China, U.S. Highlight Progress Amid Tensions as Meetings End

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U.S. and Chinese officials, concluding annual diplomatic and economic talks, highlighted incremental gains on financial and environmental issues without papering over differences on cyber-spying and tensions in the South China Sea.

U.S. Treasury Secretary Jacob J. Lew said Wednesday that China committed during the annual Strategic and Economic Dialogue to limit foreign-exchange intervention only to times of “disorderly market conditions.” Chinese Vice Premier Wang Yang said the U.S. pledged to respect International Monetary Fund procedures on China’s efforts to win reserve-currency status for the yuan.

At the same time, there was little sign of progress over difficult strategic issues, from the perennial clash over human rights to China’s recent construction of islands in the contested South China Sea, and the nation’s alleged role in the theft of U.S. government workers’ data. President Barack Obama told the Chinese delegation earlier in the day about “ongoing U.S. concerns about China’s cyber and maritime behavior,” according to the White House.

“These kinds of meetings can sometimes just be to prevent issues from deteriorating further,” said James Keith, a former U.S. ambassador to Malaysia.

Also hanging over the talks was a U.S.-led trade agreement that excludes China, with Obama warning in April that if the U.S. can’t come to terms on the Trans-Pacific Partnership, China will step in to write the rules.

Trade Measure

Less than an hour before the closing session of the U.S.- China dialogue on Wednesday, the Senate ended a six-month legislative battle by sending Obama legislation granting fast-track trade-negotiation authority to aid completion of the 12-nation TPP. The accord is a major component in rebalancing U.S. foreign policy toward Asia.

Lew, who helped campaign for passage of the legislation, omitted any mention of the pact from his closing remarks, saying that the U.S.-China talks focused on “creating benefits for both our citizens by expanding opportunities for trade and investment.”

Secretary of State John F. Kerry said the two sides had a “very frank discussion on issues on which we have not always seen eye to eye,” including Internet security and hacking.

“The United States is deeply concerned about cyber incursions that have raised security questions and quite frankly harmed American businesses,” Kerry said.

Chinese Hacking

The recent cyber attack on the U.S. Office of Personnel Management saw the exposure of millions of American workers’ personal information. Federal officials familiar with the breach have said that hackers connected to the Chinese government are believed to be responsible, but the Obama administration has declined to publicly blame any nation.

China State Councilor Yang Jiechi, one of the delegation’s leaders, reiterated that the nation is “resolutely” opposed to any form of online hacking. Officials also reaffirmed China’s sovereignty in the South China Sea region and said the U.S. isn’t a party to disputes in the area.

Kerry said the U.S. and China had agreed on the need to complete a code of conduct for online activity. “We believe very strongly the United States and China should be working together to develop and implement a shared understanding of appropriate state behavior” in cyberspace, Kerry said.

While these issues were contentious for the U.S., the Chinese came to the table with their own list of resentments, said Chas Freeman, a former State Department official with long experience in Asia. Among the irritants was the U.S. push for the TPP. “There’s an anti-China tone” that hasn’t been lost on the Chinese, Freeman said.

Climate, Oceans

Without major diplomatic breakthroughs to announce, officials on both sides stressed a few safe areas of agreement - - climate change, ocean policy, cultural exchanges and wildlife conservation.

Kerry described an agreement to cooperate on ocean policy as “breaking new ground with respect to China and the United States’ ability to find an area where we can cooperate.”

China is seeking approval later this year from the IMF for the yuan to have status in the Special Drawing Rights basket alongside the dollar and euro as global reserve currencies, which would make yuan-denominated assets more attractive for central banks to hold and potentially reduce the dollar’s longtime dominance.

IMF Blessing

While China has taken numerous steps to increase international use of the currency and loosen controls on trading and money flows, the U.S. has said this year that China needs to do more to open up its financial system before it can gain the IMF’s blessing.

On Wednesday, Lew said China committed to financial reforms “including taking the final steps in liberalizing interest rates, opening capital markets, and expanding access to foreign financial services firms and investors.” He said that the real test will be what China does when there’s pressure on the yuan to strengthen.

Vice Finance Minister Zhu Guangyao said at a separate press briefing that China has made a large amount of progress on its currency system, and reforms are still moving forward. The yuan is at a reasonable, balanced level, he said.

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