WASHINGTON (CNN) - The U.S. Treasury Department issued its strongest warning yet to China over its currency, saying the country could be deemed a "manipulative trade partner" if it doesn't revaluate the yuan soon.

"It's our view that the time has come" for China to have more flexible exchange rates, U.S. Treasury Secretary John Snow said Tuesday.

China, which uses exchange controls to artificially peg its currency to the dollar, has been the focus of claims by critics in the United States that its prices from exported goods are artificially low. The low prices, critics say, put unfair pressure on U.S. manufacturers, who cannot compete on the "China price" of goods such as textiles, electronics, and other manufactured goods.

The Treasury report said that if China continues its current trends without substantial alteration, its policies will likely meet the statute's technical requirements for designation as a manipulative trading partner.

"Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners and global economic growth," it said.

However, Snow stopped short of saying that the Chinese should allow their currency to float freely along with the dollar, euro and other world currencies.

Snow said the Chinese financial system, while making great progress in recent years, is not ready for the stress of a free-floating currency.

Snow spoke as the United States was releasing its twice yearly "Report to Congress on International Economic and Exchange Rate Policies."

The Treasury secretary said the United States has concluded in the last six months that the Chinese are now capable of adding more flexibility to their exchange rate.

An adjustment would make Chinese goods more expensive in the United States, but would make U.S.-made goods cheaper for Chinese companies and consumers.

U.S. exporters claim the yuan is as much as 40 percent undervalued, making Chinese goods unfairly cheap.

Snow added that the Chinese leaders have assured him that China wishes to move to a more flexible system.

What does China have to say about the yuan revaluation? Click here to read more.