California Summit Leaves Host of Unresolved U.S.-Sino Issues

June 10 (Bloomberg) -- Bloomberg’s Hans Nichols reports on the concluding U.S. - China summit and discussions on cyber security. He speaks on Bloomberg Television’s “In The Loop.” (Source: Bloomberg)

Though they bonded at their two-day California summit, sharing small talk about exercise and a shirt-sleeve stroll in the unforgiving desert sun, the presidents of the world’s two largest economies still confront a range of issues that threaten to pull them apart.

U.S. President Barack Obama and Chinese President Xi Jinping face protracted wrangling on cyber spying, North Korea’s nuclear ambitions and human rights. Long after the glow of their one-on-one chats -- rare for American and Chinese official exchanges -- has faded, the haggling will resume.

On July 8, cabinet-level officials from the U.S. and China are scheduled to meet in Washington for the fifth Strategic and Economic Dialogue. The opposite of this weekend’s informal get-together, that five-day conclave will test the idea that presidential chemistry can nudge Sino-U.S. ties toward the “comprehensive partnership” that National Security Advisor Tom Donilon described as the U.S. goal.

“We really saw this as an opportunity for the two leaders, at an important moment, to establish and deepen their personal relationship as a foundation for going forward to address the range of issues that we have to address,” Donilon said, briefing reporters at the summit’s conclusion.

Photographer: Jewel Samad/AFP via Getty Images

U.S. President Barack Obama and Chinese President Xi Jinping talk during a stroll over the lawns of the Sunnylands estate in Rancho Mirage, California. Close

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Photographer: Jewel Samad/AFP via Getty Images

U.S. President Barack Obama and Chinese President Xi Jinping talk during a stroll over the lawns of the Sunnylands estate in Rancho Mirage, California.

Donilon said the June 7-8 meetings at the Sunnylands estate had been “quite successful” in establishing a better understanding between the two leaders. The two men spent close to eight hours in talks that Donilon billed as “quite unique.”

Strategic Distrust

Obama, 51, had invited Xi, 59, just three months in office, to Rancho Mirage, California, in hopes of dispelling what the Brookings Institution last year called growing “strategic distrust” between the two sides.

On the first day of the summit, Obama said he wanted to take relations to “a new level,” adding that both leaders agreed “we’re more likely to achieve our objectives of prosperity and security of our people if we are working together cooperatively, rather than engaged in conflict.”

Even as the presidents pledge to cooperate, China’s economic rise is intensifying frictions. Increasing Chinese prosperity is fueling what the Pentagon last month called a “long-term comprehensive military modernization program.”

Though Chinese defense spending is still dwarfed by U.S. outlays, the People Liberation Army’s growing clout is raising concerns among the U.S. and its Asian allies. The military buildup, largely directed at dominating regional waters, comes as Chinese territorial claims in the resource-rich South China Sea have grown more assertive.

Photographer: Jewel Samad/AFP/Getty Images

Xi Jinping, China's president, left, and Barack Obama, U.S. president, chat as they take a walk at the Annenberg Retreat at Sunnylands in Rancho Mirage, California on June 8, 2013. Close

Xi Jinping, China's president, left, and Barack Obama, U.S. president, chat as they... Read More

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Photographer: Jewel Samad/AFP/Getty Images

Xi Jinping, China's president, left, and Barack Obama, U.S. president, chat as they take a walk at the Annenberg Retreat at Sunnylands in Rancho Mirage, California on June 8, 2013.

Increasing Strain

“These are things that concern us,” said Shawn Brimley, who was director of strategic planning for the National Security Council until October. “These tensions could reflect a view that the international order is going to come under increasing strain.”

Average annual economic growth of 9 percent for the past 15 years has vaulted China into global prominence. Some of that prosperity has been stolen from U.S. corporations, according to the Obama administration.

Last year, Army General Keith Alexander, who heads both the National Security Agency and U.S. Cyber Command, called the theft of U.S. trade secrets, including by China, “the greatest transfer of wealth in history.” Corporate victims of cyber attacks include Google Inc (GOOG)., Sony Corp (6758)., AT&T Inc (T)., the U.S. Chamber of Commerce, Visa Inc (V). and Mastercard Inc (MA)., he said.

Donilon made it clear that continued “cyber-enabled espionage” emanating from China imperils hopes for a genuine partnership between the two countries. The issue dominated talks between the two leaders during the summit’s final day.

Chinese Understanding

“The Chinese senior leadership understands clearly the importance of this issue to the United States,” Donilon said.

The two sides alternately cooperate and compete for global influence, wealth and power. Overcoming the inevitable tensions in the Sino-U.S. relationship presents an even greater challenge than managing the Cold War-era balance of terror between the U.S. and Soviet Union.

“Confidence-building during the Cold War was almost exclusively military. There were no economic or cultural relations with the Soviet Union,” said David Lampton, director of the China studies program at Johns Hopkins University.

In an editorial today, China’s official People’s Daily praised the summit for laying the groundwork for a bilateral relationship that “will withstand the test of history.”

The meeting “demonstrates political wisdom by ensuring China and the United States won’t repeat the historical paths of confrontation by great nations,” the editorial said.

Tangible Stake

Sino-U.S. economic ties, though often a source of friction over American job losses, also give both sides a tangible stake in better ties. “We are highly interdependent countries, societies and economies at this point,” Donilon said.

Finding a way to manage that interdependence has grown in importance for U.S. presidents, particularly since China’s 2001 entry into the World Trade Organization. Trade (TBBLCHNA) between the two countries has grown in the intervening years to more than $536 billion from $121 billion while China’s $1.2 trillion in treasury securities makes it the United States’ largest foreign creditor.

One issue for the U.S. side is greater access to China’s market, especially in the provision of services, an area of strength for American firms. U.S. financial services firms today control about 2 percent of assets in the Chinese banking system, according to Nicholas Lardy, a specialist in the Chinese economy at the Peterson Institute in Washington, D.C.

“That’s roughly what we had 10 years ago,” Lardy said.

Pushing Changes

Xi has indicated a willingness to push changes, including liberalizing interest rates, that could eventually create greater opportunities for foreign financial firms. Yet enacting such changes would mean confronting powerful domestic interests, including state-owned companies that benefit from preferential financing.

Securing stable relations with the U.S. might give Xi political room to maneuver on such issues.

“They know that they have formidable tasks in adjusting many of their domestic activities,” Henry Kissinger, former secretary of state, said on CNN’s “Fareed Zakaria GPS” program yesterday. “And they don’t want to complicate those by a crisis with the United States.”

Whatever meeting of the minds took place in the sun-scorched California desert, some are skeptical that the gains will be lasting.

“The top leader in China is not like the top guy in the White House. It’s a more collective leadership,” says Minxin Pei, author of “China’s Trapped Transition” and a government professor at Claremont McKenna College in Claremont, California.

On Guard

Xi also must guard against being seen as overly friendly with the American president, Pei says. Zhu Rongji, who set China on its path to become a global trading power, was often criticized by rivals for being too popular in the West.

As the summit ended, an agreement was announced to work together on curbing greenhouse gas emissions, which the White House called “an important new step to confront global climate change.”

The accord represented a hint of what could result from improved cooperation between the world’s lone superpower and the Asian giant that intends to regain its historic prominence. Additional benefits await the next meeting of the two leaders, probably in a Chinese version of this weekend’s informality. Staffers for the two presidents already have been told to scour presidential calendars for an appropriate time for that meeting and subsequent official state visits.

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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