Tim Geithner, President Obama's nominee as US Treasury Secretary, sent a tremor through world markets yesterday as he signalled a potential shift to a new hardline stance from Washington over China's currency policies.

In a surprisingly stern swipe at Beijing, Mr Geithner accused the Chinese Government of manipulating its yuan currency, intervening to keep it artificially cheap against the dollar, making China's exports more competitive.

“President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency,” the Treasury Secretary-designate and president of the New York Federal Reserve, said in a statement to the Senate Finance Committee. “President Obama had pledged as President to use all the diplomatic avenues open to him to seek change in China's currency practices.”

The broadside marked a firm departure from the repeated refusal of the US Treasury under President Bush formally to brand China as a currency manipulator.

Washington has shied away from such a hardline position, with most economists believing it is reluctant to do so for fear that Beijing will withdraw its key role in financing the US budget deficit by curbing its huge purchases of US Treasury bonds. It is through these purchases that Beijing acts to hold down the yuan, while boosting the dollar. As a side effect, this policy also cuts US market interest rates by driving down Treasury bond yields.

Mr Geithner's move surprised markets and could prove a dangerous gambit as it comes at a time when the surge in Washington's budget deficit because of the financial crisis means that the US will have to fund buyers for billions of dollars in new Treasury bonds to cover this borrowing need.

The riskiness of the switch in strategy, and the threat that it could dangerously inflame relations between Washington and Beijing, was highlighted as China yesterday reported that its economic growth slowed drastically in the final quarter of last year.

Official Chinese figures showed that the world's third-largest economy registered annual growth of just 6.8 per cent in the past three months, taking it worryingly close to the 6 per cent rate seen as vital to its maintaining economic and political stability. The figures emphasised the challenges confronting the country's leadership.

The spread of the global recession across Asia, which economists warn will be aggravated by China's plight, was underlined as the Bank of Japan tore up its previous forecasts of modest growth and issued an alarming warning that GDP in the world's second-largest economy is now set to shrink by 1.8 per cent in the financial year to April, and by 2 per cent in the subsequent 12 months.

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