Economic relationship between the world’s two largest economies – US and China — is likely the world’s most important financial association according to the US Treasury Secretary Jacob Lew.

However, he said, that there were several challenges ahead for China as it transitions from a manufacturing economy to a consumer driven one and consequently its ties with the US.

“US-China relationship is probably the most important economic relationship in the world since it involves the world’s two largest economies,” he said, while adding that to what extent China is able to push economic reforms remains to be seen.

“I think the desire to be included in the Special Drawing Rights — SDR – basket at the International Monetary Fund was a helpful incentive for China to make reforms in how it manages its currency. However it doesn’t reflect completion of a reform agenda,” Mr Lew said suggesting that China needs to do more.

“It is an important step along the way, recognition that China has made important policy changes, and that they meet the standards of the IMF,” he added.
The US has long maintained that China needs to allow market forces to play a more dominant role so that it can tackle the problem of excess capacity – stocks of products that are not required in any market.

“China has changed the way it manages its exchange rate, so that’s less of a hot issue today. But the real test is going to be when there is pressure on the Chinese renminbi to appreciate – does China let it appreciate? The jury will be out until we see macro-economic circumstances that test that,” he said.

On the issue of excess capacity building up in China’s key manufacturing sectors the, the US Treasury Secretary said it was not a healthy sign.

“Fundamentally, it’s just not good for China. I believe there is still room for China to manage what is the hardest transition – from a heavily industrial to a much more consumer driven economy,” he said, cautioning that China “has space, but it is not infinite space”.