The Treasury Department urged China to allow its currency to appreciate and estimated global growth will slow in the first half of 2009 in a report to Congress released Wednesday.

The biannual report on International Economic and Exchange Rate Policies describes the currency policies and exchange situations in 19 individual counties plus the Euro countries and the Gulf Cooperation Council Counties.

The report calls on China to diversify its economy by promoting internal spending. So far Treasury’s urgings have been unpersuasive as the report details how China has built a massive surplus on its export trade. Chinese leaders have indicated recently that they are satisfied with the economic model.

In the report, the Treasury states that China “needs to rebalance its economy by relying more on domestic private consumption rather than exports and by further developing its financial markets.”

Expeditious movement toward a market-determined exchange rate is an integral part of this process. As a first step, the pace of appreciation in early 2008 needs to be resumed. Treasury continues to use every opportunity to impress upon Chinese authorities the importance and urgency of exchange rate reform.”

One dollar bought 6.86 Yuan in trading today. The Yuan has appreciated about 17 percent against the dollar since China removed its currency peg to the dollar in 2005. China continues to keep its currency cheap relative to other currencies so that its exports are less expensive globally.

The report comes after Paulson visited China last week and said he was “distressed about the movement of the Yuan.” China, which owns $1 for every $10 of U.S. debt, said it is “highly unlikely” to change its currency policy, according to Yu Yongding, a former adviser to the Chinese central bank.

China has built a dominant surplus fueled by its exports despite the global economic downturn, the report showed. In the first ten months of 2008, China’s global trade balance grew to a record high of $216 billion, with exports growing by 22 percent over the same period in 2007.

Chinese imports grew by 30.7 percent in the first half of 2008 from the first half of 2007, in part due to rising import prices, but import growth in the second half of 2008 has decelerated on a monthly basis, down to a sixteen-month low of 15.6 percent in October versus October 2007.

China’s global trade surplus in the first three quarters of 2008 declined slightly to $181 billion (6.6 percent of GDP) from $186.1 billion (9 percent of GDP) in the first three quarters of 2007.

The report estimates that emerging market growth will fall to 5.7 percent in 2009 from 8.0 percent in 2007. Middle East countries, which are still profiting from high oil prices this summer, are likely to maintain high growth next year, the report said.

The report also includes an appendix on sovereign-wealth funds. The Treasury estimates that $2-3 trillion dollars are under management in SWFs and that the amount will increase to $7-11 trillion by 2013. The report said SWF representatives he met and agreed on policies to promote greater financial disclosure and macroeconomic policies to insure investment health. The report emphasized the need for SWFs to be financially, not politically motivated.