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Adelegation of economic leaders from the United States met with Chinese Vice-Premier Wu Yi and other Chinese economic leaders in December as both sides engaged in the first round of the China-US Strategic Economic Dialogue.

The US delegation was led by Treasury Secretary Henry M. Paulson, who was accompanied by Federal Reserve Chairman Ben S. Bernanke and six other Cabinet members of the Bush administration (Commerce Secretary Carlos Gutierrez, US Trade Representative Susan Schwab, Labor Secretary Elaine Chao, Heath and Human Services Secretary Mike Leavitt, Energy Secretary Sam Bodman and Stephen Johnson, head of the Environmental Protection Agency). 

Additional meetings under the format will be held by top economic policy-makers representing both sides twice each year to address a variety of economic issues of mutual concern.

Talks during the first two-day meeting addressed trade tensions arising from the United States’ soaring trade deficit with China. The US delegation asked China to move more quickly to allow its currency to rise in value against the US dollar to help narrow the trade deficit, which is on track this year to set a new record well above last year’s US$202 billion imbalance.

Vice-Premier Wu Yi said one of the core issues during meetings was the status of the value of China’s renminbi currency (also known as the yuan). No breakthroughs were reported in this area of discussion, but the vice-premier said, “A number of consensuses” were achieved.

Paulson said the US Government’s “strong view” is that the Chinese economy “would be more effective under a [monetary] regime where currency values are determined in a competitive, open marketplace based upon economic fundamentals.”

He said an upward revaluation of the yuan would make US goods less expensive in China and Chinese goods more expensive in the United States. Paulson said the Chinese side was motivated to act on the issue, because of threats by some US lawmakers to impose higher tariffs on Chinese goods as a way to address the trade imbalance. Some US leaders perceive that relatively inexpensive Chinese goods have cost jobs and forced the country to borrow US$700 billion from China to finance its import addiction.

Vice-Premier Wu said some US leaders do not fully appreciate the situation faced by Chinese policy-makers. She said that China must rely on exports to continue with its development and that more time is needed to steer its economy away from that development model. Wu said China needs to create enough jobs to absorb an estimated 300 million rural workers––a number equal to the entire population of the United States––into its urban economy over the next two decades.

As if anticipating the American appeal, the yuan did rise against the dollar on December 14, to 7.8197 yuan to the dollar, bringing its appreciation to well over 5 percent since mid-2005. Many economists say that if the yuan were to float freely in the markets, it would appreciate by 20 percent or more. Still, China’s currency exchange rate will remain a thorny topic, although rhetoric on the issue during the meetings was more subdued.

Aside from the currency issue, several significant agreements were reached during the dialogue’s inaugural meeting.

The export and import banks of China and the US jointly announced that they have completed negotiations on a form for standard medium-term credit agreements, to which borrowers and lenders will conform for specific transactions. The announcement was made at a press briefing presented by the heads of both countries’ export-import banks. By providing financing for transactions with US$20 million or less, the milestone agreement will lead to increased sales of US exports in China, according to the announcement. The loans will be guaranteed by the Ministry of Finance of China and supported by the Export-Import Bank of the United States with medium-term export credit guarantees.

Both sides said the pre-negotiated form of standard medium-term credit agreement will benefit businesses in both countries. US exporters and Chinese importers can expect a substantial reduction in the time it takes to document the financing for their export sales.

The chairman and president of the Export-Import Bank of the United States, James H. Lambright, said: “China is the fourth-largest economy in the world. By making it easier to finance US exports to this huge market we are supporting high-quality jobs in the United States, while improving the bilateral trade balance.”

After a meeting with China’s President Hu Jintao at the Great Hall of the People, Paulson told FORTUNE magazine, “There’s no doubt the Chinese were committed to reform. We each will take measures to address global imbalances through greater national savings in the United States and to increase consumption and exchange-rate flexibility in China.”

With a second meeting of the Strategic Economic Dialogue scheduled for Washington in May, officials from both countries agreed to form working groups to address how to further open China’s services sector, improve rural healthcare, address environmental and energy concerns and to inject more transparency into areas such as the Chinese regulatory process. They also agreed to continue discussing trade concerns, as well as how to better police copyright and trademark piracy.

Shortly before the trip, Paulson, in an interview with the US CNBC network, talked about currencies and competition. He said, “A big part of the strategic economic dialogue will be to persuade the Chinese to accelerate the pace of their reform. When we talk about reform with the Chinese there is total agreement in terms of what they need to do. We’re in agreement about the policies, so the question, the debate, is about timing.”