US, China facing economic, diplomatic flash points

[July 27, 2009]  WASHINGTON (AP) -- Two days of high-level talks between the United States and China are expected to expose sharp differences on trade and soaring U.S. budget deficits, but the discussion could be more amicable in the area of foreign policy.

The Obama administration is going out of its way to praise Beijing for the help it has already provided on pressuring North Korea to abandon its nuclear program.

Secretary of State Hillary Rodham Clinton, who with Treasury Secretary Timothy Geithner will lead the U.S. delegation, praised China on Sunday for being "positive and productive" in dealing with North Korea.

"We've been extremely gratified by their forward-leaning commitment to sanctions and the private messages that they have conveyed to the North Koreans," Clinton said on NBC's "Meet the Press."

Clinton's remarks came ahead of discussions Monday and Tuesday in Washington that continue a dialogue started by the Bush administration in 2006 to bridge differences between the two economic superpowers.

Both sides are emphasizing the importance of the meetings. The Chinese are bringing 150 diplomats -- one of the largest delegations it has ever assembled for discussions in Washington -- and the administration will start the discussions with remarks Monday by President Barack Obama.

With the global economy mired in recession, the United States and China have enormous stakes in resolving tensions in such areas as America's huge trade deficit with China and the Chinese government's unease over America's soaring budget deficits.

Other issues such as climate control will also be on the agenda. Both countries are the largest producers of the greenhouse gases blamed for global warming.

Three years ago, then-Treasury Secretary Henry Paulson used the initial U.S.-China talks to press Beijing to let its currency, the yuan, rise in value against the dollar to make it cheaper for Chinese to buy U.S. goods. U.S. manufacturers blame an undervalued yuan for record U.S. trade deficits with China -- and, in part, for a decline in U.S. jobs.

The U.S. efforts have yielded mixed results. The yuan, after rising in value about 22 percent since 2005, has scarcely budged in the past year. Beijing had begun to fear that a stronger yuan could threaten its exports. Chinese exports already were under pressure from the global recession.

But the Obama administration intends to remain focused on the trade gap, telling Beijing that it can't rely on U.S. consumers to pull the global economy out of recession this time. In part, that's because U.S. household savings rates are rising, shrinking consumer spending in this country.

For the United States, suffering from a 9.5 percent unemployment rate, the ultimate goal is to help put more Americans to work.

While the U.S. trade deficit with China has narrowed slightly this year, it is still the largest imbalance with any country. Critics in Congress say unless China does much more in the currency area, they will seek to pass legislation to impose economic sanctions on China, a move that could spark a trade war between the two nations.

Geithner and Clinton will be joined by their Chinese counterparts, Vice Premier Wang Qishan and State Councilor Dai Bingguo.

For their part, Chinese officials are making clear they want further explanations of what the administration plans to do about the soaring U.S. budget deficits. China, the largest foreign holder of U.S. Treasury debt -- $801.5 billion -- wants to know that those holdings are safe and won't be jeopardized in case of future inflation.

"The Chinese delegation, especially Vice Premier Wang, will make the request that the U.S. side should adopt responsible policies to ensure the basic stability of the exchange rate of the U.S. dollar and protect the safety of Chinese assets in the United States," Zhu Guangyao, an assistant Chinese finance minister, told reporters in Beijing last week.

The Chinese are likely to hear a repeat of the assurances Geithner gave them when he visited China last month. He said then that the administration is committed to cutting the U.S. budget deficit -- expected to hit $1.84 trillion this year -- in half once the emergency spending to ease the recession and the financial crisis are no longer needed.

[Associated Press; By MARTIN CRUTSINGER]

Associated Press writer Joe McDonald in Beijing contributed to this report.

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