China cannot be tagged as a country that is manipulating its currency to gain unfair trade advantage, the United States said on Tuesday.

The Bush administration did say that "more flexibility in China's exchange rate will help it achieve more balanced growth" and "promote a number of other outcomes that would be economically beneficial."

But in the report it is required to deliver to Congress every six months, the administration said that no country met the "technical requirements for designation" as a currency manipulator.

Such a designation could trigger negotiations that could ultimately lead to trade sanctions.

The latest report was released four days after a Cabinet delegation led by Treasury Secretary Henry Paulson concluded high-level talks in Beijing aimed at resolving the root causes of America's huge and growing trade deficit with China.

China's trade surplus with the United States grew to US$102.2 billion in the first nine months this year. But the US Government predicts the imbalance is on track to surpass last year's record US$202 billion based on a different set of calculation methods.

The report, which elaborated on Beijing's exchange rate regime reform, said China "took further steps to reform the currency market and (yuan) flexibility increased compared to the last six months of 2005."

The yuan has strengthened about 5 per cent since Beijing dropped its peg to the US dollar in July last year, switching to a mechanism that sets the exchange rate on a basket of world currencies.

It was trading at 7.8198 to the US currency yesterday.

But the report noted that Chinese currency reforms so far have been "considerably less than is needed" to rebalance world trade.

The report, which was scheduled to release in November, was put off because of the US mid-term election and the Sino-US strategic economic dialogue.

Chen Fengying, a senior researcher with the China Institute of Contemporary International Relations, said the report allows some leeway for both sides, paving the way for the next round of the strategic dialogue scheduled to be held in Washington next May.

The report indicates that policymakers in the White House understand that "the revaluation of the renminbi, or the yuan, will not solve the trade imbalance," she said, adding the deficit is caused by such factors as globalization and rising energy costs.

Chen emphasized that politicizing economic issues would only generate more disputes.

Ronald McKinnon, a professor of economics at Stanford University, also said the yuan appreciation would not reduce the US deficit.

He wrote in The Wall Street Journal that if China were coerced into a large appreciation of its currency, it could face the same deflationary fate as Japan in the 1980s and 1990s and all this without reducing its trade surplus.

A major revaluation of the renminbi would not correct the saving imbalance between the two countries but cause a major bout of monetary instability, which may seriously hurt the interests of the United States, he said.

Gao Haihong, a senior research fellow on international finance and trade, said China has set its own pace on the reform of the foreign exchange regime based on the country's ground realities.

She said Washington should give China more time so that it can adjust its policies step by step, adding that the report shows the Bush administration has adopted a constructive attitude towards China.

Source: China Daily/agencies