U.S.-China Talks Delve Into Central Banks Amid Snowden Cloud

The U.S. and China are meeting this week to find ways to balance a wider flow of investment and goods as their central banks try to prevent excessive risk-taking from derailing the world’s biggest economies.

The two-day U.S.-China Strategic and Economic Dialogue starting today in Washington is scheduled to be hosted for the first time by Treasury Secretary Jacob J. Lew and Secretary of State John Kerry and includes counterparts Vice Premier Wang Yang and State Councilor Yang Jiechi. All four have been on the job less than six months.

While Edward Snowden’s leak of U.S. surveillance secrets threatens to complicate the national security discussions, economic officials on both sides will press for detail on issues ranging from trade agreements and intellectual property to capital flows and monetary policies.

“The top thing that American companies would like to see is more market access in China,” John Frisbie, president of the U.S.-China Business Council, said in an interview with Bloomberg Television yesterday. He cited Chinese controls on foreign ownership in areas including cloud computing and agriculture. The council represents about 230 American companies with business in China, including Apple Inc., Ford Motor Co. and Wal-Mart Stores Inc.

Officials from both nations met in a working group on cybersecurity on July 8 amid U.S. concerns that China is waging a cyber-espionage campaign.

Spying Differences

Snowden’s disclosures about U.S. programs that collect phone and Internet data included his assertion to the South China Morning Post last month that the U.S. had been hacking into computers in Hong Kong and mainland China since 2009.

Snowden’s disclosures may weaken the U.S. negotiating position on its cybersecurity concerns, said Shen Dingli, director of the Center for American Studies at Fudan University in Shanghai.

“U.S. criticism of China will be lessened,” Shen said in a telephone interview. “Still, this is an issue that will be discussed.”

The U.S. is drawing a distinction between government surveillance for national-security purposes and cyber-enabled theft of corporate trade secrets.

‘Gain Advantage’

“It is just a different kind of activity to be stealing trade secrets and to be using them to gain advantage against a competitor,” Lew said in an interview this week with CNN’s Fareed Zakaria.

Other security issues to discuss include North Korea, Syria and Iran, according to a U.S. administration official who spoke to reporters earlier this week on condition of anonymity because the talks hadn’t begun.

Kerry’s participation could be complicated by the illness of his wife, Teresa Heinz Kerry, who has been hospitalized since July 7 in Boston. State Department spokeswoman Jen Psaki said yesterday Kerry planned to be present at today’s session in Washington, while being prepared to “make changes as needed.” She said Deputy Secretary William Burns would sit in if Kerry was unable to attend.

In the economic talks, which include Federal Reserve Chairman Ben S. Bernanke, both sides will probe the other on its central bank policies.

Liquidity Squeeze

The People’s Bank of China delayed providing liquidity in interbank markets after the overnight lending rate between banks hit a record 11.7 percent June 20, a move an Obama administration official said this week was aimed at instilling market discipline.

In the U.S., the Federal Reserve is debating the timing of scaling back a bond-buying program that’s aimed at reducing 7.6 percent unemployment.

Global equities have lost more than $3.7 trillion in value and U.S. Treasury yields have climbed to an almost two-year high since Bernanke said in congressional testimony on May 22 that policy makers could consider reducing bond purchases within “the next few meetings” if officials see signs of sustained improvement in the labor market.

Global investors want to hear that the Fed and PBOC will “continue to support healthy economic growth with their central bank activities, and to the extent that growth is anything other than healthy, that they will be even more supportive,” said Michael Holland, chairman of New York-based Holland & Co., which oversees more than $4 billion.

U.S. officials said they plan to press China to pursue policies that will help reverse a Chinese slowdown, safeguard its financial system, open its markets to overseas products and capital, and allow for a more flexible exchange rate.

Trade Imbalance

The U.S. trade deficit with China in the first five months of this year was $121.1 billion, wider than the $118 billion shortfall in the same period last year, according to Commerce Department data. For all of 2012, U.S. imports of Chinese goods exceeded American exports there by a record $315.1 billion.

Economic momentum no longer runs as strongly in one direction as it did four years ago, when the U.S. was struggling under the financial crisis and Chinese gross domestic product was advancing 9 percent a year.

The International Monetary Fund yesterday projected that China’s economy will grow 7.8 percent this year and 7.7 percent in 2014. U.S. gross domestic product is forecast to expand 1.7 percent before accelerating by 2.7 percent next year, according to the Washington-based IMF.

Slower Growth

Chinese President Xi Jinping has signaled that the country’s new leaders will tolerate slower growth. The PBOC refrained from addressing a cash crunch even as money-market rates climbed to records on June 20. Then it signaled on June 25 that liquidity support would be focused on banks that lend to help the economy. China’s benchmark money-market rate yesterday touched 3.40 percent, the lowest level since May, from a record 12.45 percent on June 20.

“There’s going to be discussion about what’s really happening in the Chinese financial system,” said Clay Lowery, a vice president at Washington-based Rock Creek Global Advisors LLC and former assistant treasury secretary for international affairs during the George W. Bush administration.

China may point to progress allowing its currency to rise. The yuan rose 0.08 percent last week to 6.1326 per dollar, the best performance since the five days ended May 24, according to China Foreign Exchange Trade System prices. It has gained almost 4 percent in the past year, the biggest increase among 11 Asian currencies tracked by Bloomberg.

In the CNN interview, Lew said China’s steps to allow a rise in the yuan has been “a good thing.”

Yuan Movements

“But we’ve also seen that the movement kind of comes and goes and it flattens out and there’s still a gap,” the Treasury secretary said.

While U.S. companies lobby for a stronger yuan in addition to opening Asia’s largest market to more foreign investment, China Investment Corp., the world’s fifth-largest sovereign wealth fund, argues it’s unfairly treated by U.S. regulators. The fund may seek a more transparent investment approval process under the U.S. national security review by the Committee on Foreign Investment in the U.S., or CFIUS.

The committee is reviewing Shuanghui International Holdings Ltd.’s proposed $4.7 billion purchase of Virginia-based Smithfield Foods Inc., the world’s largest pork producer, amid public unease about Chinese investments.

Investment Barriers

In an opinion piece in today’s Wall Street Journal, Vice Premier Wang, Lew’s counterpart in the talks, said the U.S. should ease restrictions on Chinese investment and repeated the long-held Chinese position that the U.S. should also allow more technology exports to China in order to ease the trade imbalance.

“Some Chinese wonder why their country’s corporate investments in America have suffered setbacks time and again, even as the U.S. is actively trying to expand employment,” Wang wrote in the paper. “Why should the U.S. keep talking about its trade imbalance with China while refusing to lift controls on high-tech exports to China?”

Chinese authorities may also seek clarification on the Fed’s program of $85 billion in monthly purchases of Treasuries and mortgage-backed securities. Currencies have gyrated and cash flowed out of developing economies as Fed officials consider reining in the so-called quantitative easing policy.

The Strategic and Economic Dialogue, a set of annual meetings held in the U.S. and China in alternate years, was initiated in 2006 and broadened in 2009 to include State Department issues including human rights and hacking. An earlier Strategic Economic Dialogue -- without the word “and” -- was initiated under the Bush administration, held twice-yearly and led by then-Treasury Secretary Henry Paulson to focus on economic issues.

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