China's "tightly managed pegged exchange rate" and "foreign exchange market intervention to limit currency appreciation" are partly to blame for the US's record trade deficit, the Bush administration says in a flagship economic report.

The 2006 Economic Report of the President said China's foreign exchange reserves had continued to rise, in spite of the announcement of a new currency regime in July.

The administration used blunt language on China's exchange rate management, which it said was contributing to imbalances in China and in the global economy. "Saving is encouraged, in effect, because consumption is discouraged by China¡¯s exchange rate policy," it said.

China allowed an initial 2 per cent revaluation against the dollar in July, and broke the renminbi's decade-long currency peg to the dollar, replacing it with a link to a basket of currencies. But the renminbi has subsequently risen by less than 1 per cent against the dollar under the new system.

China's foreign exchange reserves could top $1,000bn (£¿40bn, ¡ê575bn) this year, the report said. Between 2000 and 2005, the country's reserves rose by more $600bn to about $800bn.

China is the third largest exporter of capital, after Japan and Germany, with Russia and Saudi Arabia also running growing capital account surpluses on the back of high energy prices. In China¡¯s case, while domestic investment has been rising, national savings have risen faster. In the case of Japan and Germany, while savings have been flat, investment has declined.

The counterparts of these capital accounts are trade deficits run by the US, UK, Australia, Spain and Turkey.

The report was signed by George W. Bush, US president, and by Katherine Baicker and Matthew Slaughter, the two members of the Council of Economic Advisers. Ben Bernanke, the new chairman of the Federal Reserve, was CEA chairman from June until the end of last month and contributed to the report.

The US trade deficit stood at a record $726bn in 2005 ¨C 5.8 per cent of gross domestic product. The soaring bilateral deficit with China accounts for a quarter of the total shortfall.

The Treasury Department, which has primary responsibility for the dollar, has sought to avoid hectoring on the currency issue, while pressuring for further movement. It has hinted it will be forced to brand China a currency "manipulator" in its twice-yearly report on international trade and foreign exchange unless the country demonstrates that its new currency system will lead to real appreciation over time.

The report called for global action to reduce imbalances of trade and capital flows, including the need to raise US national savings. It defended US efforts to lower trade barriers, heralding the benefits of free trade in lowering prices to consumers, spurring productivity and generating higher paid jobs.

It warned against yielding to demands for protection by special interest groups. "The beneficiaries of trade protection are often a much more concentrated, well organised group of individuals or firms than the millions of households across the country that bear the costs," it said.

The administration indicated that it was taking a tough line with China and the report said that there were "areas that require further progress". However, the report said US exports to China had grown dramatically faster than overall US exports since 1990.