The Bush administration grumbles about a Chinese military build-up and the renminbi's value. Hollywood nags about pandemic DVD piracy. US clothing manufacturers are outraged by the influx of Chinese underwear and shirts. Talk of the China threat worries everyone from diplomats to investors - and the playwright David Henry Hwang.

But while most Americans would cite China's military might or trade imbalance, Hwang is anxious because America's foreign relations colour its domestic race relations. Asian-Americans are dangerously "vulnerable to shifts in perceptions of China", says the author of the 1988 Tony-winner M. Butterfly. Fear of China has been voiced in the comment pages of US newspapers, but it is a central issue in Hwang's artistic productions.

Hwang is winding up a visit to Shanghai, during which he has been absorbing its "youthful internationalism" and speed-of-light transformation. Hwang, a Los-Angeles-born Chinese-American, describes his week in China's wealthiest, most modern city as "a high". Tonight, though, he is preoccupied with something more sombre and familiar: Asian-American life.

That has been the enduring theme of Hwang's precocious career. While majoring in English at Stanford, he wrote his first play, FOB ("fresh off the boat"), which won a 1981 Obie award. In Golden Child, M. Butterfly, Family Devotions and elsewhere, Hwang examines the interaction between identity and history, illusions, realities and stereotypes. He is the only Asian-American dramatist whose work has made it to Broadway.

The correlation between US opinions of Asian-Americans and its opinions about China stems from a tendency to lump Asian-Americans with Asians who are "fresh off the boat", says Hwang, 48. "We're still perceived as perpetual foreigners" - and thus the loyalty of Asian-Americans to the US is doubted more than other minority groups, he says.

He has the experience to prove it. With China's increasing strength in the late 1990s, President George W. Bush dubbed China a "strategic competitor". Washington accused Beijing of acquiring sensitive US military technology and illegally financing Democratic campaigns, including that of the presidential-hopeful Al Gore. Chinese-American scientist Wen Ho Lee, allegedly a spy for China, was jailed. Meanwhile, Far East National Bank, an Asian-American community bank founded by Hwang's father with its headquarters in Los Angeles' Chinatown, was scrutinised for transactions of funds from China. Officials suspected money laundering, perhaps to fund Chinese intelligence operations or Democratic candidates or to buy technological secrets.

Ultimately, no charges were brought against the bank. But Hwang believes the episode shows how readily anti-China hysteria, or "yellow peril", can erupt, and "anyone who is Chinese-American can end up being drawn in". He notes that the reporter who broke the Wen Ho Lee story also broke the story about the bank. Hwang's father, who was born in Shanghai and immigrated to the US five decades ago, felt that "Chinese can only rise so far in this society." Finally, the attacks of September 11 2001 "distracted America from building up China as its next enemy" and yellow peril subsided.

The yellow peril trauma is the backdrop to Hwang's "faux autobiography" and newest play, Yellow Face. Just as As You Like It and Twelfth Night play on gender mix-ups, Yellow Face is a comedy of racial-identity errors. (Hwang took on gender-bending in M. Butterfly, tracing the true tale of a French diplomat's love affair with a Peking opera diva who proves to be both a spy and a man.) The racial muddle in Yellow Face starts when Hwang's character mistakenly casts a white actor, Marcus, in the role of an Asian. Marcus loves his new racial look, even becoming an Asian-American community activist - only to be ensnared in the yellow peril outbreak. Eventually Hwang realises his miscasting, but he and Marcus fear losing face if they confess.

Hwang's character is "the butt of a lot of the play", says the playwright. The real Hwang led an Asian-American uproar when the Welsh actor Jonathan Pryce was cast as the Eurasian lead in the 1991 Broadway opening of Miss Saigon. (Pryce had performed the role of the Eurasian pimp in the previous West End production.) "If Asians don't get to play Asians, what do they get to play?" Hwang says. He believes that casting decisions are ultimately up to the director ("artistic freedom trumps all other things"), although dissenters should be able to protest as loudly as they wish.

The Miss Saigon brouhaha generated dilemmas for Hwang as an Asian- American role model, which he expresses via Marcus. "It's a little bit arbitrary, in the sense that I could be anybody. I happened to achieve some visibility in a field [playwriting and literature] that Asians weren't that associated with," says the unassuming and mindful writer.

"But why does that give me the privilege or responsibility to represent a community? It's as arbitrary to thrust it upon Marcus as it is to thrust it upon me." The characters blur. "Who's the autobiographical character? Is it me or is it Marcus?" Hwang says. "They become two sides of the same coin."

