U.S. to press China on yuan, economy ahead of Hu visit

WASHINGTON (Reuters) – The United States wants a "real, demonstrative commitment" from China that it is serious about shifting away from export-led economic growth, a U.S. official told Reuters on Tuesday ahead of next week's state visit by China's Hu Jintao.

Treasury Secretary Timothy Geithner will on Wednesday lay out his vision for how the world's two biggest economic powers should interact. But the official's comments indicate some impatience with China's gradual approach to allowing its currency to rise and building up domestic demand.

"It's both the pace in which they do it and the conviction with which they demonstrate they're going to do it," said the senior Obama administration official, who spoke on condition of anonymity.

"What we still need to see in the first instance is that real, demonstrable commitment to the objective" of rebalancing the economy, the official said.

Washington has pressed Beijing for years to allow the yuan to rise more rapidly to cool its exports, narrow a trade gap, and shrink a $2.8 trillion pile of reserves.

But China counters that U.S. economic policies are responsible for the imbalances and has urged the United States to get its own fiscal house in order before its mountain of debt destabilizes the global economy.

The January 19 White House talks mark the first face-to-face meeting between President Barack Obama and Hu since the Group of 20 summit in Seoul in November, which was widely seen as a disappointment for Washington.

Not only did Obama get scant international support at the G20 meeting for pressuring China to speed up the yuan's rise, but he also got an earful from allies about his own country's economic policy. Topping the list of complaints was the Federal Reserve's decision to buy $600 billion in government debt to try to spur a stronger economic recovery.

Eswar Prasad, a Brookings Institution economist and former International Monetary Fund official with responsibility for China, said Geithner's speech would seek to wrest back control of the economic message.

"There is a sense that at the Seoul G20 summit, China managed to take charge of the narrative, especially about the effects of (the Fed's bond-buying program) on the rest of the world, thereby deflecting attention from yuan and trade policy," Prasad said.

PRESSURE EASES

Geithner is the first of several top U.S. officials fanning out to preview Hu's visit and detail the White House's aims. Secretary of State Hillary Clinton will give what an aide called a "major" address on U.S.-China relations on Friday.

Geithner will "stake out the expectations and make the point that the U.S. thinks now is the time to address issues that are contributing to global imbalances and hurting the recovery in the United States," said Adam Hersh, an economist at the Center for American Progress think tank.

Hersh said Geithner would likely try to convey a cooperative tone because of a recognition that taking too hard a line would pose obstacles to solving shared problems.

But Obama is keen to show that China is not dominating the relationship, a perception that has plagued him since a 2009 visit to Beijing that critics said yielded little for the United States.

The administration official said next week's meeting was part of an ongoing dialogue with China, and continuing those regular contacts would help develop mutual trust needed to make progress on economic and political issues, ranging from North Korea to human rights.

Both countries understand they have a role to play in rebalancing the global economy, and both sides would benefit from getting it right, he said.

"It's not done so we can win and they can lose," the official said. "There's a deep conviction on our side that this will benefit China as well."

Geithner has made a similar argument, telling China that it needs to let the yuan strengthen more in order to quell inflation and prevent disastrous asset price bubbles.

Since mid-June, when China announced it was loosening its grip on the yuan, the currency has risen about 3 percent against the dollar.

However, Prasad pointed out that the real effective exchange rate had risen even more when taking into account the difference between U.S. and Chinese interest rates.

That, along with big congressional gains by Republicans who are less inclined to press China over its currency, give Geithner some breathing space and allows Obama to focus on long-term strategic issues, Prasad said.

The administration official said bilateral visits were about keeping up momentum rather than coming up with big headline-grabbing agreements.

"I don't think this should be seen somehow as a dramatic moment. It's more part of the building of an important relationship and nurturing of that relationship," he said.

(Additional reporting by Arshad Mohammed; Editing by Philip Barbara)