China was classified in Tier 2 Watch List in last year's report.

The planned designation is expected to draw strong protest from China.

The decision is unusual for the administration of President Donald Trump, who has tried to avoid angering Beijing for concern such a move could hamper efforts to get China to increase pressure on Pyongyang over its nuclear and missile programs.

That was one of the reasons for Trump chose not to label China a currency manipulator in April.

The downgrade comes after Trump complained in a Tweet last week, "While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out."

China is North Korea's last-remaining major ally and a key provider of food and fuel supplies. But it has been reluctant to use its influence over Pyongyang for fear that pushing the regime too hard could result in instability in the North and hurt Chinese national interests.

Analysts doubt how far China can go in pressuring Pyongyang, saying China has often increased pressure on the North in the past, especially when Pyongyang carried out nuclear and missile tests and other provocative acts, but it never went as far as to cause real pain. (Yonhap)