The annual US-China Strategic and Economic Dialogue in Washington this week dribbled down to an exercise in treading water ahead of a crucial summit between President Obama and President Xi Jinping in September.

Amid escalating tensions over China’s island reclamations in the South China Sea and alleged cyber attacks against a US government agency, most action during the two days of high-level talks was confined to a game of polite political scrimmage. Modest progress was made on financial and market issues — but neither side budged on crucial bilateral issues in a series of “candid” and “frank” exchanges. The talks ended Thursday.

Attention is now turning to the outcome of the Obama-Xi summit.  “President Xi’s State Visit is indeed one of the most important in memory because China has become a clear No. 2  to the US as an economic superpower, an emerging military power projecting power farther from home, and is involved in every matter of international import,” Robert Lawrence Kuhn, a global strategist and official adviser to the Chinese government, told Asia Times. “Moreover, perceptions are that Sino-US relations have been deteriorating, headlined by the South China Sea and cyberattacks, such that American analysts have become markedly pessimistic. For a host of reasons, China needs to stabilize relations with the U.S.—which is critical for China’s complex domestic agenda of industrial restructure and social reforms.”

But Kuhn added, “Once Xi puts his credibility on improved relations, the road ahead should become clearer and longer, albeit occasionally bumpy.”

For the moment, the US and China remain at loggerheads over cybersecurity and the South China Sea. Secretary of State John Kerry said during this week’s strategic dialogue talks that the US remained “deeply concerned” about massive attacks on US government computers that the US has traced to Chinese hackers.

China’s top diplomatic honcho, State Councillor Yang Jiechi, said the two nations needed to cooperate  on cybersecurity and called on Washington to be “impartial and objective” when it came to the South China Sea. He stressed China’s “firm determination” in safeguarding its sovereignty and urged the US to respect Beijing’s wishes.

Yang also added: “Navigation freedom in the South China Sea is guaranteed. We do believe that there will not be any issue or problem with navigational freedom in future. We hope the US can be impartial and objective to serve peace and stability in this region.”

The talks conclude
The talks conclude

One of the few upbeat notes was sounded when US and Chinese financial honchos pledged to continue work on a Bilateral Investment Treaty. China also said it would limit currency interventions, further liberalize exchange rates, open capital markets and expand access to foreign financial service firms.

The two nations also buffed up earlier concerns about combating global warming,  Iran and North Korea’s nuclear programs, the fight against Islamist militancy, and supporting global development.

The US hasn’t officially said that China’s behind the recent data breach at the US Office of Personnel Management. But Reuters quotes sources close to a US probe as saying that hackers stole data that would be helpful to the Chinese government in counter-intelligence and domestic stability matters.

Gary N. Kleiman, an emerging markets specialist who runs Kleiman International in Washington, D.C., notes that the annual bilateral talks are rarely market-moving. Their impact on the financial side was especially muted this year due to headlines made by earlier MSCI index/China A-share  and IMF exchange rate decisions.   In other areas, Kleiman noted, “US financial firms may have marginally advanced cybersecurity agendas, especially in relation to mandatory code-sharing, and from a broad economic statistics perspective Beijing committed to observing the Fund’s basic national account standard which could add clarity on debt and reserves.”

Kleiman says China’s also hewing to a policy of further banking and securities industry opening short of majority ownership. On the downside, he says distressed-asset funds looking at local ventures were disappointed in the lack of specifics related to access and treatment in the wake of  mounting formal and shadow credit troubles in China.

The September summit between the US and Chinese presidents is interesting because it is not Xi’s first trip to Washington. Xi has visited the U.S. six times — perhaps more than any Chinese leader. Obama isn’t dealing with a fresh-out-of-China neophyte — and he knows it.

Xi reportedly made his first US trip in 1985 as a high-ranking Chinese official, returning twice in 1990s and once in 2006. He returned to Washington in 2012 as China’s vice president and heir apparent. He later met with Obama in California in 2013. But the September meeting will be Xi’s first state visit to Washington.

Former US Secretary of State Henry Kissinger and other US China hands have expressed hopes that major progress will be made in resolving bilateral differences when Xi meets Obama in September. However, it’s unclear if the two sides can achieve a breakthrough — especially on the thorny issue of the South China Sea.

A Chinese source says Xi told Obama at the APEC summit in November that Beijing considers the entire South China Sea area historically and culturally part of China and won’t back down in the island dispute.

But Kuhn says both sides are maneuvering for a compromise behind the scenes.  “Any progress on the ‘sensitive’ issues of South China Sea and cyberattacks will not be played out in public, but I’ve no doubt that arrangements are being made for some kinds of accommodations, such that they will not dominate and disrupt Xi’s State Visit to Washington, which is exceedingly important — yet without compromising ‘core interests’ or losing public face,” said Kuhn, a CCTV host and the author of “How China’s Leaders Think.”

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