Three to-dos on China

November 7, 2012: 12:28 PM ET

The race is over, but how should the U.S. approach the world's second-largest economy?

FORTUNE – During the U.S. presidential campaign, both Mitt Romney and Barack Obama piled on criticisms of China – from being a currency manipulator to playing unfairly in the way it trades with the U.S. and other economies. Now that the race is behind us, how should the U.S. approach China, the world's second-largest economy? A stronger relationship is better than a strained one, given that the two economies depend more and more on each other to grow. Here are three ways the U.S. can begin to cultivate the bond.

Resolve America's fiscal woes – The U.S. federal budget deficit surpassed $1 trillion for four years in a row – a level that not only unnerves executives across corporate America, but also Chinese investors looking to do more business in the U.S.

Last year, Obama wasn't able to lead the nation out of its fiscal woes amid all the political wrangling. Now that the election is over, he will have to try again. Unless a divided Congress can quickly reach a deal to reduce the deficit, about $600 billion in government spending cuts and higher taxes threaten to kick in on Jan. 1 and possibly push the U.S. economy back into recession.

The uncertainty has stalled U.S. businesses from hiring and investing more. Though we've heard less from the Chinese, they have plenty at stake as well, says Ken Lieberthal, senior fellow at the Brookings Instituion. "The Chinese are heavily invested in the U.S. economy."

China remains a major lender to the U.S., owning $1.15 trillion of its government debt. That's more than any other country. It's not as if the Chinese will suddenly stop buying U.S. debt if a deficit deal isn't struck immediately, but it could certainly make investors from the Far East think twice. Chinese investments into the U.S. have steadily risen over the past several years: With about two months left in 2012, it has totaled $6.3 billion, higher than the $4.5 billion in 2011.

And so if Obama wants investors from the world's second largest economy to continue investing in the U.S., the president will somehow need to bring a split Congress together and put the nation on a healthier fiscal path.

Make nice with China's new leaders – As the U.S. starts another term under President Obama, China will also begin a new chapter of its own. China, however, will take on new leaders under a far different political process. Xi Jiping will be installed into China's most powerful position as general secretary of the Communist Party, while Li Keqiang will take on the role of his deputy.

Most, including the vast majority of Chinese, aren't certain what to expect. Beyond China's political elite, the two are relatively unknown. And what their plans are for China is less certain.

While the U.S. president will have little control over China's path, Obama will have an opportunity to set a new tone with the new leadership.

MORE: Congratulations, Mr. President. Here's how to fix the economy.

"The U.S. and China really don't trust each other's long-term intensions and that distrust is very coercive," says Ken Lieberthal, senior fellow at Brookings Institution, a Washington DC-based think tank. As we recall, the U.S. presidential race was marked by get-tough on China talks. But while the candidates might have pressed China over currency manipulation and other issues over unfair trade practices, Obama will have to approach those topics delicately. Anything too punitive or aggressive could prompt China's new leaders to strike back harder, as unlike Obama, they will be trying to establish themselves politically.

Quit with those mixed signals

It's clear the Chinese want to invest more in the U.S. But the U.S. doesn't always seem to want that. Which only leaves Chinese investors with mixed signals.

Lately, China seemed to be all but a punching bag in Washington. Perhaps less so for Obama than Romney, but the 'fear China' rhetoric has aggravated Chinese concerns that the U.S. is distancing away from doing more business with China.

MORE: China slowdown may be overstated

Another blow to investors came in September when the Obama Administration, citing national security, blocked a Chinese-owned wind farm project in Oregon. A week later, a congressional report warned that telecommunications equipment made by Chinese companies Huawei Technologies and ZTE Corp were a threat to U.S. security.

"The president could demonstrate leadership by publicly confronting and reversing this misapprehension, and being more specific about what the concerns are, where there are concerns," says Daniel Rosen, a principal at Rhodium Group, a New York City-based economic research firm. He adds that a good time to broach such topics would be in May at the U.S.-China Strategic and Economic Dialogue, which Obama and Chinese President Hu Jintao created in 2009 as a means to talk about broad issues between the two nations.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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