China expressed its hope that the US government will be able to cut its budget deficit in order to prevent inflation that could jeopardize the value of China's dollar-denominated assets, as the two countries wrapped up the first of two days of high-level talks.

"We sincerely hope the US fiscal deficit would be reduced, year after year," Zhu Guangyao, assistant minister of finance, told reporters after the conclusion of the first day of talks, which have been dubbed the US-China Strategic and Economic Dialogue.

"The Chinese government is responsible and first and foremost our responsibility is [for] the Chinese people, so of course we are concerned about the security of the Chinese [dollar] assets," Zhu said.

China holds a total of more than US$800 billion in US treasury debt, making it America's largest foreign creditor.

As a result of recent American efforts to counter the financial crisis and stimulate the economy, US government spending has soared, and is projected to reach US$1.84 trillion this year. That is more than four times the previous high.

Many investors and economists fear this deficit spending will lead to inflation, as the increase in the supply of dollars drives down their value, thereby also reducing the value all dollar-denominated assets, including US Treasury bonds. As a result, some investors have started to buy shorter-term bonds, which they hope will not be impacted by any longer-term inflation driven by increased government spending.

US Secretary of Treasury Timothy Geithner assured the Chinese delegation in his opening remark on Monday that US has taken steps to overhaul its financial system, enhance regulation, and control the deficit.

"We are committed to taking measures to maintain greater savings and to reducing the federal deficit to a sustainable level by 2013," he said. However, Geithner did not reveal how, specifically, the United States planned to achieve its deficit-cutting goals during the dialogue.

Both American and Chinese officials, however, agreed that the economy has begun to slowly stabilize.

"We have agreed that green shoots have emerged in the international economy and financial markets," said Zhu. However, the economic foundation is far from being sound, and the current situation remains severe, Zhu warned.

China's economy has shown solid signs of recovery, with its GDP growth picking up to 7.1 percent in the first half of this year after dipping to as low as 6.1 percent in the first quarter. The country's retail sales growth was 15 percent in the first half of this year, the highest since 1985, according to Ministry of Finance figures.

The two-day talks, which are co-chaired on the Chinese side by Vice Premier Wang Qishan and State Councilor Dai Bingguo, and the US Secretary of State Hillary Rodham Clinton and Secretary of Treasury Timothy Geithner on the US side, covered a wide array of issues, including the global economy, climate change and clean energy as well as regional security issues.

At the opening ceremony on Monday, US President Barack Obama emphasized his hope for closer cooperation between the two countries.

"I believe that we are poised to make steady progress on some of the most important issues of our times," he said. "The relationship between the United States and China will shape the 21st century."

(China Daily July 28, 2009)