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Factbox: Key issues in annual U.S.-China Strategic & Economic Dialogue

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(Reuters) - Top U.S. and Chinese officials will meet in Washington this week for the annual U.S.-China Strategic and Economic Dialogue, a process launched five years ago to help the world's two largest economies manage an increasingly complex relationship.

U.S. Secretary of State John Kerry and Treasury Secretary Jack Lew will host Chinese co-chairs, State Councilor Yang Jiechi and Vice Premier Wang Yang. All four officials are new in their positions and leading their first S&ED talks, which include the heads of 14 U.S. government agencies and 16 Chinese state bodies.

The meetings, a month after an informal summit between President Barack Obama and new Chinese President Xi Jinping in California, will give both sides a chance to turn agreements there into practical policies.

Following are the main items in a large menu of issues to be discussed by the two countries:

STRATEGIC ISSUES

CYBER SECURITY

The United States has been complaining about hacking of U.S. government and corporate networks originating from China - and meeting Chinese denials - for nearly a decade. The dispute grew more complicated with former National Security Agency contractor Edward Snowden's revelation of U.S. hacking into the backbone server at Tsinghua University in Beijing and Hong Kong University. China is expected to demand an explanation for these activities.

The United States wants the focus to be on theft of trade secrets and other intellectual property, often through sophisticated cyber attacks, which analysts say cost the U.S. economy as much as $320 billion a year. In a case last month indicating a tougher U.S. approach to IP theft, the Chinese wind turbine maker Sinovel Wind Group Co and two of its employees were charged with allegedly stealing trade secrets from U.S.-based AMSC by the Department of Justice.

NORTH KOREA

The United States is seeking to solidify the recent tougher line on North Korea taken by China after a nuclear test in February and other provocations by Pyongyang. China has joined the United States in saying it won't recognize the North as a nuclear state, and the state-owned Bank of China cut its ties with North Korea's Foreign Trade Bank, sanctioned by Washington for its role in Pyongyang's nuclear program. Some U.S. analysts caution, however, that China's shift has been tactical and does not reflect a fundamental change in its commitment to keep an often troublesome neighbor afloat.

ASIAN MARITIME DISPUTES

China is embroiled in maritime sovereignty disputes with the Philippines and Vietnam over islets in the South China Sea and with Japan over small islands in the East China Sea. Both sets of disputes, in which Taiwan shares China's claims, are decades old but have flared up dramatically in the past several years.

The United States is neutral on sovereignty questions, rejects any role as a mediator between parties, and urges claimants to handle the disputes peacefully and avoid actions that harm freedom of navigation. China points to the fact that Japan and the Philippines are formal military allies of Washington and asserts that the Obama administration policy of rebalancing its forces to Asia emboldens those countries to challenge China.

BILATERAL MILITARY RELATIONS

Military-to-military dialogue has in the past advanced only in fits and starts, subject to suspension by China in response to U.S. arms sales to Taiwan or other issues. But military relations between the two powers have thawed considerably in the last two years, with a brisk pace of high-level visits and meeting at regional meetings. China has accepted a U.S. invitation to observe the 2014 Rim of the Pacific (RIMPAC) naval exercise.

ECONOMIC ISSUES

CLIMATE CHANGE

Climate change has re-emerged as a priority for the two countries that are the leading producers of greenhouse gases as Beijing battles severe air pollution and Obama has recently renewed a stalled climate change agenda, promising new rules to cut carbon emissions from U.S. power plants and moves to support renewable energy.

In their first talks in June, Obama and Xi agreed to phase out production and consumption of greenhouse gases known as hydrofluorocarbons (HFCs), working under the U.N's 1987 Montreal Protocol. The new U.S.-China Climate Change Working Group, agreed in April, will make specific recommendations for boosting bilateral cooperation on climate change and work to advance the HFC agreement, the State Department said.

INVESTMENT

U.S. investors face barriers or ownership limits in about 90 Chinese sectors, restricting their opportunities in the world's second-largest economy. Chinese companies seeking to invest in the United States fear a political backlash in Congress or rejection on national security grounds by the secretive Committee on Foreign Investment in the United States.

U.S. lawmakers have expressed concerns about the implications for food safety of a proposed sale of Smithfield Foods Inc, the world's largest producer and processor of pork, to the Chinese meat company Shuanghui International for $4.7 billion. The proposed biggest takeover of a U.S. company by a Chinese firm will be reviewed at a Senate Agriculture Committee hearing on Wednesday, during the S&ED meetings.

Officials are expected to hold preliminary discussions on a bilateral investment treaty during this week's talks, but any such pact is likely to take years to finalize.

ACCOUNTING

U.S. regulators late last year charged the Chinese arms of the world's top five accounting firms with securities violations, which experts say could kill off U.S. stock exchange listings for Chinese firms if not resolved. The Securities and Exchange Commission wants the firms to supply documents relating to the audits of U.S.-listed companies, but the audit firms say they are blocked from doing that by Chinese state secrecy laws. The United States won a partial victory in a related case in May, giving U.S. regulators access to Chinese companies' audit documents and opening the way to probes of bungled audits after a two-year stand-off. But the ruling applies only to enforcement cases against auditors, not against China-based companies suspected of accounting fraud.

AGRICULTURE

China is the largest market for U.S. agricultural products, but still has many barriers that frustrate U.S. farmers. The United States wants China to allow more imports of U.S. beef, pork and poultry. China also has restrictions on imports of U.S. apples, pears, potatoes and strawberries that the United States says are not based on sound science. China's slow approval process for new varieties of genetically modified crops is another frustration, although China last month approved another two strains of genetically-modified corn for imports to keep up with rising demand from animal feed producers as the world's most populous nation consumes more meat.

CURRENCY

The United States believes China's yuan currency, also known as the renminbi, is significantly undervalued, giving Chinese companies an unfair price advantage in international trade. U.S. efforts to take a stronger stance on China's currency moves have faded due to an increase in the value of the yuan, a big drop in China's global trade surplus and a rise in labor costs that has made Chinese products less competitive.

The U.S. Treasury Department in April declined to label China a currency manipulator and noted that the yuan had risen 16.2 percent against the dollar in inflation-adjusted terms since June 2010, when China moved off its exchange rate peg. But the persistently high U.S. trade deficit with China set another record in 2012 at $315 billion, fueling complaints in the U.S. Congress.

EXPORT CONTROLS

China has pressed the United States for years to ease restrictions on exports of high-technology goods that have potential military applications. Washington is in the midst of reforming its overall export control regime, but concerns about intellectual property protection and fears of helping Beijing's military increase its capabilities could limit new opportunities for Chinese companies to buy U.S. high-tech goods.

(Reporting by Doug Palmer, Anna Yukhananov and Paul Eckert in Washington; Editing by Lisa Shumaker)

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