US says will face differences head on in talks with China next week

WASHINGTON (REUTERS) - The United States said on Thursday that it would not "paper over" differences between the United States and China when top officials of the world's two largest economies meet to discuss financial and political strategy in Washington next week.

Daniel Russel, assistant secretary of state for East Asia and the Pacific, set the scene for contentious exchanges at the annual US-China Strategic and Economic Dialogue (S&ED) by stressing that differences over the South China Sea, cyber security and human rights would be high on the US agenda.

Speaking after revelations of massive cyber attacks on US government computers in the past two weeks, which US officials have blamed on Chinese hackers, Russel said cyber security issues would be raised throughout the talks from Monday to Wednesday in Washington.

The United States would also stress human rights, including the issue of democracy in Hong Kong, China's "very problematic" law on non-government organisations, and its restrictions on media and civil society, he told a media briefing.

China has indicated a desire to avoid acrimony at the talks, looking to set the scene for a successful visit to Washington by Chinese President Xi Jinping in September.

Chinese Assistant Foreign Minister Zheng Zeguang told a forum in Beijing on Friday that China would seek to "constructively handle and control" differences with the United States on maritime disputes, cyber security, and human rights.

"On these issues our attitude is to not evade and to resolutely defend China's interests," Zheng said.

- China's actions "troubling" -

Russel said maritime disputes in the South China Sea were "not fundamentally" between the United States and China and the United States had "an unwavering determination ... to avoid military confrontation, including with China."

However, he said the principles of freedom of navigation and overflight were at stake and maritime claims had to be consistent with international law. "It's an issue of China's future and of China's choices," Russel said.

He called this week's announcement by China that it planned to continue and expand the construction of facilities on reclaimed outposts in disputed waters troubling.

"Neither that statement, nor that behaviour, contributes to reducing tensions ... We consistently urge China to cease reclamation to not construct further facilities and certainly not to further militarise outposts in the South China Sea,"Russel said.

This year's meeting comes amid heightened tensions, not just over Beijing's increased territorial assertiveness and the allegations of cyber spying, but China's expanding economic influence across the Pacific Rim at a time of growing doubts over US leadership after last week's congressional rebuff of President Barack Obama's landmark Asia-Pacific trade pact.

US officials will also press China on currency policy, said a senior US Treasury official, who in briefing reporters did not rule out the possibility that Washington might one day join a China-led infrastructure bank seen as a rival to the US-dominated World Bank and Japan-led Asian Development Bank, although any such move was "well down the road."

The official said China's yuan still appeared undervalued despite a recent assessment by the International Monetary Fund that this was no longer the case.

The US-China dialogue was established in 2009 as a way to maintain practical bilateral cooperation in spite of differences. It will be chaired on the US side by Secretary of State John Kerry and Treasury Secretary Jack Lew, while China's delegation will be led by State Councillor Yang Jiechi and Vice Premier Wang Yang.