June 2nd, 2009
07:11 AM GMT
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BEIJING, China — Not long ago, the U.S. government was talking tough with accusations of currency manipulation by China. But U.S. Treasury Secretary Timothy Geithner struck a very different tone on his visit to Beijing this week.

At his speech at Peking University and with government officials, Geithner sought to reassure Beijing that the value of the dollar was safe – as are the $768 billion in U.S. treasuries Beijing owns.

The tough talk has evaporated with the spiraling credit crisis and the ballooning U.S. budget deficit of $2 trillion – nearly 13 percent of GDP. Geithner assured the Chinese that the U.S. would work to cut that deficit down to 3 percent of GDP once the economy stabilized and was on the path to recovery.

Geithner says the U.S. aims to rebalance the world economy with China exporting less and importing more – preferably from the U.S., to help reduce the massive trade surplus.

How these twin economic powers can escape this embrace, however, is another matter.

Chinese bloggers, economists and editorial writers are complaining that their government is financing U.S. hegemony and urges Beijing to stop bankrolling U.S. debt. But for the Chinese economy, there are few credible options for what to do with its massive foreign currency reserves.

Should it move that cash back to China it could trigger an appreciation of the value of the yuan. Chinese asset-buying across the globe would raise thorny political concerns. The U.S. credit market is still the best place to park its cash reserves.

For the U.S., the dance is difficult because if Chinese exports decline, so too does the cash China has to buy U.S. debt.

The bond between the two has been likened to two drunks trying to carry each other down the street, or that of a crack dealer and buyer. Regardless of metaphor, it’s a very complicated relationship – one in which the fate of the world economy hangs in the balance.

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