The Chinese are coming! The Chinese are coming! Lock up your pets, hold on to your pay packet and line up a few clever investment ideas while you’re about it.

America is in the grip of a rising case of Sino-fever, a slightly dangerous condition that can lead to raised expectations and delusions of great wealth and opportunity, but with nasty side-effects for some, including hyperventilation about diminished prosperity, loss of self-esteem and a troubling, shrinking feeling.

Everywhere you look in the United States these days, China is on the rise. At the weekend Blackstone Group, the world’s largest (soon-to-be-public) private equity firm announced that it had sold almost 10 per cent of itself to the People’s Republic. Though the Chinese stake will have no voting rights, you still have to admire Blackstone’s political chutzpah. It and other private equity companies have already been the subject of aggressive scrutiny from congressmen in Washington over the claim that they are asset-stripping, job-destroying capitalist locusts. Now they have decided to get into bed with that other favourite target of American politicians – China. If you thought it was bad when some faceless capitalist was taking over your company and closing down your factory, imagine what it will be like when it’s some faceless Chinese communist helping him to do it.

The Blackstone news came on the same day that The Washington Post reported that Food and Drug Administration inspectors had impounded piles of food imports from China in the past month because they failed to meet health and safety requirements. The yucky goods included apples coated with cancer-causing chemicals, sardines smothered in putrefying bacteria and mushrooms laced with illegal pesticides. All that plus, of course, the now-famous Chinese pet foods that are causing illness and even death among America’s dogs. The juxtaposition of the two events – China’s venture capitalists bounding on to Wall Street and its dodgy products poisoning pooches on Main Street – underscores the deepening complexity and challenges of the US-China relationship.

It comes at an apposite moment. This week here in Washington we will be witnessing part two of the US-China Strategic Economic Dialogue, when a massive team of Chinese bureaucrats will descend on the US capital in the latest phase of the programme initiated last year by Hank Paulson, the US Treasury Secretary, to improve economic understanding and relations between the two countries. The Chinese delegation will be led by Madam Wu Yi, the Vice-Premier for International Finance. Mr Paulson, an old China hand from his Goldman Sachs days, will throw a couple of lavish banquets for the visitors. Yet between the vast dinners and the innumerable toasts, there will be some hard talking to be done.

American lawmakers are increasingly antsy about Chinese imports – not just the pet-killers but the job-killers, the ones that undercut US domestic prices and turn US factories into museums of 20th-century capitalism.

Mr Paulson has been successful, so far, in holding back rising American anger at what are seen as unfair Chinese trading practices, most notably the artificially undervalued currency. But he can’t keep the anger at bay for ever. Congress now has before it a Bill, sponsored by the congressmen Tim Ryan and Duncan Hunter, that would slap tariffs on Chinese goods if the country does not revalue the yuan. Last week, before announcing the Blackstone deal, the Chinese authorities moved a little, widening the bands within which the pegged yuan is allowed to move against the dollar.

The move will not satisfy anyone here, so it falls to Mr Paulson to keep juggling the various elements of his China strategy – pressure Beijing to do more, both by occasional sorties into WTO confrontations and by pushing for a currency revaluation; explain the benefits to American consumers and companies of the broader US-China economic relationship; and seek a really big breakthrough by getting Beijing to liberalise its capital markets, so that US companies can tap the vast potential of the domestic Chinese economy. It’s a delicate challenge. American assertiveness on the various bilateral trade disputes in the past few months have already provoked an angry reaction in China. There was even very public talk that Madam Wu might skip the meeting this week. At the same time, an election is going on in the US and populist politicians are leveraging domestic concerns about China into powerful campaign issues.

Mr Paulson should take a lesson from the Blackstone playbook and be bold and risky. He should forget the currency issue. It is a red herring (not a poisoned Chinese one, we hope). There would be few gains for the US even if China did revalue its currency. Instead, the Treasury Secretary should focus on the much bigger goal of bringing China more fully into global markets. He should explain both to US politicians and his Beijing friends how free markets benefit everyone and push China to open up its financial markets to the world.

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