The Aftermath of the China-U.S. trade talks.

Implications: Paulson - China are gradual reformists.

Bernanke- changed text in his prepared speech and pulled the term "effective subsidy" that angered the Chinese side and replaced it with the term "causes distortions" which will only add give fuel to the anti-China lobby in the U.S. China was caught off guard by his comments.

China states that rapid RMB appreciation would undermine Chinese Economy.

Next meeting in Washington in May.

Analysis: It seems clear that Hank Paulson is very much respected by China and his 70+ visits during his Goldman days was time well spent.

Ben Bernanke however seems to have thrown some of the Chinese financial hierarchy into a spin.

China thought that Bernanke was going down the path well trodden by Rubin, Summers, Snow and Greenspan who all adhered to the belief that RMB has little to do with the source of the trade imbalance. Instead they heard that Bernanke views the RMB rate as an "effective subsidy."

China views the trade imbalance problem as a structural issue. They see that there is a lack of internal market consumption and a savings glut within China, and on the U.S. side they see a lack of savings and over consumption. China was shocked to hear Bernanke's viewpoint which was mostly definitely a departure from the Greenspan mantra. Greenspan warned that the dollar might decline for a few years in a little publicized article last week.

Madame Wu Yi should tone down the strident rhetoric at the next meeting, the U.S. side should acknowledge that part of the rhetoric was aimed at the domestic Chinese audience.

I see an unofficial quid-pro-quo emanating from these meeting in the form of large commercial Chinese contracts being awarded to American firms and the RMB appreciating in a 3-5% band annually for a few years.