It is difficult to be a role model, Hwang adds - audiences can be demanding. Once you're cast as a representative, people may comment that your writing and perspective don't feel authentic to them. "There is no one authentic vision - there are multiple visions," says Hwang. "The best is to have a lot of people [in the community] writing."

As a meditation on identity, Yellow Face, set to open in New York's 2006-07 season, also reveals Hwang's makeover since FOB. "When I was in my twenties, there was almost this idea 'I am Asian- American, therefore I am' - that is, discovering you're Asian- American was the key to understanding yourself. But it's not," Hwang says. Now, "I'm less devoted to being Asian-American." At times, he's even concerned that the title "Asian-American writer" has pigeonholed him. (A glance at his repertoire - penning librettos for Philip Glass operas, co-authoring a song with Prince, writing the books for Broadway musical versions of Aida and Tarzan - would seem to refute that.) Hwang challenges the pervasive reflex to label minorities by their race or ethnicity, rather than by other criteria such as occupation, age group or neighbourhood, or not to label them at all. "Why is it that only if you're a minority, does the factor of your ethnicity tend to get attached to your description a lot?" he says. "What does it say... if [people] believe that my most important attribute is my ethnicity? That that's the thing that tells the most about me?"

Hwang now has "a greater appreciation for humanism and interculturalism", he says. "In the best possible world, your culture should not have to bear any relationship to your genetic make-up. If you happen to be attracted to a particular culture which isn't the one that's in your gene pool, you can [adopt] that, because culture doesn't equal race [and] race doesn't equal culture." In an ideal world, he says, "James Earl Jones can be cast as George Washington. Jonathan Pryce can be cast as a Vietnamese pimp."

How does Hwang identify himself? With "various labels", he says. "I don't ultimately know the answer. [My] work is about asking that question... It's in the asking that you learn something about where you are, who you are, at a particular time."

One reason Hwang is "less fundamentalist about identity" is because he has young "mixed-race" children. Hwang's actress wife is German- European. Their son doesn't have Asian looks; their daughter does. The playwright surprised everyone, especially himself, when he realised he did not want to start talking race with the kids, which he ascribes to the invariable "improvising" element of parenting. "You have these theories about how you are going to raise kids, and when your kids finally show up, you're just laying track in front of the train," Hwang says, breaking into his first grin of the night. "It's really nice that they have a period in their lives when race is not an issue," he has decided. "So I've been waiting for them to bring it up."

Hwang's personal interpretation of Asian-Americanism is also shifting. Some 25 years ago, "when I started being an Asian- American, it was so important for us to be American, not Asian, not from the root culture," he notes. Now, as Asians and Asian- Americans increasingly criss-cross east and west in birth, schooling and work, "there is much more acceptance of the blurring of lines."

Hwang's heightened curiosity about the Asian half of his Asian- Americanness prompted this Shanghai visit. Over the past few years, "all of the interesting east-west work has been done here", he says. Having allowed Western producers such as Cameron Mackintosh to bring in a smattering of shows (including The Phantom of the Opera earlier this year and Les Miserables in 2002), China is now anxious to create homegrown musicals, on which Hwang has offered to help.

He also hopes local theatre troupes will try out his plays ("I'd love to see what real Chinese people think [of them]," he quipped during a public talk in Shanghai). In particular, Obie-winning and Tony-nominated Golden Child (about Hwang's great-grandfather in south China, his three wives and his embrace of Christianity and modern ideas in the early 1900s) and The Dance and the Railroad (about two Chinese immigrants in the 1860s building the US transcontinental) would be suitable for a Chinese stage, he thinks. The breakthrough hit M. Butterfly might be too pointed for China now, but Hwang anticipates that in a few years the culture will catch up with the play.

This is "a unique moment in history" for US-China relations, Hwang says. Both countries have lots of money and mutual interest and are "circling, but still know very little about one another. This permits individuals from either country to travel to the other and represent themselves as more significant than they were" - possible fodder for a fun, Glengarry Glen Ross-type play, he adds.

On a larger scale, in what Nicholas Kristof of The New York Times calls "the most important diplomatic relationship in the world", misrepresentation and misperception can fuel no-joke jingoism and conflict. As China's power grows, so does the likelihood that "the US will come to perceive it as an enemy, which could trigger a yellow peril hysteria," Hwang says. That's a real replay of Yellow Face he doesn't want to see.