China is in some ways a fragile economy

For all its rapid strides, China is in some ways a fragile economy. That, trade experts say, is a danger not just to leaders in Beijing but to the world economy.

"If reform stalls, the Chinese economy will stall, and that is in nobody's interest," says Daniel Griswold, an economist at the Cato Institute, a libertarian think tank in Washington. Paulson "understands that our interest is in a thriving, liberalizing China."

China has committed itself down the road to an increasingly market-based economy. Its surging output of electronics and other goods has been stunning - and unsettling to rival manufacturers in other nations.

But this doesn't mean China's path of progress will necessarily remain smooth. Among the challenges: an outdated financial system heavy on bad loans, state-owned businesses in distress, a volatile social rift between prosperous urbanites and the rural poor, and the looming burden of a rising elderly population.

[The stated goals of [Henry Paulson, America's new Treasury secretary] for the US-China economic relationship have much in common with those of his predecessor, John Snow. Both put the issue of a more flexible Chinese currency high on their list - a move that could bolster the exports of struggling US manufacturers.

But Paulson's tone appears at once softer and more ambitious. He is not simply calling for change from Beijing officials. He expects to work with them regularly, building on the ties he established there in his career as a globe-trotting investment banker...

All this reflects a tempered approach to China at a time when critics continue to press the Bush administration for punitive measures if China is not responsive.

"Time is running out. I hope that Hank returns with tangible results," Sen. Charles Schumer (D) of New York said in a statement last week. He and Republican Sen. Lindsey Graham of South Carolina say they may have "no choice" but to call for a vote on their proposal that China face a 27.5 percent tariff in the US if Beijing fails to act on the currency issue...

Many economists, however, caution that a trade war could harm both nations and the world economy. Their arguments include:

• The US and China, currently the twin engines of global growth, have become increasingly interdependent. Supporting gradual reforms, and a healthy Chinese economy, is more important than winning concessions.
• China's increasing clout makes it likely that its leaders will continue to make decisions based on perceptions of their own interests, not outside pressure.
• Even if the yuan were to rise sharply against the dollar, it is unclear how much impact that would have on the mammoth US trade deficit. America might simply import more from other nations, or pay more for imports from China.

Moreover, a large revaluation of the yuan might destabilize China.

"If they did it suddenly, their financial system might not be able to withstand the adversity," says Michael Cosgrove, an economist in Dallas who publishes the Econoclast newsletter.