Q+A-What does Obama gain naming China a currency cheat?

WASHINGTON, March 18 (Reuters) - President Barack Obama faces a tough choice on China's currency.

He could cave in to U.S. congressional calls to challenge China and anger a vital creditor as he seeks to boost American jobs in an election year. Or he could play it safe and duck the issue, following the example of his predecessor George W. Bush.

Analysts say they think Obama is still undecided and is listening to arguments from people who fear the geopolitical fallout, as well those who want the yuan to appreciate.

"If it was based on pure economics, they would have been labeled as a manipulator a long time ago," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, a Washington think tank.

Here are some questions and answers regarding the issue.

WILL A STRONGER YUAN BOOST U.S. JOBS?

Economists say the yuan is at least 25 percent undervalued, which makes Chinese exports artificially cheap for foreign customers. This has helped its economy weather the global recession at the expense, critics argue, of jobs everywhere else in the world. But are these really U.S. jobs?

China is a low-wage, low-technology producer and competes with the likes of Mexico and India. The United States builds supremely complex things like airplanes and computers in competition with Germany and Japan, and the dollar has already depreciated nicely against their currencies. So those worried about taking a tough line with Beijing see no real jobs gain.

Those favoring action say getting China to move would free southeast Asian economies, which now hold their currencies in check to compete with China. They say this is a first step to opening such markets for American exports and rebuilding U.S. manufacturing.

IS ANTAGONIZING AMERICA'S LARGEST CREDITOR WORTHWHILE?

China holds $889 billion worth of U.S government bonds and is the country's biggest lender, creating a potentially potent weapon if it decided to dump the holdings.

Chinese selling could push up U.S. bond yields and borrowing costs, hurting the economy and probably hitting the dollar. All are good reasons not to antagonize China while the U.S. recovery is still fragile. This is especially true of housing. The stability of government-controlled mortgage giants Fannie Mae and Freddie Mac plays a vital role in the availability of finance. China is a big holder of their debt.

Skeptics say the argument is an empty threat because China would shoot itself in the foot by selling Treasuries. It would inflict losses on its foreign reserves while weakening the dollar, directly defeating the object of Beijing's carefully maintained peg between its yuan and the U.S. currency.

Furthermore, U.S. investors increasingly have bought Treasuries since the recession began in December 2007 as domestic savings rates soared, reducing the country's reliance on funding from foreign creditors like China.

"The notion that China can threaten us with their large Treasury holdings is not serious," said Robert Scott, director of international programs at the Washington-based Economic Policy Institute.

WHAT ABOUT NUCLEAR PROLIFERATION?

China could play a major and potentially very helpful role on a number of levels in the effort to control nuclear proliferation in Iran and North Korea, a top Obama policy goal.

The United States hopes China will take part at a senior level in a nuclear summit in Washington next month, but it is not clear this will happen. China may fear being embarrassed on the international stage if it sends a senior official, only to have the Obama administration take action over the yuan days later.

China is also the West's best hope of shepherding North Korea back to the nuclear negotiating table and has worked hard to reconvene six-party talks that have been suspended for more than a year. China is a crucial source of support for the otherwise-isolated North Korea, whose leader Kim Jong-il is reportedly considering a visit to China for discussions that could restart negotiations in early April.

In addition, China wields a potential veto on the U.N. Security Council, where the United States and its allies are trying to forge tougher sanctions against Iran over its nuclear program. That said, the West has so far made little progress in getting China on board for another round of sanctions. Beijing wants more diplomatic efforts before any escalation in action against Tehran, which the West says is seeking the means to make nuclear weapons, a claim Iran denies.

WHAT HAPPENS TO G20 WITH AN ANGRY CHINA?

Obama hosted leaders of the Group of 20 leading industrial powers in Pittsburgh in September and crucially secured Chinese acceptance of the need to better balance world growth. This achievement could be jeopardized by aggravating China. Without Beijing's collaboration, the G20 will be just another pointless international forum.

"What China is doing with its currency is a problem. But the people who should be complaining are other low-wage producers like Mexico," said Barry Bosworth, a senior fellow at the Brookings Institution in Washington, who said the right place to tackle the issue was the G20.

"The United States is risking a lot by not exploring this through the G20. Do we think we're the world's economic policeman? It is just a very arrogant position," he said.

The Pittsburgh communique implicitly acknowledged the problems caused by China's massive trade surplus with the United States, and the challenges of the corresponding U.S. trade deficit. These require action on both sides to solve, with greater U.S. savings, investment and exports, combined with stronger Chinese domestic demand and higher imports.

(Reporting by Alister Bull; Editing by Will Dunham)