States.

Last week Giulio Tremonti, the Italian finance minister and Geithner's host for the weekend, reviewed the U.S. administration's stimulus in a Milan newspaper.

"If the problem is an excess of debt, the cure is not adding more debt, whether that debt is public or private," he wrote in the newspaper, Corriere della Sera, referring to this approach as the "American way."

Italy is one of the most indebted countries in Europe, with a debt that surpasses its annual gross domestic product.

The national debt of the United States, by contrast, was about 40 percent of GDP at the end of 2008, but Moody's Investor Service said it expected that to rise to 60 percent by 2010 because of the recession and spending tied to the government's bailout and stimulus programs.

There was also much discussion about the "Buy America" provision in the stimulus plan, which covers iron, steel and manufactured goods. The president of the World Bank, Robert Zoellick, said he had emphasized in meetings with ministers how crucial it was to keep the world economy open, not closed and to not repeat the protectionist policy errors of the 1930s.

"The 'Buy American' provision is very dangerous," he said.

Geithner was careful to take on both issues at his closing news conference where he emphasized the administration's commitment to open markets, while taking up as well America's growing debt burden.

"We need to show the world that we can bring our resources and expenditures back into balance," he said. "That is crucially important."

Hit with a barrage of questions regarding his bank plan, he effectively said - stay tuned.

"We are going to move quickly to lay out a broad design," he said. "But we also want to makes sure that they work."

And amid the camera flashes and aggressive questioning, the Treasury secretary seemed to have found a comfort level that was lacking during his earlier public appearance when he announced his bank plan but took no questions. His voice had a deeper quality and his smile was more self-assured.

When there were no more questions, he waited several beats before exiting with a quick wave and headed for the plane waiting to take him and his team back to Washington.

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