WASHINGTON - U.S. and Chinese officials began grappling on Monday with how and when to withdraw the huge economic stimulus spending each has applied and to put in place measures to promote steadier long-term growth.

On the first of two days of economic and political talks, a U.S. delegation including Treasury Secretary Timothy Geithner urged China to boost domestic consumption and Beijing responded with tough questions about how Washington intends to rein in its soaring budget deficits.

Behind the so-called Strategic and Economic Dialogue lies the reality that the United States and China are two leading powers with sometimes conflicting interests but a common need to get a wobbling global economy back onto a job-creating growth path.

The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world, U.S. President Barack Obama said. That reality must underpin our partnership.

Obama said the two nations needed to overcome mutual wariness and deepen cooperation on issues from the global economic crisis to climate change and North Korea.

But he also risked China's displeasure by urging it to respect and protect its ethnic and religious minorities -- an apparent reference to unrest among ethnic Uighurs and Tibetans in western China and subsequent crackdowns from Beijing.

The dialogue wraps up on Tuesday with a closing communique in late afternoon, followed by press conferences and remarks at an evening dinner by Geithner and Secretary of State Hillary Clinton as well as Vice Premier Wang Qishan, who leads the Chinese delegation.

Officials said on Monday both sides felt the acute financial crisis of the past two years was easing but neither was completely confident and each indicated strong opinions about what the other should do to help.


The foundation of economic stability and turnaround is not solid enough and China's economic rebound will be a complex and tortuous process, warned China's Assistant Finance Minister Zhu Guangyao.

We sincerely hope that the U.S. fiscal deficit will be reduced year after year, according to the objectives of the Obama administration.

U.S. government spending is forecast to exceed its income by a staggering $1.8 trillion in the current financial year, giving rise to concern that the dollar's value could suffer because of the flood of debt Washington is issuing.

At the start of talks on Monday, neither side mentioned publicly past U.S. efforts to persuade China to let its yuan currency appreciate more rapidly, but they later acknowledged the sensitive issue had been on the table.

We hope that the yuan/dollar exchange rate remains stable and we are focused on the security of China's investments in the U.S., Zhu said.

The U.S. Treasury's coordinator for the talks, David Loevinger, was more circumspect.

We talked about China's exchange rate policy, they talked about their desire to reform the international monetary system, and I'll just leave it at that, he said.
Loevinger said there was agreement that China must move toward more domestic consumption to keep its economy growing.

If China's going to grow, it's not going to be able to grow by exporting to the U.S. and as far as we can tell to the rest of the world, he said.


Geithner and Obama renewed a pitch for China to rely less on exports for growth and instead make it possible for its citizens to spend more at home. Many social services like health care are relatively underdeveloped in China, forcing people to curb consumption and save for emergencies.

Obama said the impact of the financial crisis will permanently alter U.S. spending habits and China needs to accept that it will not be able to export as much.

As Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation, because just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods, Obama said.

Wang, the top Chinese official at the talks, said China's efforts to stimulate its economy were working and this would help the U.S. and other major economies.

But U.S. manufacturing groups complain China heavily subsidizes its exports, including by keeping the value of its currency artificially low against the dollar.

China's multiple predatory trade practices severely weaken America's domestic economy, said Kevin Kearns, president of the U.S. Business and Industry Council.

The time for simply talking with China is long past. In fact, more chit-chat diplomacy is harmful to U.S. interests.

The United States has consistently been China's best customer for products from shoes to furniture, creating a trade deficit -- which reached a record $268 billion in 2008 -- that has caused economic and political friction.

Clinton praised Chinese cooperation in dealing with North Korea's nuclear weapons but said the path ahead would not always be easy.

The United States needs to sustain Chinese resolve over North Korea, where tensions are escalating after several missile launches and the testing of a nuclear device in May.

Obama also called for greater unity on efforts to prevent Iran from acquiring a nuclear weapon and ending the suffering in Sudan's troubled Darfur region.

(Additional reporting by Sue Pleming and Emily Kaiser; Writing by Glenn Somerville; Editing by Simon Denyer and John O'Callaghan)