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Key China-US Economic Talks Begin in Beijing


Top Chinese and U.S. economic officials have begun two days of talks in Beijing aimed at easing friction over the two countries' economic relationship. Roger Wilkison reports from Beijing that, while both sides emphasize the need for long-term solutions to Washington's huge trade deficit with China, both face short-term political pressures.

This week's "strategic economic dialogue" between the two economic giants has brought a U.S. delegation of unprecedented prestige to Beijing. It is led by Treasury Secretary Henry Paulson, and includes six other cabinet-rank officials and the head of the Federal Reserve, the U.S. central bank. They are meeting with an equally high-powered Chinese group led by Vice-Premier Wu Yi.

On Wednesday, as a prelude to the talks, the two sides announced a series of deals between U.S. and Chinese companies. U.S. Commerce Secretary Carlos Gutierrez, a member of Paulson's delegation, says increased purchase by China of American products and services can help both economies.

"Commercial engagement built on open markets with fair, effective rules, is the foundation of the healthy, strong and continually growing trade relationship that we envision for China and the United States," he said.

But the feel-good atmosphere on Wednesday masked serious economic strains between the two countries, and neither is promising any immediate breakthroughs.

Paulson wasted no time in renewing Washington's call for the Chinese to move further towards allowing their currency, the yuan, to float freely.

American officials and businessmen say that by keeping the yuan artificially undervalued, Beijing gives Chinese exporters an unfair price advantage. The U.S. trade deficit with China last year was $202 billion, and is on track this year to rise even further - a major source of friction between the two countries.

Beijing allowed the yuan some flexibility in 2005, and on Thursday, as the meeting in Beijing began, it had risen to an all-time high of 7.818 to the dollar.

The U.S. side wants more, but the Chinese are afraid that too strong a yuan will destroy export-related jobs that employ tens of millions of Chinese workers. Maintaining social stability, which includes fighting unemployment caused by China's shift to a market economy, is paramount on the Communist Party's agenda.

Showing that China will not cave in to American pressure, Wu told Paulson the U.S. fails to fully understand China's problems. The Chinese have also called for economic reforms on the U.S. side, including a higher savings rate, a reduction in budget deficits and less reliance on personal credit, all of which Beijing says contribute to the trade imbalance.

Paulson has warned the Chinese that if improvement in the trade imbalance does not come, they risk a spiral of protectionist sentiment in the incoming congress controlled by the Democratic Party.

Chinese leaders face a major Communist Party meeting late next year that will shape government policy and determine individual career prospects. They will be preoccupied with domestic political maneuvering, and will be wary of making unpopular decisions that could cost them at home.

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