US Senate turns heat up on yuan

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A key US Senate committee has backed new measures to protect business and workers from what it says is unfair currency manipulation by China.

The Senate Finance Committee voted by 20 to one to support legislation giving the government new powers to counteract trade-distorting currency values.

The move is seen as a warning to China which US politicians say has depressed the value of the yuan to boost trade.

The US Treasury said it preferred negotiations to punitive legislation.

Trade deficit

The committee's bipartisan support marks a crucial stage in legislators' attempt to force China to rethink its policy on its exchange rate.

Washington sees the artificially low value of the yuan against the dollar as the main reason for the country's spiralling trade deficit with China, which increased 17% in the first five months of 2007.

For far too long, American workers and business have been hurt by foreign governments that seek an unfair competitive advantage Senator Max Baucus

The bill would require the US government to identify foreign currencies which were "fundamentally misaligned" as a result of government policy and to take action against them.

It would activate a sliding scale of measures ranging from suspension of government procurement contracts to antidumping tariffs on products from the countries involved.

In the most extreme cases, should foreign governments take no action on their currencies within a year, it requires the US government to take cases to the World Trade Organization and to consider other forms of intervention.

"The US government must do all that it can to protect America's economic interests from misaligned currencies," said Senator Max Baucus, one of the bill's sponsors.

"For far too long, American workers and business have been hurt by foreign governments that seek an unfair competitive advantage by undervaluing their currency."

'Play by the rules'

Some senators denied the proposed measures were aimed squarely at China, one stressing that they were not "country-specific" and would apply to any "out-of-whack currency".

But Senator Charles Schumer acknowledged that China was the focus of their concerns, saying it "showed the Chinese it is time to start playing by the rules".

The proposed legislation is not as far-reaching as seemed likely last year when many legislators called for immediate and wide-ranging sanctions against China.

But the bill could still be vetoed by President George W. Bush who has preferred to tackle the issue through patient negotiations.

The US Treasury, which declined to cite China for currency manipulation earlier this year, said it believed "direct, robust discussions with the senior Chinese leaders, not legislation, is the best means of achieving progress".

The vote comes only days before Treasury Secretary Henry Paulson is due to visit China to discuss the currency situation and other economic issues.

Beijing says it has allowed the yuan greater flexibility but argues its policy is driven by domestic concerns such as maintaining economic growth.