By
Nina Easton, Fortune Washington bureau chief
Beijing (FORTUNE) -- China will invest in an American-led clean coal technology project. The New York Stock Exchange and NASDAQ will get the okay to open offices here. And Treasury Secretary Hank Paulson promises that America will try to increase its dismal savings rate.
So went the fitful ending to the much ballyhooed two-day Strategic Economic Dialogue between top U.S. and Chinese officials, where tangible progress on small bites was overshadowed by expectations that progress could be made on the big stuff. Paulson's savings rate promise was tucked inside his concluding remarks, where it will likely have the same impact as Chinese commitments to address American concerns over its undervalued currency and massive trade surplus.
 | | U.S. Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi. |
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The Treasury Secretary knew he couldn't come home empty-handed, hence the energy and stock exchange deals. Yet he couldn't escape the intense political focus on more intractable, long-term problems. So his seat-of-the-pants spin: the Chinese are genuine reformists, just more gradual than Americans would like. "There's no doubt the Chinese were committed to reform," Paulson told Fortune during a brief limousine ride back from his private meeting with President Hu Jintao at the Great Hall of the People.
Paulson formed that impression after two days of meetings between U.S. cabinet secretaries, ambassadors and agency heads, and their Chinese counterparts. U.S. Trade Representative Susan Schwab said the delegation "asked and received assurances" that economic reform was not stalling, though she added it was "clear there are voices in China" that want to turn back the clock.
American concerns over the pace of those reforms played out this week in a complex rhetorical dance over China's currency. By assigning an artificially low value - rather than let it float in the market - China has ensured a booming export market that helps produce its huge trade surplus.
Federal Reserve Chairman Ben S. Bernanke tried to drive home American concerns, with a Friday afternoon speech to a Beijing think tank. "The fact that Ben Bernanke was there gave a whole new dimension to it," said Paulson.
Yet Bernanke seemed to pull his punches. The text of Bernanke's speech described China's undervalued currency as an "effective subsidy" of Chinese exporters over domestic producers - language he didn't use in his delivered remarks, but is certain to lend ammunition to China critics back in the U.S.
In his remarks before the Chinese Academy of Social Sciences, Bernanke argued that flexible exchange rates were in China's best economic interest. During the two-day session, Paulson said, Chinese officials responded to U.S. pressure for more currency flexibility by expressing concerns over the country's economic stability if its currency rose in value.
In his speech, though, Bernanke said that while a more flexible rate "would be helpful," a more direct way to address the global imbalance is to reduce China's savings rates. The country's high savings rates, he said, reflect China's "thin social safety net"; families save for medical expenses and old age. But in the language of "global economic imbalances," it's hard to complain about Chinese families hoarding their earnings without the Chinese bringing up the American practice of spending far more than they earn. So, like Paulson, Bernanke balanced his critique of Chinese savings rate with a declaration that the U.S. needs to save more and borrow less.
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 up China's services sector, improve rural healthcare, address environmental and energy concerns and inject more transparency into areas like the Chinese regulatory process. They also agreed to continue discussing trade concerns, as well as how to better police copyright and trademark piracy.
Paulson, facing pressure from Democrats on Capitol Hill who blame cheap Chinese competition for American job loss, said the two-day meeting ended with "tangibles," calling the NYSE-NASDAQ deal "a symbolic milestone toward China's further integration into the global marketplace." "This is the beginning of a conversation of a level and scope that hasn't been witnessed before," said a senior Treasury official. Perhaps, but that only highlights how much further there is to go.
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Trade trouble with China? 
