China struck a conciliatory note at the opening of talks with the United States on Monday by vowing to spur domestic demand and keeping a guarded opening to exchange rate reform, which the Obama administration says is needed to rebalance the global economy.

The United States treaded softly on the subject and welcomed Beijing's long-standing pledge to reform the yuan as the two sides held their second Strategic and Economic Dialogue.

The one slight point of discord were U.S. calls for a tougher line against North Korea over an alleged sinking of a South Korean warship, contrasting with China's appeals for restraint.

The world's biggest and third-biggest economies are seeking to steady relations after a burst of tensions early this year. While Chinese President Hu Jintao broke no new ground on the currency dispute that has divided them, he set an amicable tone for the two days of talks.

China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual, he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington -- worried about its yawning trade deficit with China -- has also advocated.

At the meeting, U.S. Treasury Secretary Timothy Geithner appealed to Beijing to work together to reduce trade barriers and develop a more balanced global economy.

On the yuan, which has been effectively pegged to the dollar since the global financial crisis worsened in mid-2008, Geithner said the Chinese government was moving in the right direction.

We welcome the fact that China's leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda, he said.

Trying to press the case that yuan appreciation would be in China's own interest, Geithner said that a more market-driven exchange rate would help suppress inflation while also driving private firms to move up the value chain.


The vows of closer economic coordination were partly offset by U.S. Secretary of State Hillary Clinton's effort to coax China into joining international pressure on North Korea after South Korea found it responsible for torpedoing its warship in late March, killing 46 sailors.

China is the sole major backer of North Korea, and has not publicly criticized Pyongyang over the alleged sinking, instead issuing broad calls for restraint. Earlier this month, China hosted the North's leader, Kim Jong-il, on a visit.

We must work together to address this challenge and advance our shared objectives for peace and stability on the Korean peninsula, Clinton told the meeting.

Tensions flared between Beijing and Washington in the first months of 2010, when China denounced U.S. criticism of its Internet censorship, Washington's arms sales to Taiwan, and President Barack Obama's meeting with the Dalai Lama, Tibet's exiled leader.

Beijing considers Taiwan a part of its territory, and Hu said on Monday that it was important for countries to respect one another's sovereignty.

Beijing officials have said they want only quiet discussion of U.S. complaints that the Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope that a quieter approach will give Beijing more political space to let its currency appreciate.

Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, told a news conference that the euro, not the yuan, had come up for discussion in the opening session of the dialogue.

With uncertainties over the impact of the European sovereign debt crisis, we believe that we must be cautious about the choice of timing of exit strategies, he told a news briefing.

The annual U.S. trade deficit with China fell to $226.8 billion in 2009 from a record $268.0 billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a point of friction with Beijing.

U.S. officials have sought to concentrate attention on policies they claim may unfairly impede U.S. companies hunting for customers in China.

(Additional reporting by Chris Buckley; Editing by Nick Macfie and Ken Wills)