Ambassador Alan Holmer said that those policy reforms include making the Chinese currency more flexible and switching the Chinese economy from an over-reliance on export-led growth.
American manufacturers contend that a major reason for America's soaring trade deficit with China is that country's manipulation of its currency. They contend the yuan is undervalued by as much as 40 percent, making Chinese goods cheaper for U.S. consumers and U.S. products more expensive in China.
"To enable market forces to efficiently rebalance the economy and spread prosperity to all the Chinese, China needs more flexible prices, including a much more flexible, market-driven exchange rate," Holmer said in a speech to the Center for Strategic and International Studies, a Washington think tank.
Holmer spoke in advance of a third round of high-level economic talks known as the Strategic Economic Dialogue, to be held in China on Dec. 12-13. The U.S. delegation will be led by Treasury Secretary Henry Paulson and will include a number of Bush Cabinet officials.
Holmer said those talks have already yielded major results in such areas as civil aviation, opening China's financial markets to foreign competition and collaboration on energy security and the environment. He said the talks had also focused on addressing concerns over a string of high-profile recalls of Chinese imports, including tainted food and toys containing lead paint.
But Holmer said China still faces a major risk that its government will not act quickly enough to make policy changes needed to allow the country to successfully move to a more market-oriented economy less reliant on manufacturing exports.
"Bold structural policies are needed to shift China's growth away from heavy industry, high energy use, capital intensiveness and dependence on exports - towards greater reliance on domestic demand," Holmer said.
The administration is pushing China to overhaul its economy as a way of dealing with the soaring trade gap between the two nations, which hit an all-time high of $233 billion (EUR156.6 billion) last year and is on track to surpass that this year.
Members of Congress have complained that the administration needs to act more forcefully to get China to halt what critics see as unfair trade practices which they blame for contributing to the soaring trade deficits and the loss of 3 million U.S. manufacturing jobs since 2000.