By Michael Martina and penipu Humeyra Pamuk

WASHINGTON, May 24 (Reuters) - The U.S.
State Department's top China policy official Rick Waters is set to step down at a time of fraught relations between Washington and Beijing.

Waters, deputy assistant secretary of State for China and Taiwan who leads the department's recently created China House policy division, will leave his role on June 23 and remain a member of the senior foreign service, according to a State Department spokesperson.

Waters announced his intention to leave his post at a staff meeting earlier on Wednesday, sources familiar with the matter told Reuters.

"We thank him for his two years of skillful service on China and Taiwan issues, to include his standing up the Office of China Coordination and his leadership over the Office of Taiwan Coordination," the spokesperson said in a statement.

Waters did not immediately respond to a Reuters request for comment.

Reuters reported two weeks ago that the State Department delayed human rights-related sanctions, export controls and other sensitive action to try to limit damage to the U.S.-China relationship after an alleged Chinese spy balloon traversed the United States in February.

The report referenced an email Waters sent to staff that relayed instructions to postpone some actions so the department could focus on a "symmetric and calibrated response" to the balloon.

Relations between the world's two largest economies are at their worst in decades, according to many analysts, as the strategic rivals clash over issues ranging from Taiwan to trade.

"China House is already strengthening the administration´s work to advance a free and open Indo-Pacific and out-compete China," said Assistant Secretary of State for East Asian and Pacific Affairs Daniel J.

Kritenbrink.

"There are few people in the U.S. government who understand the PRC (People's Republic of China) better than Rick Waters, and standing up China House under his leadership will be a lasting legacy. Rick is a strategic thinker who has skillfully advanced U.S. policy on China," said Kritenbrink, adding that the State Department is in the process of choosing Waters' successor.

President Joe Biden's administration has sought high-level meetings with China in an effort to keep ties from veering toward conflict, particularly since the diplomatic crisis over the balloon's flight past sensitive U.S.

military sites.

U.S. Secretary of State Antony Blinken postponed a planned February trip to China after the balloon incident, but the White House has said efforts are continuing to facilitate visits by Blinken, as well as Treasury Secretary Janet Yellen and Commerce Secretary Gina Raimondo.

Waters has led China House - officially the Office of China Coordination - since it was launched in December as a reorganization of the department's China desk to sharpen policies.

He has served as deputy assistant secretary for about two years.

Some Biden administration critics have questioned U.S. overtures to China, arguing that past decades of engagement have failed to change its line on a range of trade, security and human rights issues.

Congressman Mike McCaul, the Republican chair of the House of Representative's Foreign Affairs Committee, cited the Reuters report in a letter he sent to Blinken dated May 19, demanding information related to actions toward China.

"For the U.S. to succeed in its strategic competition with the PRC, it is essential that it be willing to unflinchingly hold the PRC accountable for its aggression and malfeasance, and that it be well-organized and effective in doing so," McCaul wrote.

The Biden administration has recently seen other changes among senior officials focused on China.

U.S.

Deputy Secretary of State Wendy Sherman, who has driven much of the department's approach toward China, announced on May 12 that she is retiring.

And a former top official for China on Biden's National Security Council, Laura Rosenberger, stepped down this year to head a U.S.
government-run nonprofit that manages unofficial relations with Chinese-claimed Taiwan. (Reporting by Michael Martina and Humeyra Pamuk Editing by Don Durfee and Lisa Shumaker)