The US Treasury said in a report on Tuesday that China's foreign exchange policies were "highly distortionary and pose a risk to China's economy, its trading partners, and global economic growth".

The Treasury Department issued the warning as part of its twice-a-year report to Congress. However, it stopped short of finding that China, or any other major US trading partner, was engaging in unfair currency practices.

"While we did not conclude that China met the statutory findings, we did express our concern about China's currency regime," US Treasury Secretary John Snow told a news conference.

"Failure to adopt a more flexible regime increasingly in our view risks economic disruptions both within China and within the larger global trading system."

Exerting pressure

But the Bush administration clearly stepped up the pressure on China, saying it could be branded a manipulator of currency if the country does not switch soon to a flexible exchange system, something advocated not only by the US but also by other economic powers.

US discontent at Chinese trade policies has crystallised around the issue of the country's currency, the yuan, which has been pegged for a decade around 8.28 to the dollar.
  
That level of exchange rate, according to US critics from the White House down, is a big factor in fuelling a trade imbalance between the two countries that last year reached $162 billion.