For the first time since taking office, President Obama called his Chinese counterpart, Hu Jintao, on Jan. 30. They had a lot to talk about. The White House indicated that the conversation covered a broad range of topics, but the most challenging aspect of China-U.S. relations in 2009 will be resolving economic tensions caused by the financial crisis.

Since the start of this century, the United States and China have formed an economic synergy beneficial to interests on both sides. China produced low-cost goods at reasonable quality that American consumers purchased with gusto. The Chinese government then invested the dollar proceeds from this trade in Treasury and other U.S. government securities. This supply of liquidity kept U.S. interest rates low, enabling American consumers to continue their consumption binge. A positive feedback loop was established that provided jobs for Chinese workers, cheap goods for U.S. consumers and high corporate profits for American companies involved in the China trade.

One way or another, this synergy is coming to an end. As the U.S. job market weakens and credit becomes scarce, the American consumer just does not have the same purchasing power as before. On the other side of the Pacific, Chinese firms and workers are directly impacted by this consumption decline, as thousands of firms go belly-up and millions of Chinese migrant laborers are thrown out of jobs.

The unraveling of this synergy is already creating tensions, recently illustrated by the war of words between Washington and Beijing over the value of China's currency, the yuan. In written answers to the Senate Finance Committee during his confirmation hearings for treasury secretary, Timothy Geithner noted that he "believes that China is manipulating its currency." While complaints that China artificially depresses the value of the yuan to bolster its exports are old, the Bush administration had long avoided this language.

China's Commerce Ministry shot back, arguing that the Beijing government "never used so-called currency manipulation" to gain unfair trade advantages. At the World Economic Forum in Davos, Switzerland, in late January, Chinese Premier Wen Jiabao implied that the American-led financial system had created the world's economic slump. Without naming the U.S. directly, his veiled criticism noted a failure of government supervision of the financial sector, "inappropriate macroeconomic policies," and an "unsustainable model of development, characterized by prolonged low savings and high consumption."

Currency issues have long been a source of tension between the two economic giants, but if this war of words spins out of control, it could upend the delicate China-U.S. financial balance. Neither side stands to win, since even without playing political blame games, there are several possible scenarios that could threaten financial stability.

First off is that China might not be able to continue its dizzying accumulation of U.S. government debt. A little noted fact is that over the 18 months from early 2007 until the middle of 2008, about $386 billion in speculative capital flowed into China to take advantage of an appreciating yuan. Recent indications are that these flows are reversing, as fears about China's economic stability are rising, and more Chinese individuals and firms place their money abroad. If the flows increase, it could affect China's ability to bankroll U.S. trade and budget deficits.

A related scenario concerns China's own economic prospects. As the global financial crisis reverberates, China's economy is slowing sharply. Already, as many as 26 million of China's roughly 130 million migrant workers are unemployed. The Chinese government has warned of a tough year ahead and made clear that its priority is using various stimulus packages and other means to protect the domestic economy and forestall social unrest.

If the Chinese economic downturn continues, it raises the question of whether China might opt to invest some of its almost $2 trillion in official reserves at home. As Wen recently noted, "Whether we will buy more U.S. Treasury bonds, and if so by how much — we should take that decision in accordance with China's own need."

Finally, a prolonged downturn in the U.S. economy could rapidly increase protectionist pressures, especially in Congress. In this regard, Geithner's comments were unhelpful, since they could set in motion forces in Congress to label China a currency manipulator.

At present, China is the largest foreign investor of U.S. treasuries, with $681.9 billion as of November 2008. Threats to impose punitive measures toward China might prod Beijing to reduce its buying of treasuries just as the U.S. government readies to issue record amounts of debt. An escalating currency row could thus make it more expensive for the U.S. to service its debt and deal a further blow to an already tottering economy. As with trade restrictions in the 1930s, currency tensions could lead to a downward spiral.

The China-U.S. economic relationship is arguably the most important in the world, but so far it has gotten insufficient attention from the Obama administration. The world's largest and third-largest economies are highly co-dependent, and a tit-for-tat war of words — or even worse, retaliatory measures — would make both sides losers. Open and constant dialogue is urgently required to steer this fragile relationship through tough times.

Christopher A. McNally is a research fellow and political economist at the East-West Center in Honolulu. He wrote this commentary for The Advertiser. Reach him at mcnallyc@eastwestcenter.org.