U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency.

A major goal of Geithner's maiden visit to China as Treasury chief is to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

Chinese assets are very safe, Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

But later in the day, Chinese Vice Premier Wang Qishan said it was important for the two nations to show the world they are working together through their joint economic dialogue.

We must through our dialogue send a clear signal that China and the U.S. are engaged in practical cooperation to address the crisis, Wang told Geithner, according to the Chinese Foreign Ministry's website (www.mfa.gov.cn).

This is important for boosting confidence and encouraging global financial stability and economic revival, said Wang.

In his speech, Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised very disciplined future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing.

We have the deepest and most liquid markets for risk-free assets in the world. We're committed to bring our fiscal deficits down over time to a sustainable level.

We believe in a strong dollar ... and we're going to make sure that we repair and reform the financial system so that we sustain confidence, he said.

Geithner also offered strong backing for a bigger Chinese role in international policymaking.

China is already too important to the global economy not to have a full seat at the international table, he said.

ECONOMY LOOKING UP

Geithner, who is due to meet President Hu Jintao and Premier Wen Jiabao during two days of talks, described the recession as still powerful and dangerous in much of the world.

Recent signs of improvement were not enough to change an International Monetary Fund prediction that world output would shrink this year for the first time in 60 years. And credit was likely to be tight for some time, Geithner said.

But he added: The global recession seems to be losing force.

Moreover, the U.S. financial system was healing and it now seemed assured that the world would avoid financial collapse and deflation.

But Geithner said there could be no return to business as usual either for the United States or China: both must change their growth strategies as U.S. consumers pay down debt after years of living beyond their means.

For China, which he said was in an enviably strong position, that meant reducing its dependence on exports.

Purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past, he said.

In China ... growth that is sustainable will require a very substantial shift from external to domestic demand.

To that end, Geithner said a more flexible exchange-rate regime for the yuan, which would almost certainly see the value of the Chinese currency rise against the dollar, was particularly important because it would spur more Chinese demand.

A stronger yuan would make imports cheaper for China and Chinese exports more costly for foreign buyers.

CHINA ROLE

Geithner offered U.S. backing for a higher-profile role for China in running global institutions including the IMF -- a controversial proposition since it raises the sensitive issue of reducing Europe's voting share in the global lender.

The United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China's importance in the global economy, he said.

In words clearly intended to soothe Chinese concerns that its vibrant export economy might be targeted by U.S. lawmakers who are feeling pressure from soaring American joblessness, Geithner said the Obama administration would resist any such moves.

As we go through the severe stresses of this crisis, we must not turn our backs on open trade and investment, he said. In return, we expect increased opportunities to export to and invest in the Chinese economy.

Geithner said he was hopeful that General Motors Corp and Chrysler would be able to stand on their own feet once they emerge from bankruptcy.

GM will file for bankruptcy on Monday, U.S. officials said, forcing the 100-year-old automaker once seen as a symbol of American economic might into a new and uncertain era of government ownership.

We want a quick, clean exit as soon as conditions permit, Geithner said. We're very optimistic these firms will emerge (from restructuring) without further government assistance.

(Reporting by Glenn Somerville; Editing by Alan Wheatley/Toby Chopra)

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