COSTAS: But given China’s growing strength and America’s own problems, realistically how much leverage and influence does the U.S. have here?

THE PRESIDENT: First of all, I don’t see America having problems. I see America as a nation that is a world leader, that has got great values. And leverage is — I don’t think you should look at the relationship as one of leverage. I think you ought to look at the relationship of one of constructive engagement where you can find common areas, like North Korea and Iran, but also be in a position where they respect you enough to listen to your views on religious freedom and political liberty.

COSTAS: If these Olympics are as successful as they are shaping up to be, most people believe this only further legitimizes the ruling party in the minds on most Chinese citizens. And even absent true liberty as we understand it, the lives of hundreds of millions of Chinese people are much better than they once were. Therefore, what’s the party’s incentive to reform?

THE PRESIDENT: Well, first of all, if you’re a religious person, you understand that once religion takes hold in a society it can’t be stopped. And secondly, I think the Olympics are going to serve as a chance for people to come and see China the way it is, and let the Chinese see the world and interface and have the opportunity to converse with people from around the world. This is a very positive development, in my view, for peace.

You can watch the first part of the interview here, and here’s the full transcript.