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I guess there are two theories on this question: 1.) That the Chinese have a huge amount of leverage over us because we owe them over $1 trillion; it's only natural that we'd pull our punches under the circumstances. 2.) Obama's believes you're more likely to make progress through patience and dialogue than with in-your-face demands; his instincts are conciliatory rather confrontational.

While both probably apply on some level, I happen to think the latter looms larger. There's no question that our dependence on Chinese debt-buying gives them power over us--long-term interest rates would abruptly spike if they suddenly stopped vaccuuming up U.S. Treasuries. (And it would be an absolute calamity if they went so far as to sell their U.S. debt holdings.) But, of course, that wouldn't just hurt us. It would send the market value of China's Treasury holdings into a nosedive and subject the Chinese leadership to some whithering domestic criticism (for being dumb enough to build that trillion-dollar stockpile of Treasuries in the first place). The regime gets enough criticism for the mere possibility that they'll lose money on this investment. Actually seeing its value collapse could be closes to destabilizing.

To the extent our silence on their mercantilist policies (currency manipulation, export subsidies, etc.) is driven by their economic leverage over us, I think it's much more subtle than our fear that they'll retaliate. The practical upshot of their leverage, I think, is agenda-setting power. That is, when we get together for bilateral meetings, the Chinese insist on talking about things like our long-term budget deficit, health care (a major driver of that deficit), the proper timetable for withdrawing U.S. monetary stimulus, U.S. protectionism, etc., etc. And because they hold so much of our debt, we have little choice but to honor those requests. But, of course, more time spent talking about our deficit and monetary policy is less time we have to nudge them on their currency.  

Still, I'm fairly certain that the rationale for the Obama approach runs much deeper. I've talked to several Treasury officials about this in recent months, and they all maintain that, given the m.o. of the Chinese leadership, and the domestic political constraints they face, they can make far more progress talking about currency policy "behind closed doors" (that's a phrase you hear a lot) than in public. And they insist that that's precisely what they've been doing. The argument, in a nutshell, is that lecturing the Chinese on their currency only makes it harder for them to act, because it would make them look like they're caving to foreign pressure, which is a dicey issue domestically.

Now we can argue whether it's the case that you make more progress this way--that obviously remains to be seen. But I've heard this argument often enough from administration officials,  and with enough conviction, that I think they sincerely believe it.

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