US and China Differ on Aim of Economic Talks

When the U.S. Treasury secretary, Henry Paulson Jr., proposed a "strategic economic dialogue" with China last summer, American officials were cheered by the choice for leader of the Chinese team: a vice premier with a reputation for tough but successful trade negotiations since the early 1990s.

But in the past few months, American officials and experts on China say that Wu Yi, a vice premier and the country's highest-ranking woman official, may be more interested in using the "dialogue" to advance China's demands than to guide it toward changes sought by Washington.

China appears to see the dialogue less as a vehicle for adjusting its policies than as a means to air its own call for the United States to reform its own economy to end its addiction to Chinese goods and Chinese loans sustaining gigantic American trade and budget deficits.

"I'm not expecting any miracles," said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing. "This visit by Mr. Paulson will have some influence on Chinese political leaders, but China always prefers gradualism."

Yu, an Oxford University-trained economist, whose institute is the location for a major speech scheduled on Friday by Ben Bernanke, the Federal Reserve chairman, said Wu was not seen in China as especially sympathetic to the main American demand in these talks — that China stop manipulating its currency to expand exports.

"I have been arguing for a change in economic policy for years, but my voice is quite lonely," he said, adding that however understanding Wu might be, she and the Communist Party are largely beholden to China's vast export sector, which accounts for more than a third of China's economy.

The United States wants China to let its currency float in relation to the dollar, which most economists say would cause it to rise in value, raising the cost of exports for American consumers and reducing the cost of imports into China. Congressional leaders and business executives say currency reform should be Paulson's top priority.

The American argument is that it is in China's interest to channel its surplus of investment capital, not into export industries, but into improving the lives of Chinese citizens and promoting a service and consumer-led economy that does not use as much energy to run and does not further degrade its ravaged environment.

But a transition to that kind of economy could take years, maybe decades.

The Chinese fear that letting the yuan float upwards could massively weaken their export-driven economy. The textile industry alone supports 90 million workers but makes minuscule profit, Yu said, so a drop in sales could force millions out of work or require more subsidies to keep them employed.

Paulson arrived here Wednesday with Commerce Secretary Carlos Guttierez, Labor Secretary Elaine Chao, Health and Human Services Secretary Michael Leavitt, Energy Secretary Samuel Bodman, the trade representative Susan Schwab and Stephen Johnson, head of the Environmental Protection Agency.

Their goal starting Thursday is to discuss a range of issues as a way of coaxing the Chinese to move on the major economic priorities. Besides currency manipulation, the issues are opening the Chinese economy to foreign investment and services and cracking down on piracy of videos, software, pharmaceuticals and other items.

A senior Bush administration official who knows Wu said it was not clear how much clout she would have in overcoming these problems, even though she has a record of advocating some modernization of the Chinese economy to make it less export-dependent.

"She's an impressive interlocutor, very direct and very capable of getting things done," said the official, who said he could be more candid if not quoted by name. "I don't think that's the concern. The concern will be frankly whether she and the other forces for change continue down the path of reform. The jury is out on that."

Wu, a 66-year-old former petroleum engineer, has been described for years as a "rising star" in the Communist Party, though she is due to retire next year. In past trade negotiations, such as the bargaining over China's joining the World Trade Organization in 2000, she was seen more as an implementer than policy maker.

"She always brought a very pragmatic attitude toward problem-solving," said Charlene Barshefsky, the former top trade negotiator under President Bill Clinton. "But she will still have to do consensus building. Chinese bureaucrats are like bureaucrats everywhere: they don't like people treading on their turf."

Wu's expected retirement is the Chinese counterpart to the fact that Paulson also has only two more years in office. Yet both sides say their dialogue will take many years to yield results, producing a natural wariness of concessions up front.

The Chinese figure most likely to make the decisions on what reforms are possible is Prime Minister Wen Jiabao, to whom Wu reports. But Wen, who is in charge of foreign policy, is considered a cautious consensus-builder with an aversion to anything that could make China unstable.

Wu is further handicapped, political experts say, by the sidelining of a top member of the Politburo, Huang Ju, who has been associated with past banking and currency reforms. Huang has been kept out of the talks by illness and his association with corruption scandals in Shanghai, where he was party chief.

As a result of all these problems, American officials have for months tried to lower expectations. They also proclaim their interest in listening to China's agenda, though it will be at least as difficult for the United States to carry out what China wants as it is for China to meet the American agenda.

For example, China wants the United States to raise its own savings rate and cut its budget deficit and reliance on consumer borrowing, which are blamed for the influx of Chinese goods and capital. Paulson can't easily deliver on that even if he had a compliant Congress, which he won't.

The Beijing government also charges that it could shift the trade imbalance and import more if the Bush administration relaxed tight controls on high technology exports with sensitive military applications. The Bush administration has rejected that request.

China also wants the United States to lift barriers to Chinese banks getting licenses in the United States and appears to be freezing efforts by American banks to set up offices in China in retaliation. But the Federal Reserve has effectively barred Chinese banks because of their alleged failure to meet Western standards on transparency.

Finally, China would like to sell some of its estimated $700 billion in dollar- denominated reserves, earned after years of trade surpluses, and acquire American corporate assets.

Bush administration officials, remembering the furor in 2005 caused by the attempt to buy Unocal by China National Offshore Oil, say that public aversion to Chinese purchases remains high.

Most of all, China is hoping that the "dialogue" will enable them to educate Americans about their problems, easing the pressure from on them to act. But this desire comes just as the Bush administration says it needs Chinese action to ward off protectionist measures aimed at China in Congress.

"This dialogue will help us explain to the U.S. side how we view the trade imbalances," said a Chinese official. "I think the Bush administration has to explain to members of the Congress about this dialogue."

Speaking anonymously under Chinese government ground rules, he said China fears that Americans do not appreciate the Chinese-American partnership, not only on economic issues, but on international matters like Iran and North Korea.

"We want Americans to understand that what we're doing in China is a very big experiment in the history of mankind," said the official. "We are transforming a highly centralized state-controlled economy into a market economy, and transforming an export- driven economy to a consumption-driven economy."

These changes, he vowed, will accelerate in the next five years. Meanwhile, he called for patience and for an examination of the facts. "The facts will prove that China is not a threat to the United States," he said.