Inside the Obama-Hu meeting

The official White House readout of the bilateral meeting between U.S. President Barack Obama and Chinese President Hu Jintao focused on Iran, but the real movement in the U.S.-China relationship may come first on the issue of China’s undervalued currency.

When Hu finally agreed to attend the 47-nation Nuclear Security Summit, which officially began today in Washington, there was widespread speculation that in exchange, the Obama administration had agreed to delay a Treasury Department report that was scheduled for an April 15 release and would have weighed in on whether China should be labeled a "currency manipulator" because its currency is artificially pegged to the U.S. dollar and greatly undervalued.

Not so, say our well-placed diplomatic sources, who described a more complex and nuanced set of interactions that include but aren’t limited to the U.S. pressuring China to let its currency float, even a little, toward a more equitable rate.

The Treasury Department wouldn’t have delayed the report (indefinitely) unless it had received some serious assurances from the Chinese side that some form of currency movement was being considered for announcement soon, our sources said. Following Monday’s meeting, U.S officials feel confident that movement is in fact coming.

The question going forward is how soon … and how much.

And when the announcement comes, the Chinese will want to explain it as a domestic necessity. Their economy is beginning to overheat, they will say, making a small currency adjustment prudent. They can’t very well be seen as bowing to U.S. pressure, especially considering their view of how the United States has handled its own economy.

Inside Tuesday’s Obama-Hu meeting, Obama "reaffirmed his view that it is important for a global and sustained and balanced global economic recovery that China move toward a more market-oriented exchange rate," Jeffrey Bader, the NSC’s senior director for Asia, said after the meeting. "The president also noted his concern over some market-access issues, market-access barriers, in China and the need to address them as part of the rebalancing effort."

Our sources said the U.S. officials at the meeting came out with a positive reaction, feeling that the meeting went much better than Obama’s last bilateral with Hu in November in Beijing.

Robert Hormats, the U.S. under secretary of state for economic, energy and agricultural affairs, was in Beijing this week and called for a "rebalancing" of the Chinese economy. "We need more consumption from the Chinese side and more saving and exports from the U.S. side," he said.

Hormats spoke about Chinese market protectionism, intellectual property, innovation, and a host of other economic issues, but did not mention currency once in his April 9 speech at a Chinese think tank — showing the sensitivity and private approach the administration is taking with China on the issue.

On Iran, Bader said of the Chinese, "They’re prepared to work with us."

"The two presidents agreed that the two delegations should work on a sanctions resolution in New York, and that’s what we’re doing."

Many reports depicted that as some sort of shift, but as Bader noted, the Chinese had already agreed to work with the P5+1 countries at the U.N., and those talks are ongoing. China agreed to no specific commitments or deadlines within the meeting, our sources relate.

Obama was very tough and resolute when talking about the Iran issue to Hu and said he wanted to see some progress by the end of April, we’re told. Meanwhile, the Chinese, while not making any specific promises, are accepting the principle of a dual-track approach toward Iran, mixing engagement with pressure, and are working with the other countries in good faith, our sources report.

As one put it, "They’re coming around."