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During an economic summit in Beijing last month, U.S. Treasury Secretary Henry Paulson and the rest of a high-powered American delegation, including Federal Reserve Board Chairman Ben Bernanke, had to suffer through a condescending lecture, replete with PowerPoint presentation, from China's Vice Premier Wu Yi. One of the country's top bureaucrats and a woman with a vaunted reputation as a problem solver, Wu enlightened the Americans with a lesson on the 5,000-year history of China. Her essential point: those who criticized China's economic policy did so out of ignorance. "We have had the genuine feeling," said Wu, "that some American friends not only have limited knowledge of, but harbor much misunderstanding about, the reality in China."

Yet the issues that the U.S. delegation had come to discuss are not all figments of uninformed American imaginations. For a start, those pirated DVDs of first-run Hollywood movies available for 75 cents on the streets of Shanghai are all too real—despite repeated pledges from the Chinese government to crack down on rampant intellectual-property theft. And China's trade surplus, which rocketed to $177.5 billion in 2006 and has risen from less than 2% of its total economy to around 7% in five years—surely Beijing has something to do with that. But instead of substance, the Americans got a soliloquy—which may explain why, during Wu's speech, some of the U.S. delegates looked bored, fidgety or downright annoyed. One delegation member later joked that Wu reminded him of his "fifth-grade teacher," adding, "I didn't much like fifth grade."

If Paulson was suffering, though, you wouldn't have known it—even though he was the U.S. official who least needed the lecture. He remained attentive throughout. After all, Paulson made countless trips to Beijing during his investment-banking career at Goldman Sachs and had doubtless sat through many similar monologues. "He's been in a lot of meetings with a lot of Chinese officials, and knows that the last thing you do is get angry at the effective ones," says one former U.S. diplomat. Wu spearheaded China's effort to join the World Trade Organization five years ago and was named Health Minister during the 2003 SARS crisis. "She's been helpful in the past, and she'll be helpful in the future," said the former diplomat.

These days, U.S. officials routinely acknowledge that the Washington-Beijing relationship is the world's most important. Combined, the U.S. and Chinese economies accounted for more than half of global growth over the past four years, and how these nations interact over everything from Iran to North Korea will do much to determine whether peace and prosperity prevail in Asia and beyond. But high-level U.S. talks with China in recent years have been sporadic, at best. The heaviest hitters in President Bush's Administration have been preoccupied with the war on terror and the deepening fiasco in Iraq. Aside from last April's promise by China's President Hu Jintao to try to expand market access for U.S. goods, there has been scant evidence of constructive dialogue on trade issues.

Hank Paulson is trying to rectify that. Since he took over at the Treasury six months ago, the former Goldman Sachs CEO has made China the centerpiece of what will be his two-year run as the Administration's top economic policymaker. The December meeting in Beijing was the first of a series of biannual economic summits that are supposed to increase communication, with a specific focus on intermediate and longer-range economic issues. China's leaders "want to know that this relationship is being managed," explains Paulson during an interview in his ornate office at the Treasury Department. "It's important to them, and it's important to both Presidents."

In virtually the same breath, however, Paulson acknowledges that mind melds about the large economic issues confronting the two countries aren't what a lot of folks in Washington are looking for these days.

Led by a Congress now controlled by the Democrats, the get-tough-on-China brigade in Washington is growing. Some U.S. lawmakers are demanding tangible action by Beijing on a range of issues, including the massive bilateral-trade imbalance, piracy of intellectual property and the perceived loss of U.S. manufacturing jobs to low-cost labor in China. Specifically, the trade hawks want a faster revaluation of the yuan, China's currency, against the dollar, which would help balance trade by making Chinese goods more expensive in the U.S. and American products cheaper on the mainland. Absent significant policy shifts by Beijing, Congress might try to punish China by erecting punitive trade barriers, which could damage both countries, politically and economically. Does Paulson have any sense of what might be deliverable—and when? "None of the issues we're dealing with lend themselves to quick fixes," he says. "But I've never been known as the world's most patient person. I totally recognize that we need to get results."

