Talks between the US and China ended with an agreement to negotiate a bilateral investment treaty between the world's two largest economies, a development seen by Washington as a significant step in reforming China's economy.

Chinese president Xi Jinping, who met US president Barack Obama last month in California, has promised to reform the Chinese economy to encourage more domestic consumption and to reduce its reliance on exports.

The US has sought a treaty for years as part of efforts to help give level playing fields for US businesses in China, allowing greater market access and reducing some of the advantages enjoyed by domestic producers.

"China announced its intention to negotiate a high standard bilateral investment treaty with us that will include all stages of investment and all sectors – a significant breakthrough, and the first time China has agreed to do so with another country," US treasury secretary Jack Lew said at the conclusion of the annual strategic and economic dialogue talks in Washington. Commerce minister Gao Hucheng said negotiations on substantive parts of a treaty would start "as soon as possible."

At odds
While the two sides were able to find agreement on trade issues in Washington, they remained sharply at odds over China's handling of the case of former US spy agency contractor Edward Snowden. Hong Kong allowed Mr Snowden to leave its territory, a sign of a rift between the two. Last night Mr Snowden indicated he would seek asylum in Russia.

“We were disappointed with how the authorities in Beijing and Hong Kong handled the Snowden case, which undermined our effort to build the trust needed to manage difficult issues,” US deputy secretary of State Bill Burns said.

But China's state councillor Yang Jiechi defended the Hong Kong authorities, saying the territory's actions were in accordance to the law.