By Doug Palmer and David Lawder
WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner sought to convince U.S. lawmakers on Thursday he was taking a tougher line on China's currency and trade policies, but Beijing warned that pressure from Washington could backfire.
Striking his sharpest tone yet in what has long been a flashpoint in U.S.-China relations, Geithner planned to tell a Senate hearing that the yuan was strengthening too slowly and he was looking for ways to get Beijing to move faster.
Geithner's testimony could be critical to whether lawmakers, who say China hurts U.S. jobs and corporate profits by keeping its currency artificially cheap, decide to push ahead on legislation targeting Beijing's policies before November elections, which are being shaped by voter anguish over the economy.
"China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces," Geithner said in prepared remarks for the first of a pair of Capitol Hill appearances.
Signaling a reluctance to give in, China's Foreign Ministry said pressure over the yuan exchange rate "not only would fail to solve the problems; on the contrary, it could have the opposite effect."
It was unclear, however, whether Geithner's get-tough talk would be enough to overcome skepticism in Congress over the administration's approach and head off a bill that would slap punitive duties on Chinese goods.
"There's no question that the economic and trade policies of China represent clear roadblocks to our recovery," Senate Banking Committee Chairman Christopher Dodd said, calling for "concrete action" to address the situation.
LAWMAKER QUOTE
With the U.S. jobless rate stuck near 10 percent while China is again running up big trade surpluses, some analysts see chances for legislation as more likely now than at any time in the recent past.
Geithner made clear that U.S. patience on China's currency policy was wearing thin.
Implicit was the threat that the Treasury Department's next semiannual foreign exchange report due on October 15 could bring a declaration that China manipulates its currency for unfair advantage, which would open the door to U.S. trade sanctions.
But Geithner also appeared to be looking for breathing room for the administration to try to squeeze concessions from the Chinese before frustrated lawmakers press ahead with a bill that would force its hand.
China in June, a week ahead of a meeting of Group of 20 leaders in Canada, had freed the yuan from a nearly two-year-old peg to the dollar.
RETALIATION POSSIBLE
China could retaliate if Congress actually passes legislation. A trade war between the two countries would be a serious blow to President Barack Obama's effort to ease strains on a range of economic and foreign policy disputes.
Complicating the situation was Japan's first intervention in six years on Wednesday to push its own currency down from 15-year highs against the dollar as Japan struggles to support its export-led economy. Analysts said allowing Japan a free pass to intervene would make it harder to persuade China to curtail such activity.
The yuan has risen only about 1.25 percent against the dollar since Beijing announced the end to its currency peg in June, an increase that Geithner has called insufficient.
In the past six days, however, the yuan has scored its fastest rise since February 2008 -- a move that some analysts view as a response to growing U.S. rhetoric.
The Obama administration faces a delicate balancing act. It wants to pay homage to American resentment over Chinese trade practices but also must avoid alienating Beijing, whose diplomatic support is needed to tackle nuclear standoffs with Iran and North Korea.
Washington is also mindful that Beijing holds massive amounts of U.S. debt, and the two countries are deeply entwined economically.
(Additional reporting by Paul Eckert, writing by Matt Spetalnick; Editing by Leslie Adler)
