(Adds comments by Lew, analysts)
By Jason Lange
WASHINGTON, July 1 (Reuters) - U.S. concerns over China's cyber spying on American companies will not impede progress on other fronts when top officials from Washington and Beijing meet next week, U.S. Treasury Secretary Jack Lew said on Tuesday.
"I'm optimistic that we are going to be able to make some progress again this year," Lew told an event sponsored by the U.S.-China Business Council. "Not withstanding other issues that come up between our countries, it is in both of our interests to maintain the economy discussions."
But Lew downplayed the possibility of big breakthroughs, saying it was unrealistic to think the two countries would conclude a bilateral investment treaty at the July 9-10 Strategic and Economic Dialogue talks.
He also said he was frustrated with China's slow implementation of what he described as an ambitious economic reform agenda. For example, he said Chinese plans unveiled on Monday to remove some restrictions on foreign investment were underwhelming.
The annual talks, which span everything from trade and currency to geopolitics, come amid a pronounced rise in military tensions between the two countries over the last year.
Beijing and Washington have traded allegations of massive cyber-spying, while China has voiced suspicion over Washington's support for Asian allies that have tense relations with China, notably Vietnam and the Philippines.
Many analysts have suggested these frictions could hamper progress on coordinating economic policy between the world's two largest economies.
"It's going to be very hard to keep the (talks) insulated from that," said Adam Posen, who heads the Peterson Institute, a leading U.S. think tank on international economics.
Lew, however, noted that the talks are organized to prevent such contamination. Officials will hold parallel discussions on dozens of issues, he said. This compartmentalized process has helped keep past meetings productive even during public spats.
TENSIONS RUNNING HIGH
But tensions are particularly intense currently.
The United States recently charged five Chinese military officers and accused them of hacking into American companies to steal trade secrets. China showed its anger over the allegations by shutting down a bilateral working group on cyber security.
Lew said he hoped the two sides would take up the matter at the talks.
The two countries' economic relationship adds up to more than a half trillion dollars in trade every year, so both sides have a big stake in reducing tensions.
Lew said U.S. officials would go into the meetings with a mix of support for China's reform agenda and concerns the Chinese are moving too slowly to execute their vision.
China's leaders laid out a plan in November that seeks to reduce government control over the economy and give market forces a "decisive" role.
U.S. officials are aware such momentous changes pose risks to social stability, and that Chinese leaders have their work cut out in cementing domestic political support for the agenda. The current Chinese economic model gives huge privilege to state-owned enterprises.
"They have ... legitimate concerns about managing change in a way that doesn't cause unnecessary social and political upheaval," Lew said.
At the same time, he said China needs to move more quickly to let markets determine interest rates and exchange rates. He specifically called for a stronger yuan currency, which he said was giving China an unfair trade advantage.
These policy changes could help head off the risk of future financial instability in China, Lew said, noting there are currently worries about a possible Chinese property bubble. Even if China's property market melted down, Lew said it was unlikely to do much damage globally.
Washington's mix of criticism and support "is a version of tough love," said Charles Collyns, a former top international official at the U.S. Treasury.
"You want to show empathy," he said. "On the other hand, you need to be fairly clear there are certain things that are unacceptable for the United States." (Reporting by Jason Lange; Additional reporting by Elvina Nawaguna, Krista Hughes and Tim Ahmann; Editing by Bernadette Baum and Cynthia Osterman)