The New Year lull in the sniping between China and America over the US trade deficit and calls to revalue the yuan look set to end next month when US Treasury Secretary Henry Paulson visits Shanghai ahead of May's bilateral summit in Washington. Mr Paulson is busy knocking his China department into shape as the US seeks to use the 'strategic economic dialogue' between the two countries to press for greater currency flexibility and better access to China's growing number of middle-class consumers. Two weeks ago Mr Paulson announced the appointment of Alan Holmer, a former pharmaceutical industry lobbyist and deputy US trade representative, as a special envoy responsible for handling the dialogue. US officials have also been working with their Chinese counterparts over the past few weeks to reach agreement on a range of disputed issues, including services, intellectual property rights and investment and transparency. However, the biggest US concern remains the value of the yuan and weak demand for American goods on the mainland. 'China does not yet have the currency policy that we want it to have and that it needs,' Mr Paulson told the US Senate Banking Committee last month. US officials are pushing for an appreciation of the yuan, which would make China's exports less competitive and imported US goods cheaper for Chinese consumers. The US-China trade deficit hit US$232.5 billion last year, American trade statistics shows. American negotiators argue that a rebalancing of the Chinese economy away from investment- and export-led growth to a more consumption-based model would not only help reduce the US trade deficit, but also promote healthy growth in China. They point to China's consumption statistics to support their claim that China's growth model is a drag on sustainable domestic development. Government figures show private consumption's share of gross domestic product in 2005 was just 38 per cent - very low by international standards - while investment accounted for a whopping 43 per cent. Having stood as high as 46 per cent as recently as 2000, private consumption's share is expected to drop below 37 per cent when last year's figures are released. But a new report by Dragonomics, a Beijing-based economics consultancy, suggests that China's consumption figures have been massively under-reported. 'The consumption share of GDP is almost certainly four to five percentage points higher than official figures suggest,' said Arthur Kroeber, director of Dragonomics and author of the report. 'Chinese data on consumption is so defective that it is quite difficult to state precisely what share consumption has of GDP and how fast it is growing, but we can state that there are many reasons why consumption is understated in national accounts and none to suggest that it is overstated.' The main reason for the under-reporting of consumption was an outmoded statistical system biased towards measuring investment in fixed assets and manufacturing rather than consumption of intangibles such as services, Mr Kroeber said. Retail sales figures also miss a good proportion of low-level buys that fall below the radar of the national accounts. The Dragonomics report estimates consumption's true share of GDP at 42 per cent, while investment's share falls to 40 per cent. Chinese officials, led by Vice-Premier Wu Yi , are determined not to give in to US pressure on the yuan issue, but are more open to arguments that economic imbalances risk domestic growth. Evidence of higher consumption is not necessarily positive news for US exporters and retailers as they seek to conquer the Chinese market. 'The idea that a foreign retailer can come in selling at premium prices and roll out its product to a vast number of middle-class consumers across the country is simply rubbish,' said Paul French, director of Shanghai-based market research consultancy Access Asia.