http://www.atimes.com/atimes/China/KC28Ad01.html

While the world is focused on the Group of 20 (G20) summit in London early next month, it will also watch closely the meeting on the sidelines between Chinese President Hu Jintao and his US counterpart Barack Obama. The first Sino-US summit since Obama was sworn in more than two month ago will not only address bilateral relations and mutual concerns, but also provide an opportunity for the leaders to build personal trust and upgrade the countries' strategic dialogue.

A number of issues of mutual interest are likely to be addressed at the Hu-Obama meeting.

To foster closer cooperation on bilateral and international affairs, the leaders are likely to endorse the establishment of a mechanism of Strategic and Economic Dialogue, an upgrade from the current level of dialogue between the countries. This has been indicated by meetings held between US Secretary of State Hillary Clinton and Chinese Minister of Foreign Affairs Yang Jiechi in each nation's capital before the summit.

Days after the Sino-US naval standoff on South China Sea this month, Obama told Yang during an Oval Office meeting that it was crucial to raise the level of military-to-military talks "in order to avoid future incidents". The meeting between Hu and Obama, both commanders-in-chief of their armed forces, will decide whether the two militaries are truly ready to enhance links.

The leaders may also address anti-terror and non-proliferation issues. The US is now shifting its anti-terror strategy, with plans to send more troops to Afghanistan, which has a border with China. While China and the US share fundamental interests in fighting international terrorism, this shift could mean China will need to adjust its own strategy regarding terrorism and peripheral stability.

With North Korea's plans to launch a "satellite" in early April, the resumption of the six-party talks is naturally an issue for Hu and Obama to discuss. With "regime change" in Washington, Pyongyang has had time to devise a new strategy to engage the new administration. Its recent rhetoric has raised the importance of re-opening these talks and the need for Chinese-American synergy in their approach to them.

This list of common interests in non-proliferation and regional security issues extends to Iran's nuclear program and stability in South Asia. However, Obama will be most interested in bringing forth his own agenda for the summit. Predictably, he will be preoccupied with economic security, as the devastating financial crisis poses a serious threat to the world and US economies. If he cannot offer hopeful remedies to this, over time his standing could be in jeopardy.

It is this crucial issue that could split participants at the G20. Though they all claim to share the common objective of recovery from the crisis, their approaches could be quite different. The US is likely to stress the importance of spending and stimulus measures, while the EU is keener on reforming the global financial system, such as plans to build stronger supervision and a better early-warning mechanism. China cares primarily about the security of its own financial assets in America.

Clinton said during her visit to Beijing in February, "The US appreciates China's continuing confidence in American dollars." China now is the largest holder of US Treasury bonds. According to the US Treasury Department, China holds bonds worth US$740 billion, which is equal to 6% of all bonds the US has issued. Obama may hope more Chinese investment will come from his meeting with Hu, while the Chinese president is likely to reiterate Beijing's concerns about the safety of its dollar assets.

China is not concerned over the US economy's long-term recovery, but more if the crisis has passed its worst phase and begun to bottom out. How this legitimate concern is answered will dictate the scale of China's US-bound investment, as Beijing must protect its investments. From this perspective, while China appreciates Obama's promise that the US is a reliable manager of foreign funds, the reality is that America has failed to manage its own wealth lately. On this issue, Hu and Obama may have a lot to discuss.

Although China is willing to "ride on the same boat" with the US, it is likely to paddle more cautiously. Beijing is apprehensive of American protectionism, either in the form of "Buy American", or in unreasonable conditions being placed on the quality of imported goods. China has been concerned over officials within the Obama administration accusing it of "currency manipulation".

Realistically, the US jobs lost due to manufacturing outsourcing will never return to America, whether China manipulates its currency or not. It is one thing for US politicians to talk about this for domestic political reasons, but quite another if the Obama administration allows such talk to develop a level that could harm its interests.

Although there is much common ground, China and the US are still at odds on other issues, for instance on Taiwan and Tibet.

Since China and the US established formal ties in 1979, Taiwan has been a frequent source of tensions. On Tuesday, the US Congress passed a resolution reiterating the US's "unwavering commitment" to Taiwan's security. It also called the 1979 Taiwan Relations Act a "cornerstone" of US policy. The act requires that the US upholds Taiwan's capability to defend itself, including by providing the island with "arms of a defensive character". This prompted China to lodge a formal protest on Thursday.

Therefore, while it may sound trite, Hu is certain to stress that Taiwan remains a core issue in Sino-US relations.

Though the US government professes a "one-China" policy and recognizes Taiwan as a part of China, arms sales to Taiwan by the George W Bush administration have kept Beijing suspicious of Washington's genuine intentions. Unconfirmed reports that the Obama administration might sell Taiwan advanced jetfighters or upgrade what the US sold earlier could cast a serious shadow on bilateral relations.

Tibet is another thorny issue that may hurt Sino-US relations. Despite the US's recognition that Tibet is a part of China, Beijing is not happy with what it considers Washington's interference in China's internal affairs, especially given America's commitment to the separation of religion and state.

The Congress has just passed overwhelmingly the resolution Democrat party representative Rush Holt initiated in support of the Dalai Lama, the Tibetan spiritual leader in exile. The Chinese side finds it difficult to understand why the American leadership has failed to note that the Dalai Lama was the "god-king" ruler of a serf system, and still aspires to restore that system - in which religion is not separated from politics.

The recent naval standoff in the South China Sea involving the USNS Impeccable, as well as the air collision incident in the same area in 2001, have prompted questions as to what a rising China means, and where the center of gravity of power is shifting in the Asia-Pacific.

The best approach to avoiding such incidents would be for the US to limit or even stop military missions in this area. It has also been noted that the military-to-military hotline that was set up after arduous efforts was not used during the incident. This negates the whole purpose of creating the mechanism. The two governments also need to work out an engagement protocol of their respective navies and air forces in the South China Sea, particularly in the Exclusive Economic Zone areas in which China has special economic rights.

During the past eight years of the Bush administration, China, with its fast economic growth, has narrowed its economic gap with the US. China's gross domestic product is now one-third of the US's, compared to one-ninth eight years ago. Obama may need to ponder how much closer this gap is to be further narrowed under his presidency, and adjust Washington's China policy accordingly.

With the apparent decline of the American empire and the rise of China, the Hu-Obama meeting is expected to usher in a new era of Sino-US relations in which Beijing and Washington will cooperate to face international security challenges, but at the same time compete with each other with their different values and systems.