Treasury secretary Paulson was in China as part of the ongoing Strategic Economic Dialogue. http://www.treas.gov/initiatives/us-china/. While there were substantive talks on product safety, regulation, and policy transparency, there was not any improvement on the key issue of trade imbalances and the evaluation of the yuan. This is the number one global issue facing both countries, yet there is a clear impasse. The US would like a higher yuan and China is not ready to move on this issue.
The Chinese economic environment is becoming more complex. Growth has been strong again in 2007 but inflation is significantly higher. Monetary policy is expected to be tightened to slow growth and inflation. There are also some labor shortages with wages increasing. China may lose its status as the low cost manufacturing producer. Any change in the currency level has to be analyzed with respect to domestic issues and not based on what may happen in the US. Consequently, the current go slow approach is most likely. The Chinese are also concluding that the Bush administration is a lame duck and will not use a change in exchange rate policies too early. They may reserve this option for when potential trade issues heat up either in the summer or after the next election. It is unlikely that Paulson will be able to sway the Chinese of anything significant during his tenure.
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