Yuan a fight?
As China and America each draw up military budgets with the other in mind, there is the threat of a growing mutual suspicion that will be hard to ratchet down. But both countries have an incentive to get on: the huge and growing entanglement of their economies.
In America, China looms enormous in the public's fear of globalisation. According to a recent Harris Poll, four in ten Americans believe that China will be stronger than America within a decade, and most reckon the Asian giant will have a negative effect on the future of America's economy. China's economy is still less than a fifth the size of America's, at the market exchange rate. But that exchange rate reflects China's undervalued yuan. China's blistering growth rates worry industries that are shedding jobs in America.
America's current-account deficit is big and growing, and this is a legitimate cause for concern. The bilateral trade deficit with China is headed toward the mark of $200 billion per year. But too much blame has been heaped on China, which accounts for under a quarter of America's trade deficit. The imbalance has more to do with Americans' unwillingness to save, combined with an over-abundance of savings in other countries.
However, China's economic policies do play a part. Chinese growth is increasingly reliant on demand elsewhere: China's overall external surplus will reach around 8% of GDP this year, and the country has accumulated over $750 billion in foreign-exchange reserves. Hence pressure in Congress, from Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, to threaten a 27.5% tariff on Chinese goods unless Beijing revalues the yuan by a similar amount. In July, China revalued by 2% and pegged the currency to a basket of foreign currencies, rather than just the dollar. But the yuan has appreciated by just 0.3% since then, and the threat of protectionism remains.
During Mr Bush's trip, Mr Hu said that his government will "unswervingly press ahead" on making the yuan more closely reflect its market value, while offering no concrete steps to do so. The prime minister, Wen Jiabao, made similarly empty statements on China's efforts to crack down on the counterfeiting of American products. So the threat of American protectionist retaliation remains. Already this year, America has fought off a bid by China's state-owned oil company for Unocal, a mid-sized American oil firm. And earlier this month, the Bush administration caved in to demands for quotas on Chinese textiles to be extended until 2008.
Despite this, Bush administration officials, known more as dogged salesmen of ideological policies than as pragmatists, have been nuanced in their relationship with the Red Kingdom, resisting the no-doubt-powerful political urge to demonise China as the White House struggles with other woes. Protectionists in Congress and hawks in the Pentagon will continue to do their best to make Americans worry about China's rise. Chinese officials, for their part, occasionally fan the flames with irresponsible rhetoric over Taiwan. But Robert Zoellick, America's deputy secretary of state, who formerly served ably as its trade representative, made a practical point in a recent, optimistic speech. "Picture", he said, "the wide range of global challenges we face in the years ahead-terrorism and extremists exploiting Islam, the proliferation of weapons of mass destruction, poverty, disease-and ask whether it would be easier or harder to handle those problems if the United States and China were co-operating or at odds."
He has a point. But as his speech in Kyoto demonstrated, Mr Bush can and will continue to press China to change, opening up its politics and expanding personal freedoms. This rankles in Beijing. In September, Mr Bush gave Mr Hu a list of dissidents America wanted to see freed. China sometimes releases a batch of political prisoners as a gesture when an American president visits, but failed to do so this time.
It may well be that common points between America and China outnumber differences. But the differences are not trivial, and both leaders have a difficult task in finding the right relationship between the world's only superpower and its proud and growing rival.