Financial Times Editorial Comment: Geithner’s good start in Beijing

Financial Times Editorial Comment: Geithner’s good start in Beijing
Copyright The Financial Times Limited 2009
Published: June 1 2009 20:06 | Last updated: June 1 2009 20:06
http://www.ft.com/cms/s/0/10adcf3c-4ed5-11de-8c10-00144feabdc0.html


The US and China are locked in a teetering dance, each grudgingly matching one another’s first steps. This week, in a speech at the start of his visit to Beijing, Tim Geithner, US Treasury secretary, set out a plan for how this relationship can develop into a more graceful arrangement. Mending the world economy, however, must go beyond mere bilateral talks.

Mr Geithner’s speech was geared towards both US and Chinese audiences. He sent a reassuring message to China, the largest buyer of US government debt, about his plans to cut the fiscal deficit. By setting out his stall first, the Treasury secretary managed to avoid the impression of being an incorrigible wastrel, summoned to see his suspicious bank manager.

Mr Geithner also noted that China needed to change its economic model. Beijing does need to move away from its export-orientation. But, by acknowledging that the US is equally responsible for the world’s economic imbalances, he made his case without upsetting his hosts. This was no mean feat.

In the run-up to the crisis, Chinese strip mills fed American strip malls. Chinese savings financed American consumption. In the future, the US must save more and the Chinese people must create more final demand.

This is easier said than done. If China stops financing the US deficit or US consumers stop spending too rapidly, the crisis will enter a new, darker chapter. In the longer term, making China less parsimonious and the US less voracious means re-engineering both economies. Re-establishing habits of thrift in America will be painful; no one wants to cut consumption.

Chinese demand is limited by workers’ income, which is a mere 40 per cent of national output. Demand also suffers because, lacking a robust social security system, Chinese consumers save up as insurance against illness and unemployment. Building a social safety net and redistributing money from Chinese corporations to workers would mark a generational shift with serious consequences for the elite.

In the short term, China and the US can do only so much. The G2 is the world’s most important bilateral relationship; it accounts for 31 per cent of world output and a quarter of its trade. While their relationship is crucial, the world cannot be brought back into kilter by these two Goliaths on their own. Global economics is a multilateral affair today, a dance with several partners. Mr Geithner and his hosts should bear that in mind.