Sept. 22 (Bloomberg) -- Economist Donald Straszheim calls it the Group of Two.

When we think about the world's most important economies, the Group of Seven springs to mind. Anyone attending this week's events in Singapore, where the International Monetary Fund held its annual meeting, could be excused for thinking the world has been whittled down to just two economies.

``The most important global economic relationship is the United States and China, the G-2,'' says Straszheim, vice chairman of Newport Beach, California-based Roth Capital Partners.

That wasn't supposed to be the emphasis as representatives of 184 IMF members, nongovernment-organization staffers and a small army of journalists descended on Singapore. The planned focus was on spreading prosperity to those it has eluded and on giving more clout to developing nations, not just China.

Instead, it was all China, China, China. When all eyes weren't on the world's most-populous nation, the collective attention of IMF-meeting attendees seemed to be on how China and the U.S. together are becoming the core of an increasingly interconnected global financial system.

Perhaps it's not surprising that the U.S. and China were on center stage. The No. 1 and No. 4 financial powers have created an unofficial global economy; both rely on each other more than they would like to admit. China needs U.S. investment and for U.S. consumers to keep consuming; the U.S. needs China to hold down costs for everything from money to goods to services.

G-2 Meetings

And, of course, the rest of the world needs the U.S. and China. Hence the focus on two economies in Singapore, and on Henry Paulson as he makes his first official visit to Beijing as Treasury secretary. And hence Paulson's decision to meet with Wu Yi, China's vice premier, twice a year to discuss economic relations -- the equivalent of G-2 meetings.

It's heartening to see Paulson, in his two months in the job, taking a more nuanced and realistic approach toward China than did his predecessor, John Snow. Paulson is under plenty of pressure to nudge China to boost the yuan. After 70 trips to China as an executive for Goldman Sachs Group Inc., though, he knows podium-thumping won't work.

Paulson seems to realize that the logic behind the Treasury's ``strong dollar'' policy has some utility with China. Rather than complain that rich Americans are losing their jobs to poor Chinese, Paulson is arguing that a strong currency would be in China's best interest, just as it is in the U.S.'s. A flexible yuan would give China more control over growth, cool inflation and offer its consumers more purchasing power.

Imbalances Galore

Yet all is not well between the U.S. and China and, by extension, economies relying on their growth. Neither wants to take responsibility for its own imbalances. Both nations are engaged in a dangerous game of musical chairs. There won't be enough chairs to go around and the music may stop at any moment.

If the U.S. wants to lead the global economy, it must do so by example. That means reducing the U.S. trade and budget deficits, and fast. Once that happens, China will have few excuses to delay change in its own backyard. Sadly, it's not happening, and the world is a riskier place because of it.

That was Lawrence Summers's take on things in Singapore. When I asked the former Treasury secretary whether he thought we'd seen the worst of global imbalances, he said: ``No, I don't see evidence that there are strong correcting forces. I think the greatest area of risk is yet to come.''

Summers's Time

Treasury chief from 1999 to 2001, Summers says it's irresponsible for the U.S. to demand that China tackle its imbalances without addressing its own. Summers also wonders about the precariousness of a rich country like the U.S. being supported by money from developing nations.

Five years ago, the world seemed to be flying on one engine -- the U.S. Increasingly, it's flying on two -- the U.S. and China. It helps that Japan and Europe are growing again, though neither is drawing the attention being accorded the G-2.

Even as economies such as Brazil, India and Russia step up efforts to woo investors, and international institutions try to get smaller economies onto the radar screen, the focus is still on the U.S. and China. Their dominance will make it harder for smaller countries to make their mark on the global economy.

Both the U.S. and China have vulnerabilities that may worsen over time. A rickety financial system, the growing risks of social instability and a variety of speed bumps could hamper the Chinese economy. The U.S. has a record current-account deficit, which raises the specter of a dollar crash.

Never mind being too big to fail, China, like the U.S., is reaching the point where it may be too big to save in the event of a crisis. Amid so many risks, it would be nice to see the G-2 working simultaneously to put their economies on sounder footing.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Singapore, or through the Tokyo newsroom at wpesek@bloomberg.net.

Last Updated: September 21, 2006 16:03 EDT