U.S. Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner’s arrival in Beijing for a fourth round of Strategic Economic Dialogue (SED) with several high-ranking members of the Chinese leadership took on added importance this week, with both sides taking time to put out diplomatic fires in the wake of blind activist Chen Guangcheng’s escape from house arrest. Perhaps eager to report good news in a week otherwise filled with missteps over the handling of Chen’s situation, officials nevertheless walked away from the two days of talks with renewed optimism over the progress made on a number economic and trade issues.

The China Daily reported that the two sides reached 67 agreements during the course of the summit, which was co-chaired by Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo. Premier Wen Jiabao claimed that the talks yielded “some important breakthroughs,” including indications by China that it was willing to take steps to level the competitive environment surrounding its state-owned enterprises and signs that the United States would help China in its efforts to position the renminbi as an international reserve currency, according to The New York Times:

China agreed to remove what United States officials said were unfair subsidies and favorable regulations affecting state-owned corporations and to allow foreigners to take bigger stakes in Chinese securities firms, according to a senior official of the United States delegation who spoke on condition of anonymity.

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Treasury Secretary Timothy F. Geithner, meeting Friday with Li Keqiang, a Chinese vice premier, said the economic talks had achieved “very good progress.”

Later, in prepared remarks for the meeting’s closing ceremony, Mr. Geithner praised the Chinese for moving toward a more flexible exchange rate system and loosening controls on moving capital in and out of the country.

“These steps are significant and promising, and, we believe, will lead to further appreciation in the exchange rate over time against the dollar and other major currencies,” he said.

One senior US administration official told The Financial Times that while the topic of financial sector opening has resided at the center of bilateral discussions for some time, the meetings demonstrated increased momentum for such reforms. The Chinese press spent most of the week emphasizing mutual trust, respect and cooperation, and a Sunday People’s Daily editorial stuck to the same script:

The development of China-U.S. relations is a process of building up mutual trust and solving problems. It has been recognized in both countries that cooperation benefits both sides, while confrontation can only hurt. However, interference by outdated rules and clashes of interests have brought many challenges for the countries in terms of enhancing strategic mutual trust.

In order to implement the consensus reached by the heads of state to establish a partnership based on mutual respect and mutual benefit, the two countries should take long-term interests into consideration, put aside differences, and increase consensus, which requires wisdom, rationality, and courage. Pragmatic dialogue is undoubtedly a constructive and effective way to remove strategic misunderstanding and resolve disputes and friction.

Disputes and friction are a natural part of China-U.S. relations as they are in different development levels and have different growth models. Trade friction between the two countries has increased along with their rapid progress in carrying out substantial cooperation in a wide range of areas. Pragmatic dialogue can not only help resolve problems and disputes properly, but also provide strong practical support for the development of China-U.S. relations.

Most eyes remained fixed on the SED this week, a short work week in China due to the May 1 holiday. The week’s lone significant data release, the official Purchasing Managers Index (PMI), rose 0.2 percentage points to 53.3 in April as the index saw its fifth straight monthly increase (anything above 50 indicates an expansion). The HSBC flash PMI, which was published a week earlier and focuses on small and medium-sized enterprises versus the SOE-centric official number, indicated a contractionary environment at 49.1 but still posted its best reading so far this year.

Foreign Firms Still Look To China

Despite lingering global fears of a sputtering Chinese economy, The China Daily reports that foreign firms remain bullish about China and see opportunities to maintain or increase their presence there:

For the first time China has become German companies’ top foreign investment destination, totaling $1.36 billion by the end of last year, according to a survey by the Association of German Chambers of Industry and Commerce. The amount was more than the combined German investment in France, Spain and Italy.

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According to Sarah Butler, managing director of consultancy Booz & Company’s China division, for foreign firms, investing in China is no longer an option but a necessity.

“This reality is driven partly by the natural and inevitable saturation of their home markets as the Western economies mature and companies are driven by the need to continuously seek growth opportunities internationally.”

Despite forecasts that China’s economy will slow – which was verified by the latest year-on-year GDP growth of 8.1 percent in the first quarter – General Motors China is planning to double its sales volume to 5 million units over the next five years, said president and managing director Kevin Wale.

How To Spot A Fraud

CNN catches up with Carson Block, whose short-selling Muddy Waters Research has made a name for itself by identifying potential fraudulent accounting practices at Chinese companies over the past two years:

Some clear warning signs Block watches for?

“Too many mergers and acquisitions at one company are definitely a red flag,” said Block. “Companies trying to raise cash when they appear to have a lot on their balance sheet is also an issue.”

Block has also found it useful to scrutinize members who sit on the board of directors at Chinese companies, as well as those who are major investors — a tactic Block used to formulate his short position on Focus Media.

Finally, Block says he also watches to see how companies respond to criticism — whether it be accusations of fraud or otherwise.

“If a company responds to a short seller’s claims by brushing them off and saying that it will continue to run its business and in turn, void any investor concerns, it generally turns out that the short seller is wrong,” said Block. “But when a company starts buying back shares, that’s not necessarily a positive.”

Fears Of Spying Hinder China Mobile’s U.S. Push

U.S. national security officials may refuse to allow Chinese telecom giant China Mobile to build facilities on American soil and offer international service to American customers, according to The Los Angeles Times:

Officials from the FBI, the Department of Homeland Security and the Justice Department’s national security division are concerned that the move would give the company access to physical infrastructure and Internet traffic that might allow China to spy more easily on the U.S. government and steal intellectual property from American companies, according to people familiar with the process who declined to be identified because the deliberations are secret.

Those officials, known collectively as “Team Telecom,” review FCC applications by foreign-owned companies. They could advise the FCC not to issue the license, but may instead demand a signed agreement designed to satisfy security concerns, the people said.

The review is being led by the Justice Department, which declined to comment, as did the FBI and DHS.

A move to block the license could provoke a lawsuit by China Mobile, officials said. But lately, the U.S. government’s focus on cyber espionage has sharpened considerably.

Other News:

• Shares in fragrance and tobacco producer Huabao International, listed in Hong Kong, plunged 7% on Friday despite a rebuttal after a short seller reportedly suggested irregularities in the company’s financial statements.
• Yahoo!’s reported agreement to sell part of its Alibaba stake back to the Chinese company is not a must for Yahoo! shareholders and shouldn’t be rushed, writes Forbes contributor Eric Jackson.
• Toyota’s April China sales are up 14.3 percent over the same period last year, and up 68 percent since last April.
• The Wall Street Journal reports that roadblocks in Aluminum Corp of China’s (Chalco) agreement to acquire a stake in coal miner SouthGobi indicates an increased wariness in Mongolia over Chinese investment.
• The China Money Podcast speaks to BlackRock’s Ewen Cameron Watt, who sounds off about China’s property sector and what key China data indicator global investors should keep their eye on as they assess their positions.