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Spying Fuels U.S.-Sino Friction Year After Obama-Xi Talks

President Barack Obama and Chinese President Xi Jinping, left, walk at the Annenberg Retreat of the Sunnylands estate Saturday, June 8, 2013, in Rancho Mirage, California, U.S. (AP Photo/Evan Vucci) Close

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President Barack Obama and Chinese President Xi Jinping, left, walk at the Annenberg Retreat of the Sunnylands estate Saturday, June 8, 2013, in Rancho Mirage, California, U.S. (AP Photo/Evan Vucci)

A year ago, President Barack Obama and Chinese President Xi Jinping took a friendly stroll at a California estate to repair the fraying bonds between their two nations. It didn’t work.

Long-simmering disputes over cyber-espionage boiled over with this week’s U.S. government allegations that Chinese hackers stole trade secrets from five American corporations. Coming less than two weeks after the U.S. harshly criticized China’s movement of an oil rig into disputed waters in the South China Sea, the rising acrimony signals the two sides are moving farther apart.

“The relationship is clearly tipping in the direction of greater strategic competition, greater friction,” said Bonnie Glaser, a China expert at the Center for Strategic and International Studies in Washington. “It’s strained, there’s no doubt about it.”

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At risk if the relationship between the world’s two largest economies deteriorates is their cooperation on a host of concerns ranging from restraining nuclear programs in Iran and North Korea to preventing further damage to the environment.

In response to the Justice Department’s May 19 indictment of five Chinese military officers on charges of cyber-espionage, China suspended its participation in a bilateral cyber-security working group. Victims of U.S. computer attacks should sue Washington, the state-run Global Times newspaper said in an editorial today, calling the U.S. a “mincing rascal” on the issue of network security.

Photographer: Jewel Samad/AFP/Getty Images

US President Barack Obama, right, and Chinese President Xi Jinping take a walk at the Annenberg Retreat at Sunnylands in Rancho Mirage, California, on June 8, 2013. Close

US President Barack Obama, right, and Chinese President Xi Jinping take a walk at the... Read More

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Photographer: Jewel Samad/AFP/Getty Images

US President Barack Obama, right, and Chinese President Xi Jinping take a walk at the Annenberg Retreat at Sunnylands in Rancho Mirage, California, on June 8, 2013.

Retaliatory Measures

Though some additional retaliatory measures are probable, U.S. officials and analysts played down the likelihood that China -- preoccupied by a slowing economy -- would escalate the latest dispute.

State Department spokeswoman Jen Psaki said the U.S. is hopeful that other exchanges will proceed as planned. These include the next round of the high-level Strategic and Economic Dialogue talks scheduled to be held in Beijing in early July.

Obama is also scheduled to visit Beijing in November.

U.S. Trade Representative Michael Froman told reporters on a conference call from Singapore that the Obama administration “remains fully committed to developing a constructive and productive relationship with China.”

For his part, China’s Xi confronts a full domestic agenda. His economy grew in the first quarter at a 7.4 percent rate, down from almost 12 percent four years earlier. The most far-reaching economic reforms in a generation, along with an anti-corruption drive that has roiled top Communist Party ranks, demand his full attention.

Sustain Exports

“They don’t have a need to start a trade war,” said William Reinsch, head of the National Foreign Trade Council, a business group. “Right now, frankly, they need us more than we need them. They need to sustain their exports.”

For more than two decades, as China grew more prosperous, its leaders followed Deng Xiaoping’s admonition to “hide your strength, bide your time” while concentrating on economic development at home.

Now a series of maritime disputes in recent years between China and its neighbors has sparked concern that its increasing prosperity and military might may have caused Chinese leaders to abandon their customary caution.

Speaking May 21 at a regional conference in Shanghai, Xi warned against military alliances directed at a “third party” while pledging support for the “peaceful settlement” of conflicts. Among those in the audience were representatives of Japan and the Philippines, both close U.S. allies.

The world’s second-largest economy is embroiled in disputes with several countries over portions of the 1.4-million-square-mile South China Sea. Along with the latest standoff over Chinese plans to drill for oil in waters that Vietnam claims, China and the Philippines are locked in running battles over several uninhabited shoals and islands.

‘More Complicated’

“I’m more concerned about Chinese behavior and policy making,” said David Lampton, director of China studies at the Johns Hopkins School of Advanced International Studies in Washington. “In some sense, this is a more complicated and dangerous juncture we’re at than 1989.”

At that time, policy makers struggled to reconcile concerns over human rights -- in the aftermath of the violent suppression of the Tiananmen Square protests -- with the Sino-U.S. strategic relationship.

Today, Obama and Xi say they want to avoid the friction that historically has attended relations between the world’s dominant nation and a rising power. That means “managing a growing and primarily competitive relationship amid deep interdependence,” David Shambaugh, director of the China Policy Program at George Washington University, said in an e-mail.

For all the sharply worded salvos this month, trade between the two countries last year topped $562 billion. Only Canada did more commerce with the U.S. And China is the largest U.S. creditor, holding $1.3 trillion in Treasury securities.

Igniting Protests

Still, an episode that saw an 80-vessel Chinese flotilla escort an oil-drilling rig into disputed waters in the South China Sea off Vietnam -- igniting anti-Chinese protests and shaking the Hanoi stock market -- left some investors fretting about China’s rise.

“More people are now starting to think about the broader issue with China,” said Arthur Kwong, head of Asia Pacific Equities at BNP Paribas Investment Partners in Hong Kong. “Before Vietnam, you had Taiwan and the Philippines. Before that, Japan, Korea and Mongolia. Five countries -- it can’t be a coincidence.”

Worries about a more aggressive China under Xi, who has pledged to restore the country to its historic prominence, add uncertainty to the global economy.

Nike’s Stake

The trade routes that snake through the Asian waterway represent the world economy’s jugular. Almost one-third of global crude oil supplies and more than half of liquefied natural gas shipments pass through the South China Sea each year, according to the U.S. Energy Information Administration.

More than half the world’s merchant fleet by tonnage transits the South China Sea each year. Nike Inc. (NKE) contracts with 170 factories in six countries in Southeast Asia, employing more than 530,000 workers, according to a database housed on the company’s website.

“This is a reminder that we’ve probably been too complacent about geopolitical tensions in Southeast Asia,” said Wai Ho Leong, a Singapore-based economist at Barclays Plc. “The worst thing that can happen to a strategic investor is sporadic unrest popping up at critical junctures, disrupting supply chains, in a world where margins are already under pressure.”

Markets Muted

So far, markets have been relatively sanguine about Chinese muscle-flexing. Though the South China Sea showdown sliced more than 5 percent off the Hanoi stock market’s value, broader economic consequences have been muted. The FTSE/ASEAN40 index, which tracks 40 stocks from Indonesia, the Philippines, Singapore, Malaysia and Thailand, rose 1 percent since the May 7 clash, as of yesterday.

In Washington, Ely Ratner, a former State Department China analyst, said the Sino-U.S. relationship has always involved a mix of competition and cooperation.

U.S. officials, he said, need to manage “serious areas of competition” and address a key question: “Will these areas of competition infect the entire relationship?”

To contact the reporters on this story: David J. Lynch in Washington at dlynch27@bloomberg.net; Brian Wingfield in Washington at bwingfield3@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Jon Morgan at jmorgan97@bloomberg.net Mark McQuillan, Joe Sobczyk

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