UPDATE 3-Senators urge US to combat China currency policy

* China currency "manipulation" a subsidy, senators say

* Commerce Department urged to investigate charge (Adds Commerce Department position)

By Doug Palmer

WASHINGTON, Feb 25 (Reuters) - A bipartisan group of 15 U.S. senators on Thursday insisted China's currency practices are effectively a subsidy and urged Commerce Secretary Gary Locke to consider action against Chinese imports.

"There can be no doubt that China's policy of large-scale intervention in the exchange markets and the significant undervaluation of its currency acts as a subsidy to Chinese exports," the senators said in a letter that increased pressure on President Barack Obama to deal with the currency concern.

U.S. lawmakers and manufacturers have complained for years that China undervalues its currency by as much as 40 percent to give its companies an unfair trade advantage.

Beijing bristles at the suggestion it is "manipulating" its currency, known as the renminbi or yuan. It is likely to react strongly to any U.S. action based on that conclusion.

Obama accused China of manipulating its currency during his 2008 election campaign.

But since taking office, he has twice declined to formally label China as a currency manipulator in a semi-annual Treasury Department report. The next report is due on April 15.

Obama, who has angered China over recent decisions to meet with Tibet's spiritual leader, the Dalai Lama, and to sell arms to Taiwan, needs Beijing's cooperation on issues ranging from Iran's nuclear program to reviving global economic growth.

COMMERCE DEPARTMENT LEAVES DOOR OPEN

In their letter to Locke, the senators sided with U.S. coated paper producers and other manufacturers that have brought cases asking the Commerce Department to treat China's currency practices as a subsidy under U.S. trade law.

They want the department to include an estimate of how much China undervalues its currency when it calculates "countervailing duties" on Chinese goods in individual cases filed by U.S. producers.

There is precedent for the department to consider currency practices when calculating duties, but Locke has said previous cases against China failed to met the statutory standard.

It is scheduled to announce its preliminary countervailing duty decision in the coated paper case next week.

"As senators from key paper product-producing states, we are very concerned that domestic paper manufacturers and paper industry workers are substantially harmed by subsidized Chinese imports," the senators said.

"Moreover, we are concerned that the agency's failure to investigate China's actions regarding its currency derives from a flawed interpretation of the legal standard for the department's assessment of a subsidy allegation," they said.

A Commerce Department spokeswoman kept the door open to considering China currency practices in the paper case.

"It is important to note that we have not reached a decision about whether to initiate a countervailing duty investigation regarding the specific alleged subsidy in the Certain Coated Paper case," spokeswoman Parita Shah said.

"We share the senators' commitment to the continued rigorous enforcement of U.S. trade laws to ensure that U.S. businesses and workers maintain a level playing field."

PRESSURE ON OBAMA

The group of senators included Democrats Charles Schumer, Robert Byrd, Carl Levin, Barbara Mikulski, Russ Feingold, Debbie Stabenow, Ben Cardin, Sherrod Brown, Bob Casey and Arlen Specter, along with Republican Senators Lindsey Graham, Susan Collins, Olympia Snowe, Sam Brownback and Jim Bunning.

Each made a separate statement calling for action.

"The Commerce Department has yet to take this issue seriously and we must keep pressing the agency until it does the right thing," Schumer said.

"Because the yuan is artificially devalued by 15-40 percent below its true market value, American companies are losing market share for an unacceptable reason," Graham said.

"An investigation of Chinese currency manipulation as a countervailing trade subsidy makes sense," Byrd said.

China's has kept its currency, the renminbi, at about 6.83 to the dollar since July 2008. However, many analysts believe it could begin allowing it rise again this year.

Simon Johnson, a former chief economist at the International Monetary Fund, said Obama should formally label China as a currency manipulator in the April 15 report.

The United States should follow by making a push within the Group of 20 leading developed and developing nations to get China to raise the value of its currency, he said.

It also should press for new global trade rules against currency manipulation, Johnson said. (Editing by Andrew Hay)