Therein lies the formidable challenge of Paulson's position. For the moment, he's still riding his Wall Street résumé in Washington, where his Goldman pedigree has given him the instant credibility in financial markets that his two immediate predecessors at the Treasury Department helm (Paul O'Neill and John Snow) lacked. The result, for now, is that both Democrats and Republicans respect him—a rarity in an Administration that's loathed by most Democrats. Paulson counts among his friends Democrat Charles Schumer, a New York Senator who co-sponsored one of the most egregiously protectionist bills to emerge from Capitol Hill in recent memory—the legislation would have imposed a 27.5% tariff on Chinese imports if Beijing failed to revalue the yuan sharply upward. It was Paulson's low-key lobbying that helped convince Schumer and his colleague, Republican Senator Lindsey Graham, to withdraw the bill last year.

At the same time, Beijing views Paulson as a "Friend of China." During his tenure as CEO, Goldman Sachs advised the government on numerous privatizations of state-owned companies. Paulson himself was a key behind-the-scenes force in the controversial—and ultimately unsuccessful—attempt by state-controlled oil producer CNOOC to buy U.S.-based Unocal. Paulson also has a genuine interest in China that goes beyond profits. During his interview with TIME, he became most animated when discussing the Nature Conservancy, an environmental NGO that he chaired until last year, and the work the group is doing in China's southwestern Yunnan province.

But being Washington's Mr. China is a delicate balancing act for Paulson. Chinese leaders such as Vice Premier Wu expect him to understand where China is coming from—and cut it some slack. In Washington, however, his China background means something else entirely: he's the man who knows which buttons to push in Beijing to get fast results. "That's the expectation, sure," says Nicholas Lardy, a senior fellow at the Institute for International Economics in Washington. "It may not be realistic, but it is what it is." To make any progress on trade issues, Paulson will have to play to perfection his role as intermediary—one part translator, one part referee—between an increasingly sinophobic Congress and the always wary cadres in Beijing.

Paulson says that on the current, headline-grabbing issue between the two countries—the yuan's undervaluation against the dollar—the difference between the two sides is all about timing. "I've been in meetings with my colleagues on the Hill and have explained to them that they are saying the same things as the Chinese," he says, "but [the two sides] are not communicating very well." In 2005, Beijing abandoned its practice of fixing the yuan directly to the dollar and instead linked it to a basket of currencies. But the yuan's value is still managed by the government, which has allowed the currency to rise less than 6% against the dollar since the dollar peg was scrapped. Beijing argues this policy has delivered a strong flow of foreign direct investment that has stabilized the country's weak financial system and helped modernize its economy. While most Chinese officials recognize that the yuan is undervalued, they insist adjustments must come gradually. They fear that an abrupt rise could trigger financial instability, a sharp slowdown in economic growth and rising unemployment. The U.S. is pushing for faster action.

Paulson thus views his job as something like cajoler-in-chief. He says he has sympathy for Beijing's argument that it must move cautiously. But he also wants the Chinese to pick up the pace, because it's in their own interest to do so. Unless they continue to push reform throughout the economy—especially in a financial sector dominated by bloated state-owned banks that lend lavishly to uncompetitive state enterprises—the cost of dealing with the problem later will balloon. (And the argument is fair enough: it's a lesson the Japanese learned in the 1990s when Tokyo dragged its feet on banking reform).

Besides, Paulson says, the world may run out of patience if Beijing doesn't get a grip on currency and trade issues. The threat of protectionism in the U.S. is very real, he warns: "It's one of the major risks we face. If China were a relatively small economy that was in a period of transition, it would be very easy for the rest of the world to say, 'take your time.' But ... they're already a global economic leader, so they aren't going to get as much time as they might like." China may not be in a position to float its currency today, he adds, "but it needs to get itself into that position."

Will China take Paulson's message to heart? The yuan has risen slightly since last month's summit in Beijing, but it's still not clear that Hu and his fellow leaders have any real sense of urgency on trade and currency issues. Lardy, the Institute for International Economics fellow, is skeptical that there will be any significant policy changes soon. He calls China's leaders "momentum players," observing that they are loath to change course while things are going well. After all, China has double-digit economic growth, huge trade surpluses, and more than a trillion dollars in foreign-exchange reserves. Why mess with success?

Paulson disagrees with that characterization. "No one [in Beijing] is saying 'everything's great, let's leave it alone,'" he says. "Their discussion is all about, 'how fast do we move?'" He and his boss in the White House are hoping China's leaders move decisively within the next two years, before Bush's term expires and a new Cabinet is appointed. Otherwise, Hank Paulson might be the last friendly face at the U.S. Treasury the Chinese see for a while.

• Bill Powell / Washington