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U.S., China to launch high-stakes economic, security talks despite diplomatic tension

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Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy F. Geithner headed to Beijing on Tuesday for high-level economic and security talks, hoping for progress on key issues despite looming political transitions in both countries and thorny diplomatic questions about the status of blind activist Chen Guangcheng.

This is widely expected to be the last annual Security and Economic Dialogue summit for both Geithner and Clinton, who have said they will not continue in their present roles even if President Obama wins reelection this fall. China’s Communist Party, meanwhile, is planning a leadership transition later this year.

As negotiators tackle big topics such as trade, North Korea and currency, which lie at the heart of the sometimes tense U.S.-China relationship, observers are waiting to see whether Geithner’s four years of intensive dialogue with Beijing will pay off.

Geithner, citing important gains made in earlier discussions, has said he will press for long-sought changes to China’s financial system. Chief among the bright spots, according to the Treasury chief and many observers, has been progress toward closing the yawning trade deficit between the two countries. U.S. exports to China have almost doubled since the beginning of Obama’s term.

Even the issue of getting China to stop pegging its currency to the dollar — a major source of tension a few years ago — has receded somewhat, as the value of China’s yuan has moderately increased against the U.S. dollar.

Geithner has “kind of lowered the volume on the currency [issue] and used less inflammatory language, and yet he’s been firm,” said Nicholas R. Lardy, the Anthony M. Solomon senior fellow at the Peterson Institute for International Economics. “He’s managed the issue in a difficult environment.”

U.S. business leaders view this round of talks as a prime opportunity. Advocates of reform within the Chinese government are speaking up, they said, and the mood is positive following the recent visit to the United States of future leader Xi Jinping.

“No other country presents China’s particular mix of opportunities and challenges,” Geithner said last week in a speech to the Commonwealth Club in San Francisco. The Obama administration, he said, has made “significant progress” on its goals.

U.S.-China Business Council President John Frisbie said American companies are hoping the Chinese will agree to open discussions on a bilateral investment treaty that would allow foreign investors to take full ownership of Chinese firms.

As it stands, there are dozens of types of companies in China whose ownership is limited, forcing automakers into joint ventures in which they can own only 50 percent, for example, and capping ownership by securities firms at 33 percent.

“There is positive momentum in terms of the overall tenor and tone of the conversation,” Frisbie said. “We want to see if they are serious about putting ownership limits on the table.”

On security issues, the United States is continuing to press the Chinese for help in discouraging Iran and North Korea from developing nuclear weapons, and there have been signs the Chinese are listening.

China signed on to a U.N. statement condemning a recent North Korean rocket launch, and it has cut back on oil purchases from Iran.

But observers say it is hard to predict whether the momentum from earlier talks can be maintained in light of Chen’s escape from house arrest last week. The activist lawyer is believed to be receiving shelter and protection from U.S. diplomats in the Chinese capital, highlighting U.S. concern about China’s human rights record — concern that often puts China on the defensive. Frisbie cited worries that the sensitive diplomatic issue could preoccupy officials on both sides.

“The Chen situation could overwhelm all of it,” he said. “This is a bit of a test of the relationship’s maturity, to see how they will handle this.”

According to a confidant of Chen’s, U.S. diplomats are trying to work out a deal with Chinese officials under which Chen might be able to leave China for the United States. Officials remained silent on Chen’s situation as Clinton traveled to China overnight Monday and Tuesday. But in a White House appearance Monday, Obama urged China’s leaders to do better on human rights, saying, “China will be that much more prosperous and strong as you see improvements on human rights issues in that country.”

Chen’s status “is going to be a complication, but we shouldn’t forget that the [U.S.-China] relationship is built around critical security and economic issues,” said Jeffrey Bader, the John C. Whitehead senior fellow in international diplomacy at the Brookings Institution.

Even before Chen’s dramatic flight from his village, the political situation in China had been shaken in recent weeks by the scandal surrounding fallen party chieftain Bo Xilai, whose wife has been named a suspect in the murder of a British businessman.

Clinton is unlikely to bring up Bo’s name in the talks, analysts said. But reports alleging corruption in Bo’s inner circle have already posed a challenge to Chinese officials, with the apparent details of Bo’s operation undermining the image the party likes to project of a political leadership that moves flawlessly in lockstep.

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