China urges the European Union (EU) to lift its arms embargo on China and recognize China's market economy status, calling on the EU to remove?political obstacles in the two sides' bilateral relations.

Chinese Vice-Foreign Minister Fu Ying made the remarks after the second round of the China-EU strategic dialogue in Hungary.

"If we can get rid of the obstacles, we'll be able to march forward rapidly," said Fu.

However, the EU side declined to discuss the issue in detail, with David O'Sullivan, Chief Operating Officer of the European External Action Service, saying "We have exchanged views on this issue very frequently."

As to the recognition of China's market economy status, the high-ranking EU official said that the EU has "very strict criteria" about the recognition.

China's State Councilor Dai Bingguo and EU's foreign policy chief Catherine Ashton co-chaired the dialogue. During the five hours of discussion on Thursday, the two sides exchanged views on a number of economic and foreign affairs issues. Both sides said the talks had laid the foundation for handling international relations in a quickly-changing and turbulent era.

The dialogue is "comprehensive, productive and candid," said Dai, adding that Sino-European relationship has profound impact on the world.

Ashton said China and EU are key players in international relations and China's emergence on the global stage is extremely impressive. "The EU-China relationship should be an example of international cooperation for the 21st century," she said.

Despite the two sides' confidence in further cooperation, there still exist a number of trade issues between them, one of which is EU's blame that the Chinese currency is undervalued.

In an interview before the second round of China-EU dialogue, Ashton told China Daily that an "undervalued" yuan is one of the reasons for the EU's "large bilateral trade deficit" with China. Her remarks came after the yuan hit a new historic high of 6.4948 against the US dollar earlier this week.

"The (EU) Commission shares the view that the Chinese currency remains undervalued in effective terms," Ashton said, adding that "the renminbi has appreciated against the US dollar but depreciated against the euro during the first quarter of 2011."

"The US and the EU have no reason to press China on yuan appreciation, as the trade surplus is expected to fall sharply this year," China Daily quoted Yao Shujie, head of the School of Contemporary Chinese Studies and professor of Economics and Chinese Sustainable Development at the University of Nottingham in England, as saying.

According to Yao, the EU should adjust its economic structure and increase its exports to China, as it still restricts high-tech exports to China.

Also, the EU imposed its first-ever anti-subsidy duties on imports from China Saturday. The EU will levy a 4-12 percent anti-subsidy duty on Chinese coated fine paper. The dual duties would last for the next five years and could be extended if the expiry leads to a recurrence of injury to the European paper industry, the European Commission said.

However, Chinese analysts believe that EU's move was a bad precedent and legally flawed.