WASHINGTON - President Barack Obama declared a new era of "co-operation, not confrontation" with China on Monday, even though two days of high-level talks were not expected to resolve differences over the two nations' yawning trade gap and China's unease over soaring U.S. budget deficits.

The Obama administration pledged to get control of the deficits once the economic crisis is resolved. It also pressed China to reshape its economy to rely more on domestic demand and less on exports that drive up the U.S. trade deficit.

Chinese Assistant Finance Minister Zhu Guangyao, briefing reporters after Monday's meetings, said the U.S. and Chinese sides had "profound exchanges" on the recovery of the U.S. economy.

"We sincerely hope the U.S. fiscal deficit will be reduced, year after year," Zhu said, speaking through an interpreter, after being asked if China was worried about U.S. recovery.

The discussions in Washington represent the continuation of a dialogue begun by the Bush administration, which focused on economic tensions between the two nations. Obama chose to expand the talks to include foreign policy issues as well as economic disputes.

Top officials from both countries have called the relationship crucial to solving many of the world's crises. The Obama administration hopes the talks can set the groundwork for co-operation on climate change, lifting the world economy out of turmoil and addressing nuclear standoffs with North Korea and Iran.

Both sides sought to underscore the importance of the revamped Strategic and Economic Dialogue, with Obama delivering a major policy address to welcome a sizable Chinese delegation of 150 diplomats.

"I believe that we are poised to make steady progress on some of the most important issues of our times," Obama told officials from both countries assembled in the vast atrium of the Ronald Reagan Building.

"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," Obama said.

Vice Premier Wang Qishan, China's top economic policymaker, said his country's attempts to create a more open economy would help U.S. recovery efforts.

"With the furthering of China's reform and opening up, China and the United States will have even closer economic co-operation and trade relations and (the) China-U.S. relationship will surely keep moving forward," Wang said, speaking through an interpreter.

Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner were leading the U.S. team. The Chinese delegation was led by Chinese State Councilor Dai Bingguo and Wang.

Geithner and Wang both spoke of hopeful signs that the global economy was beginning to emerge from its worst financial crisis since the Great Depression.

Geithner said the stimulus packages put together by Beijing and Washington had made a substantial contribution to fighting the global downturn and represented a milestone in economic co-operation between the two nations.

The United States, the world's largest economy, accounts for about 22 per cent of global output, and China around 7 per cent. The combined impact of the massive stimulus programs should make a difference, economists said, in cushioning a recession that appears to be bottoming out in the United States and some other countries.

Geithner travelled to Beijing last month to assure Chinese officials that federal budget deficits, which have ballooned because of government efforts to deal with the recession and stabilize the financial system, would be reined in once those crises have passed.

He said Americans were already moving to boost their personal savings rates. Economists have long argued that is necessary to controlling U.S. trade deficits because it means Americans are not consuming as much in imports from China and other countries.

"We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013," Geithner said at the opening session of the talks.

Geithner did not spell out how the administration planned to accomplish those objectives. Many private economists have said the Chinese are right to worry about a U.S. budget deficit that is projected to hit $1.85 trillion this year, four-times the previous record, and under the administration's estimates will not dip below $500 billion over the next decade.

The Chinese, who have the largest foreign holdings of U.S. Treasury debt at $801.5 billion, have expressed worries that soaring deficits could spark inflation or a sudden drop in the value of the dollar, thus jeopardizing their investments.

Zhu told reporters, "The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets."

The United States played down the issue of China's currency, the yuan, which American manufacturers contend is being kept at artificially low levels by Beijing to gain trade advantages against the United States.

Both sides are trying to emphasize areas of agreement, in part to avoid upsetting global financial markets during a period of stress for the world economy.

Geithner did say that it would be a "huge contribution to more rapid, balanced and sustained global growth" if China shifted toward more domestic-led growth and away from the current extensive reliance on exports.

While Chinese officials have pledged to move in this direction, it was unclear that the changes would be fast enough or substantial enough to satisfy U.S. demands.

The two nations are the world's largest emitters of the pollution blamed for global warming, but so far China has resisted calls to set specific caps on emissions or to eliminate tariffs on clean energy technology that the United States and other countries would like to sell them.

The administration did praise China for its help in the nuclear standoff with North Korea. Clinton said the United States and China must work together to stop North Korean "provocations." She said both countries "appreciate the dangers of escalating tensions" and a possible arms race in East Asia.

While the U.S. trade deficit with China has narrowed slightly this year, it is still the largest imbalance with any country. Critics in Congress say unless China does much more in the currency area, they will seek to pass legislation to impose economic sanctions on Beijing, a move that could spark a trade war.

Dai said the countries must work together to help solve the world's problems.

Speaking through an interpreter, he noted that the countries are trying to build better relations despite their very different social systems, cultures and histories.

"Can we manage to do that? My answer is, we must work hard to make it happen, and, yes, we can - that is borrowed from President Obama." He added in English: "Yes, we can!"


Associated Press writers Foster Klug, Jeannine Aversa and Steven R. Hurst contributed to this report.