WASHINGTON — A congressional advisory panel said yesterday that Chinese spying represents the greatest threat to American technology and recommended counterintelligence efforts to stop China from stealing the nation’s manufacturing expertise.

The U.S.-China Economic and Security Review Commission also said in its annual report to Congress that small and medium manufacturers, which represent more than half the manufacturing jobs in America, “face the full brunt of China’s unfair trade practices, including currency manipulation and illegal subsidies for Chinese exports.”

China’s economic policies create a trade relationship that is “severely out of balance” in China’s favor, said the commission, which Congress set up in 2000 to investigate and report on American-Chinese issues.

Carolyn Bartholomew, the commission’s chairwoman, told reporters that “China’s interest in moving toward a free market economy is not just stalling but is actually now reversing course.”

China denied any spying activities, stressing the importance of healthy economic ties with America. “China never does anything undermining the interests of other countries,” a Chinese Foreign Ministry spokesman, Liu Jianchao, said at a regular briefing yesterday in Beijing. “China and the U.S. have a fundamental common interest in promoting sound and rapid development.”

The report comes about a year before American presidential and congressional elections, and candidates have been critical of what they see as China’s failure to live up to its responsibilities as an emerging superpower. China often is singled out for its flood of goods into America; for building a massive, secretive military; for abusing its citizens’ rights, and for befriending rogue nations to secure sources of energy.

American officials also recognize that America needs China, a veto-holding member of the U.N. Security Council, to secure punishment for Iran’s nuclear program and to persuade North Korea to give up its nuclear weapons.