Stakes high as Obama and Xi confront evolving economic ties

WASHINGTON (AP) — The United States and China can't go on this way.

As President Barack Obama meets President Xi Jinping in Washington this week, the world's two biggest economies are trying to rework their tangled relationship as partners and rivals — the frenemies of the globalized marketplace.

What's transforming their ties is the end of two decades-plus of super-charged growth in China. A slowdown carries far-reaching consequences for countries and companies that have supplied it — from Chilean copper mines and Indonesian rubber plantations to equipment manufacturers like Ingersoll-Rand in the United States and Komatsu in Japan.

Concern about a decelerating China — which last year accounted for nearly a third of global economic growth — was a key reason the Federal Reserve decided last week to delay a long-awaited increase in short-term U.S. interest rates.

Xi is scheduled to arrive Tuesday in Seattle and Thursday in in Washington, where he will attend a White House state dinner on Friday.

For four straight years, China's economy has slowed and almost surely is decelerating again this year. The International Monetary Fund expects China's gross domestic product to expand 6.8 percent in 2015 — fast by normal standards but the slowest for China since 1990. Many economists suspect that growth is even slower, perhaps below 6 percent.

China's economy isn't just slowing. It's also begun a vast transformation. Beijing is trying to shift the economy away from unsustainable dependence on exports and often-wasteful investment in factories, real estate and infrastructure such as railways and airports. In its place it envisions a new economy — slower-growing but steadier — on a foundation of spending by China's consumers.

"We're into uncharted territory," says Stefan Halper, research professor at the University of Cambridge and author of "The Beijing Consensus," about China's challenge to America's global leadership.

The United States has a huge stake in a successful transition. The old Chinese model delivered cheap products to U.S. consumers. It also helped produce gaping U.S. trade deficits — imports far exceeding exports — that sapped American economic growth and bred tensions.

"The growth we were getting out of China was not helping the world," says Patrick Chovanec, chief strategist at Silvercrest Asset Management. "In some ways, it was weighing it down."

Obama last week said he would tell Xi that China must reform and transform its economy

"You can't simply pursue an export-driven strategy, because you're too big," Obama said. "You're not going to be able to grow your economy at the same pace over the next 20 years that you did in the last 20 years."

A retooled Chinese economy, powered by consumer demand, would buy more U.S. goods and services. In theory, the economic relationship would be healthier, more balanced.

The two economies are already enormously interdependent. China is the United States' second-biggest trading partner in goods behind Canada, according to U.S. Census Bureau figures for 2013. U.S.-based multinational companies last year earned a record $11.2 billion in China, up 19 percent from 2013. U.S. companies have invested a cumulative $65.8 billion in China, up from just $17.6 billion a decade earlier.

Increasingly, money has flowed the other way. China invested $6.4 billion in the United States from January to June, a record for the first half of the year, according to the Rhodium Group consultancy. Chinese money is pouring into everything from Miami condos to factories in rural Alabama to the Waldorf Astoria hotel in New York.

Chinese tourists are coming, too — 2.2 million last year, up 21 percent from 2013. They spend an average $6,000 per trip, more than tourists from anywhere else.

Mark Zandi, chief economist at Moody's Analytics, calculates that every 1 percentage point drop in annual Chinese growth reduces U.S. economic growth by 0.2 percentage point. The damage is equal to a $20 increase in the price of a barrel of oil.

But the economic relationship has been marred by friction. Obama said he intends to confront Xi over allegations that Chinese hackers, backed by Beijing, are "engaging directly in industrial espionage and stealing trade secrets, stealing proprietary information from (American) companies. That we consider an act of aggression that has to stop."

Last month, financial markets trembled after China unexpectedly devalued its currency, the yuan. Jittery investors detected a desperate move by Beijing to grant Chinese exporters a price edge in foreign markets. More worrisome, the devaluation suggested that China's economy might be weaker than anyone realized.

Chinese authorities insisted they were merely responding to market signals that the yuan was overvalued. They said the move reflected only their intent to give market forces more say in China exchange rate. Whatever the case, the move ignited a sell-off in global markets.

"They need to communicate more clearly with the markets what their intentions are," Nathan Sheets, U.S. Treasury undersecretary for international affairs, said in an interview.

Washington worries that Beijing will lose its nerve as its economy slows, backsliding on reforms meant to open the Chinese economy to foreign competition.

The U.S.-China Business Council, which represents American businesses in China, complains that China denies foreign investors access to more than 100 industries. Conversely, the United States completely blocks foreign access to just five — nuclear energy; domestic airlines; customs brokerage services; credit unions and savings banks; and companies that issue bonds providing insurance on federal contracts — and restricts investments in 24 others.

" 'Uncertainty' best characterizes the current view of American business leaders about China — uncertainty about China's economic slowdown, the leadership's commitment to meaningful reforms of its economy and the strategic issues in the U.S.-China relationship, especially cybersecurity,' " John Frisbie, the council president, wrote Monday in the group's magazine.