In a letter sent to the World Trade Organisation, which is conducting a formal review of China trade policy, John Clarke, heading up the EU delegation, accused Beijing of continued protectionism. It said China was using a weak currency, state subsidies and export incentives to keep its economy firing, while ignoring domestic demand.

"Even though China reiterates its firm commitment to continued opening up and reform, this does not duly characterise the current situation in China," Clarke said in the letter. "In fact, our companies have reported a worsening of the business climate."

Clarke said the financial crisis had exposed China's structural weaknesses "in terms of internal demand deficit, an underdeveloped capital market, and as we well know, an excess dependence on export-led growth – boosted by a low value of its currency, various forms of state intervention, and focusing investment in export-oriented industries".

China's GDP increased by 11.9% in the first quarter – the fastest annual growth rate since 2007 – fuelling the arguments of US and European politicians that China was in a position to let its currency rise and level the playing field between the world's biggest exporters.

But China, which two years ago pegged the yuan at about 6.83 to the dollar, to help its exporters weather the global financial crisis, has stressed that the latest growth figures were distorted and that significant risks remained to its economy.

China is now widely predicted to overtake Japan this year to be the world's second-largest economy.

China exported $21.45bn worth of goods to the EU in March, a 25% increase on the same month a year ago, outstripping the $19.33bn of exports from China to the United States in the same month.

Clarke said the level of "state interference in the economy is still noticeable", adding: "The Chinese trading regime remains unduly complex and characterised by a large number of non-tariff barriers and a burdensome regulatory process."

He said: "Nine years after China's accession to WTO, China is a key player in the multilateral system. With that power come responsibility and the need to contribute. There is still a mismatch between the two."

Economists say that China's economy appears to be enjoying what they term a "Goldilocks" moment – not too hot and not too cold. Inflation in March softened to a rate of 2.4%, soothing fears the world's third-largest economy is on the brink of overheating. But it has been growing fast and so far there are no signs of that trend being derailed.

The currency issue has strained relations with US president Barack Obama's government particularly. As he battles to bring down a near-10% US unemployment rate, he has pressured Beijing to allow its currency to appreciate to help US firms compete with Chinese goods. But the US has now backed off, apparently to allow China space to make its own move without appearing to have bowed to foreign pressure.

Sourced from www.guardian.co.uk