• Reuters, Kyodo

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President Barack Obama announced on Friday that he had reached a “common understanding” with Chinese President Xi Jinping on curbing economic cyber-espionage, but threatened to impose U.S. sanctions on Chinese hackers who persist with cybercrimes.

The two leaders also unveiled a deal to build on a landmark emissions agreement struck last year, outlining new steps they will take to deliver on pledges to slash their greenhouse gas emissions.

Speaking after White House talks during Xi’s first U.S. state visit, Obama quickly homed in on the thorniest dispute between the world’s two biggest economies — growing U.S. complaints about Chinese hacking of government and corporate databases, and the suspicion in Washington that Beijing is sometimes behind it.

“It has to stop,” Obama told reporters at a joint news conference in the White House Rose Garden, with Xi standing beside him. Obama said he and Xi made “significant progress” on cybersecurity.

But he added warily: “The question now is, are words followed by actions?” and made clear he is prepared to levy sanctions against cybercriminals.

The two leaders said they agreed that neither government would knowingly support cybertheft of corporate secrets or business information.

But the agreement stopped short of any promise to refrain from traditional government-to-government spying for intelligence purposes. That could include the massive hack of the federal government’s personnel office this year that compromised the data of more than 20 million people. U.S. officials have traced that back to China but have not said whether they believe the government was responsible.

Xi reiterated China’s denial of any government role in the hacking of U.S. corporate secrets and said the best way to address the problem was through bilateral cooperation and not to “politicize this issue.”

“Confrontation and friction are not the right choice for both sides,” he said. China has routinely insisted that it, too, is a victim of hacking.

Analysts said the agreement was significant. James Lewis, senior fellow at the Center for Strategic and International Studies, said the leaked plan for sanctions helped push the Chinese toward a better-than-expected agreement, but noted that Beijing also got Washington to consider some Chinese concepts for norms of behavior.

Obama hosted a lavish black-tie state dinner for Xi on Friday night, featuring Maine lobster and Colorado lamb for about 200 guests, with technology executives featured among them.

Seated with Obama and Xi at the head table were Apple CEO Tim Cook, Satya Nadella of Microsoft, Facebook’s Mark Zuckerberg and Salesforce.com‘s Marc Benioff.

In their dinner toasts, both leaders focused on the theme of friendship. But Obama also referenced the tensions. “There will be times when there are differences between our two countries. It’s inevitable,” Obama said, also gently urging China to accept diverse views and “uphold the rights” of all people.

Earlier in the day, the two men struck a serious, businesslike tone when they appeared before reporters, showing little sign of close personal rapport as Obama laid out concerns with Beijing’s economic policies, territorial disputes with its neighbors and its human rights record.

As the two leaders spoke, dozens of pro- and anti-Xi protesters gathered near the White House grounds, waving flags, beating drums and shouting slogans.

U.S. and Chinese officials sought to cast their talks in a favorable light by showcasing at least one area of cooperation — the global fight against climate change.

As part of their agreement, Xi announced that China, the world’s biggest emitter of greenhouse gases, will launch a national carbon cap-and-trade system in 2017 to help contain the country’s emissions.

For Obama, the deal with China strengthens his hand ahead of a global summit on climate change in Paris in December.

But disagreements on other issues loomed.

Obama told Xi after a 21-gun salute at a morning welcoming ceremony that the United States would continue to speak out over its differences with China, but he reiterated that the United States welcomes the rise of a China that is “stable, prosperous and peaceful.”

Xi, who faces rising nationalism at home as well as pressure to get China’s economic house in order, called for “mutual respect.”

In their talks, Obama also pressed Xi to follow through on economic reforms and not discriminate against U.S. companies operating in China. Some analysts believe Obama has more leverage due to China’s slowing economic growth, which has destabilized global markets.

At the same time, the Obama administration is still at a loss about how to curb China’s assertiveness in the South China Sea, where Beijing has continued to reclaim land for potential military use despite conflicting claims with its neighbors.

Xi defended his government’s “right to uphold our own territorial sovereignty” and denied any plan to use its island-building efforts to create military strongholds.

China has said repeatedly that the artificial islands it has built up on disputed reefs would be used for military defense and analysts say satellite pictures show it has completed one military length runway and appears to be working on two more.

Admiral Harry Harris, commander of U.S. forces in the Pacific, told the Aspen Security Forum in July that China was building hangers on one of the reefs — Fiery Cross — that appeared to be for tactical fighter aircraft.

Xi, however, denied that militarization was taking place.

“Relevant construction activity that China is undertaking in the Nansha Islands does not target or impact any country and there is no intention to militarize,” Xi said, using the Chinese name for the disputed Spratly archipelago.

“Islands in the South China Sea since ancient times are Chinese territory,” Xi said. “We have the right to uphold our own territorial sovereignty and lawful legitimate maritime rights and interests.”

Washington analysts and U.S. officials say the militarization of the islands has already begun and the only question is how much military hardware China will install.

U.S. experts say satellite photos from early this month also show China was carrying out dredging work around the artificial islands, a month after saying it had stopped.

Jane’s Defense Weekly published new satellite images of Fiery Cross taken on Sept. 20 that it said showed China had completed the runway on the reef and was moving closer to making it operational.

Jane’s said completion of the runway could allow China to accelerate construction of infrastructure and to start air patrols over the disputed islands.

Obama said he also had “candid” discussions on the Chinese claim to the Japan-administered Senkaku group of islets in the East China Sea.

In a reminder of potential flash points, the United States and China also finalized a plan aimed at reducing the risk of aerial collisions between warplanes in areas such as the South China Sea through adoption of common rules of behavior.

Washington announced the deal with China on a military hotline and rules of behavior to govern air-to-air encounters, just days after the Pentagon criticized China over an unsafe intercept of a U.S. spy plane.

“We agreed to new channels of communication to reduce the risks of miscalculations between our militaries,” Obama told a White House news conference with Xi standing beside him.

The new agreement on rules of behavior for air-to-air encounters was broad in scope, addressing everything from the correct radio frequencies to use during distress calls to the wrong physical behaviors to use during crises.

“Military aircrew should refrain from the use of uncivil language or unfriendly physical gestures,” read one provision of the agreement. (http://1.usa.gov/1G-7zxTW)

Another agreement created formal rules to govern use of a military crisis hotline, a move that aims to speed top-level communication. (http://1.usa.gov/1iAw9vu)

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