One hundred China Yuan Renminbi banknotes are counted in Beijing on 05 December 2006. The US government backed off from labelling China a currency "manipulator" in a twice-yearly report but urged the country to do much more to reform its foreign exchange regime. [AFP]

Washington - The Bush administration said Tuesday that China does not meet the technical requirements of a country that is manipulating its currency to gain unfair trade advantages.

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

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The report did not please China's harshest critics in US Congress, such as Sens. Chuck Schumer and Lindsey Graham.

Schumer and Graham were the lead sponsors of legislation last year that would have imposed 27.5 percent penalty tariffs on all Chinese imports if China did not "move more quickly" to allow its currency to rise in value against the dollar.

The administration opposed the legislation on the grounds that it would raise the price of Chinese imports to American consumers.

Sen. Max Baucus said he believed the requirement for a report every six months had outlived its usefulness and he planned to pursue legislation that would mandate a different approach in the new Congress.

Baucus, who next year will head the Senate Finance Committee of the United States, which has jurisdiction over trade, has proposed legislation that would offer milder sanctions against countries with "misaligned" currencies.

America's trade deficit with China is expected to easily surpass last year's $202 billion.

The Bush administration is under heavy political pressure to do something about America's record trade deficits.

Paulson did not comment on the new report, which was delivered to the US Congress two months late.

"China's economy needs a more balanced pattern of growth that is more consumption-based with a flexible exchange rate regime and a modernized financial sector," the new report stated.

The report also cited the goals of the newly launched "Strategic Economic Dialogue," which is designed to be a two-year effort to resolve some of the most contentious economic issues between the two countries through twice-a-year high-level meetings.

The report said the goals of the dialogue were to help China achieve balanced growth without large trade imbalances by pursuing exchange rate flexibility, protection of intellectual property rights, boosting domestic consumption and opening up China's service sector to participation by US and other foreign firms.

"China's currency policy is a core issue in the China-United States economic relationship," the currency report stated.

If the administration had deemed China a currency manipulator, that would have triggered talks between the two countries. China also might have faced trade sanctions -- but first the United States would have had to win a case on the issue before the World Trade Organization.

American manufacturers contend China undervalues its currency against the dollar, which makes Chinese goods cheaper for American consumers and American goods more expensive in China.