Tim Geithner, the US Treasury secretary, arrived in China on his maiden visit on Monday with calls for China to make its currency more flexible in return for fiscal reforms on the part of the US.

“A successful transition to a more balanced and stable global economy will require very substantial changes to economic policy and financial regulation around the world,” he told an audience at Peking University.

“But some of the most important of those changes will have to come in China and the United States.”

The remarks set the tone for two days of talks with Chinese leaders. Mr Geithner said both China and the US needed to reform the way their two economies interacted.

Lesson in friendship draws blushes

Perhaps Tim Geithner, US Treasury secretary, had expected plain sailing when he faced his audience at Peking University on Monday. Both his time spent in China learning mandarin 28 years ago and his father’s history as the man who brought the Ford Foundation to the country were likely to earn him massive goodwill.

But his hosts were not going to welcome him as a friend without providing a little reminder of what true friendship means in China.

When it came to exchanging gifts, a former teacher of his produced a picture taken in 1981 showing Mr Geithner and a fellow student which she identified as a “very good friend”, whom he obviously did not remember. He studied at Peking University, the mainland’s most famous and prestigious college, in the 1980s.

Mr Geithner blushed deeply but his teacher did not leave it at that. Triggering bursts of laughter from the audience, she gave the student’s name, the date and the circumstances of the joint photograph.

The Treasury chief could only stand by with an even redder face, a boyish grin and helpless shake of his head.

In response to a question after his speech, Mr Geithner told the student audience that “Chinese assets are very safe”, drawing loud laughter from his student audience – a reflection of scepticism among many Chinese about the wisdom of building up large foreign reserves.

“Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies,” Mr Geithner said.

Addressing Chinese fears over the safety of its financial assets – mainly invested in US Treasury bills – Mr Geithner reiterated President Barack Obama’s pledge to lower the US fiscal deficit once the economy is on a stable recovery path. The deficit would be brought down to a level of around 3 per cent of GDP to allow the ratio of overall public debt to GDP to start falling, he added.

He also said savings rates in the US would have to increase, and consumer demand could not be as dominant a driver of growth as it had been in the past.

But Mr Geithner also named a long list of tasks he said the Chinese government had to address to make its contribution to a more balanced global economy, including expanding its social safety net, spending more on education and encouraging changes in industry structure through market mechanisms.

“An important part of this strategy is the government’s commitment to continue progress toward a more flexible exchange rate regime,” Mr Geithner said, adding that the issues mentioned would form the core of the bilateral agenda for economic cooperation.

The currency reference was particularly sensitive, considering Chinese protests in the past over more heavy-handed attempts at allowing its currency to appreciate. In written testimony to Congress earlier this year, which the Treasury later said had been prepared by mid-level officials, Mr Geithner was quoted as accusing China of manipulating its currency.

In Beijing, however, Mr Geithner made repeated reference to China’s weight and influence in the world economy, and pledged support for a bigger role for China in international financial institutions.

The comments from Mr Geitner came as the dollar continued its recent decline on foreign exchange markets. Optimism about the global economic recovery were helped by data showing China’s manufacturing sector expanded for a third straight month in May.

The US currency fell to its lowest since mid-December against a basket of currencies and against the euro, while sterling hit a seven-month high and the higher risk and commodity-related Australian and New Zealand dollars hit eight-month highs.

Mr Geithner also inserted a note of cautious optimism about the global economy.

“The global recession seems to be losing some force,” he said. “The financial system is starting to heal,” he added.

Mr Geithner was to meet Wang Qishan, vice premier, later on Monday. On Tuesday, he is scheduled to meet Wen Jiabao, premier, and Hu Jintao, president.