Obama calls for deeper U.S.-Chinese ties

By Paul Eckert and David Lawder

WASHINGTON (Reuters) - U.S. and Chinese officials began grappling on Monday with how and when to withdraw the huge economic stimulus spending each has applied and to put in place measures to promote steadier long-term growth.

On the first of two days of economic and political talks, a U.S. delegation including Treasury Secretary Timothy Geithner urged China to boost domestic consumption and Beijing responded with tough questions about how Washington intends to rein in its soaring budget deficits.

Behind the so-called Strategic and Economic Dialogue lies the reality that the United States and China are two leading powers with sometimes conflicting interests but a common need to get a wobbling global economy back onto a job-creating growth path.

"The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world," U.S. President Barack Obama said. "That reality must underpin our partnership."

Obama said the two nations needed to overcome mutual wariness and deepen cooperation on issues from the global economic crisis to climate change and North Korea.

But he also risked China's displeasure by urging it to respect and protect its ethnic and religious minorities -- an apparent reference to unrest among ethnic Uighurs and Tibetans in western China and subsequent crackdowns from Beijing.

The dialogue wraps up on Tuesday with a closing communique in late afternoon, followed by press conferences and remarks at an evening dinner by Geithner and Secretary of State Hillary Clinton as well as Vice Premier Wang Qishan, who leads the Chinese delegation.

Officials said on Monday both sides felt the acute financial crisis of the past two years was easing but neither was completely confident and each indicated strong opinions about what the other should do to help.

TOUGH ROAD AHEAD

"The foundation of economic stability and turnaround is not solid enough and China's economic rebound will be a complex and tortuous process," warned China's Assistant Finance Minister Zhu Guangyao.

"We sincerely hope that the U.S. fiscal deficit will be reduced year after year, according to the objectives of the Obama administration."

U.S. government spending is forecast to exceed its income by a staggering $1.8 trillion in the current financial year, giving rise to concern that the dollar's value could suffer because of the flood of debt Washington is issuing.

At the start of talks on Monday, neither side mentioned publicly past U.S. efforts to persuade China to let its yuan currency appreciate more rapidly, but they later acknowledged the sensitive issue had been on the table.

"We hope that the yuan/dollar exchange rate remains stable and we are focused on the security of China's investments in the U.S.," Zhu said.

The U.S. Treasury's coordinator for the talks, David Loevinger, was more circumspect.