A Chinese bank teller counts stacks of yuan notes at a bank in Huaibei
US Treasury Secretary Timothy Geithner Thursday urged China to allow its currency to strengthen further and push forward economic reforms, which he said were crucial to the global recovery.
But his comments at the start of two-day talks between the world's two biggest economies were overshadowed by a human rights row that has threatened already strained relations.
US officials have long accused Beijing of keeping the value of the yuan artificially low to boost exports, leading to a massive Chinese trade surplus with the United States.
Geithner said China's currency had appreciated by around 13 percent against the US dollar over the past two years, but urged more gains.
"We consider particularly important the emphasis on reforms to... continue the appreciation of the renminbi (yuan) against the dollar and the other major currencies," Geithner said.
"A stronger, more market-determined (yuan) will help reinforce China's reform objectives."
He was speaking at the annual Strategic and Economic Dialogue, which has been upstaged by the case of blind Chinese activist Chen Guangcheng who on Wednesday left the US embassy where he had sought refuge after fleeing house arrest last week.
Washington had hoped to showcase small signs of progress in relations with China at the meeting, but the Chen case has sparked fresh tensions, with Beijing demanding an apology for what it called "interference" in its affairs.
Geithner said China should move forward with economic reforms, including allowing more foreign competition in its tightly guarded markets.
"We meet at a time of risk and challenge in the global economy and we both face considerable economic challenges at home," Geithner said.
"In China, you are in the process of exploring the next frontier of economic reforms, recognising as your predecessors did more than 30 years ago that future economic growth will require another fundamental shift in economic policy.
"The United States has a strong interest in the success of these reforms, as does the rest of the world."
Such reforms included relying more on domestic consumption than exports to drive the world's second largest economy, allowing private firms a greater role than state-owned giants and modernising the financial system, he said.
A US official saw progress in some areas after China shifted its position to agree to abide by international rules on providing credit to exporters, a source of friction with other major economies.
Beijing had also cracked down on pirated software and introduced reforms which allow more private financing, the official said.
"We're beginning to see movement on financial reform, which we think is very encouraging, and we want to push that forward," she said.
Chinese Vice Premier Wang Qishan, who is leading China in the economic portion of the talks, said the country had made progress and urged the United States not to "politicise" economic issues.
"We hope the US side will take concrete steps to relax control on hi-tech exports to China, expand infrastructure cooperation, increase financial market access and avoid politicising economic issues," he said.
Beijing has repeatedly called on the United States to loosen its controls on exports of hi-tech products to China, some imposed to prevent sensitive US technology from being used for military applications.
Wang made no direct mention of the currency issue but said China had expanded imports, a move aimed at addressing the trade imbalance.
China defends its exchange rate regime, saying it is moving gradually to make its currency more flexible and last month it loosened some controls over the yuan by allowing it to trade in a wider range either side of a set level.
China's central bank chief Zhou Xiaochuan, who is participating in the talks, said the two countries agreed the market should set exchange rates, but added the yuan has seen more two-way movement instead of steady gains.
Analysts say Beijing has less room to allow its currency to appreciate giving its shrinking trade surplus.
Zhou said China would move to liberalise interest rates, now largely set by administrative fiat, but gave no timetable.