dataTreasury Secretary Timothy Geithner told China that the U.S. wants to shrink its budget gap as soon as an economic recovery takes hold, reassuring the nation that is the biggest holder of U.S. government debt.

The U.S. goal is a deficit of “roughly 3 percent” of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today in a speech in Beijing.

Geithner’s maiden visit to China as treasury secretary aims to deepen cooperation in dealing with the global financial crisis in meetings with PremierWen Jiabao, President Hu Jintao and Vice Premier Wang Qishan. U.S. government debt has this year handed investors the worst loss since at least 1977 on forecasts for ballooning deficits and Wen has expressed concern about the “safety” of China’s dollar assets.

“The Chinese public is worried about the safety of its foreign-exchange reserves,” said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “If America fails to adjust its economy by increasing its saving rate and reducing its current account deficit another financial crisis triggered by a dollar crisis could be inevitable,” Yu said in an e-mail.

China held about $768 billion of Treasuries as of March. For the fiscal year that ends Sept. 30, the U.S. deficit is projected to reach a record $1.75 trillion from last year’s $455 billion shortfall, according to the Congressional Budget Office.

‘Sustainable’ Deficit

Geithner said that China’s investments in U.S. financial assets are very safe, and that the U.S. is committed to a strong dollar.

“We are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term,” Geithner said. “This will mean bringing the imbalance between our fiscal resources and our expenditures down to the point — roughly 3 percent of GDP — where the overall level of public debt to GDP is definitely on a downward path.”

The U.S. will need to phase out the tax cuts and bank rescue programs set up to help the economy recover from a deep recession, Geithner said. Spending cuts also will be needed, along with health care reform and new budget constraints like pay-as-you-go rules.

The global economic recession “seems to be losing force” although recovery will be a long and slow process, he said, acknowledging General Motors Corp. factory closures and its corporate reorganization being announced today in Washington.

China’s manufacturing expanded in May, two reports showed today, in response to the country’s 4 trillion yuan ($585 billion) stimulus package announced last year.

 

Avoiding Showdown

In his prepared remarks, Geithner repeated the U.S. desire for a more flexible yuan. He has avoided a showdown on the issue, declining to repeat comments he made in written remarks to lawmakers after his Senate confirmation hearing in January that China was “manipulating” its currency.

China has stalled gains by the yuan against the dollar since July last year after the 21 percent increase that followed the scrapping of a fixed-exchange rate three years earlier. The Chinese currency traded at 6.8283 per dollar as of 1:56 p.m. in Shanghai today.

In his remarks today, Geithner said China needs to shift its economy to rely more on domestic demand than exports.

“Allowing the market, interest rates and other prices to function to encourage the shift in production will be particularly important,” he said. “An important part of this strategy is the government’s commitment to move toward a more flexible exchange-rate regime.”

 

U.S. Banks

In comments after his speech, Geithner said “very successful” efforts by U.S. banks to raise new capital will provide a “much larger cushion” against future losses.

Geithner will meet tomorrow with Wen, who in March called for the U.S. to “guarantee the safety of China’s assets.”

Geithner said Hu and President Barack Obama agreed in April to establish a strategic and economic dialogue that will be held in Washington next month. He and Secretary of StateHillary Clinton will host Vice Premier Wang Qishan and Dai Bingguo, a state councilor.

-Bloomberg-