FACTBOX-Key political risks to watch in the United States

Sept 19 (Reuters) - With U.S. congressional elections looming on Nov. 2, investors will be paying extra attention to the actions of legislators and the Obama administration in the coming weeks.

Here are the main political risks to watch in the United States:

CONGRESSIONAL ELECTIONS

Republicans are likely to gain ground when all 435 seats in the House of Representatives and 37 of the 100 seats in the Senate are up for grabs in the election.

The high jobless rate is dragging on the Democrats' poll ratings and Republicans might win control of the House and probably pick up seats in the Senate. [ID:nN16274220]

That would make it difficult for President Barack Obama to win the kind of legislative successes he had in his first two years in office.

What to watch:

-- Obama will probably have to deal with resurgent Republicans in Congress. The question is whether he will be able to work with them to slash the budget deficit and boost hiring or whether politicians will be stuck in gridlock while the economy languishes. An early and crucial test will come in December when a bipartisan commission makes recommendations on how to cut the deficit. [ID:nN24218139]

-- Republican electoral gains are likely to be welcomed by financial markets keen to dampen Obama's zeal for regulating business, like healthcare reform and the crackdown on Wall Street. While there are always other factors such as company earnings to push shares, historically the S&P 500 index does well in the year after midterm elections, regardless of the result. In midterm election years dating to 1962, the index has on average risen more than 2 percent in the two months prior to the election but gained more than 7 percent in the three months following, according to investment firm Birinyi Associates. [ID:nN16276354] The last time the Republicans did well in a midterm vote under a Democratic president was in 1994. Stocks rose 25 percent in the 12 months from October of that year.

-- Republicans have threatened to repeal Obama's healthcare and financial regulation laws but that is improbable as they would need a two-thirds majority in both the House and Senate. Legal challenges to healthcare reform by states could win more traction.

BUDGET DEFICIT

Deficit projections have reached around $1.4 trillion and total public debt is at $13 trillion. The Republicans doing well in the election is seen as positive for deficit reduction, as both parties will share the blame for tough cuts.

What to watch:

-- A bipartisan commission will make recommendations by December on how to reduce the deficit. A leading Democrat on the panel has suggested a cap on government spending, putting him more in line with Republican thinking and increasing the chances of the commission producing feasible ideas. Political gridlock is often welcomed by markets when the economy is doing well but Wall Street would punish failure to reach agreement on the deficit.

-- Despite the hefty debt burden, the U.S. Treasury has had no difficulty so far in finding willing buyers of government bonds and interest rates remain very low. The concern is that buyers may one day lose faith in politicians' willingness to put finances back on a sustainable path. They might refuse to cheaply finance U.S. spending and borrowing costs would spike. In an unlikely doomsday scenario, the United States would have so much difficulty attracting debt investors that it would be forced into taking stern measures to curb spending and raise taxes. One worry would be that the Federal Reserve might begin printing money to buy Treasury debt, which could devalue the dollar and drive up inflation.

-- In the end, implementation of the commission's ideas by Congress in 2011 is everything and bipartisan cooperation will be needed. Republicans will push for spending cuts while Democrats are expected to seek tax increases.

-- Austerity measures. While markets are keen on keeping the deficit under control, an austerity program that crimps consumer spending could hit company earnings or stunt economic growth.

BUSH-ERA TAX CUTS

Congress is likely to vote by the end of the year on whether to extend tax cuts dating back to George W. Bush's presidency. Letting the cuts expire would help plug a hole in the deficit but would be unpopular with voters. Debate on the issue in Congress is expected to come after the Nov. 2 vote.

What to watch:

-- A tax on company dividends for upper income groups that will shoot up to 40 percent from 15 percent now if lawmakers do not extend the cuts. Capital gains taxes would also rise from 15 to 20 percent.

-- Obama wants to extend lower taxes for the first $200,000 of an individual's income but a small minority of Democrats and many Republicans favor renewing cuts for those earning above that level -- the wealthiest 3 percent of taxpayers. [ID:nN15194626]

USA-CHINA RELATIONS

Disruption to complex U.S. relations with China can move bonds, currencies, stocks and commodities globally. Beijing is the biggest single holder of U.S. Treasuries, with around $900 billion of them. Some in Washington have long feared that China could dump the bonds because of a serious political dispute, say over Taiwan, bringing prices tumbling down. But that would be counterproductive to China and is seen as unlikely.

What to watch:

-- Senators led by Democrat Charles Schumer might press ahead with a bill to punish Beijing by charging duties on exports to the United States if it does not revalue the yuan -- a big one for forex and bonds. U.S. companies with most to benefit from a stronger yuan include Caterpillar (CAT.N), Alcoa (AA.N) and General Electric (GE.N) but they also stand to lose from any tit-for-tat trade fight with Beijing. A yuan revaluation might stimulate Chinese demand for commodities but that could be offset by reduced export competitiveness.

-- Taiwan lingers as a potential flashpoint in China's relations with Washington but trade ties between the island and Beijing have improved. A more likely diplomatic dispute would be a sudden incident such as China confronting U.S. surveillance ships in waters off China's coast.

-- A larger Republican presence in the U.S. Congress after the midterm elections could pressure Obama to be tougher on Beijing over Taiwan and the yuan.

-- Friction between multinationals and the Chinese government after Google (GOOG.O) and Beijing locked horns over the Internet giant's search page. That dispute has been fixed but companies like GE, Siemens (SIEGn.DE) and BASF BASF.DE have also complained of the tough investment climate in China.

ENERGY LEGISLATION

The Obama administration and Democrats in Congress want to clamp down on the oil industry's offshore drilling practices after the massive Gulf of Mexico spill. There is a ban on deepwater drilling in the Gulf as well as investigations into companies involved in the blown-out well owned by BP Plc (BP.L)(BP.N) and major energy legislation in Congress.

What to watch:

-- The House has passed legislation to reform offshore drilling but the measure still has a long way to go before it can become law because it would have to be merged with a similar bill pending in the Senate. If it does not go ahead, the effort likely would be revived next year but again faces hurdles. A Congress with more Republicans could see a renewed push to open drilling in protected areas such as the Alaskan wilderness.

-- A moratorium in May barred new drilling below 500 feet (152 meters) for six months but it was put on hold by a judge. The Interior Department has issued a new moratorium which has also been challenged in court. It could be several months before the drilling ban is lifted, either by a court or Congress or because the government is satisfied drillers can prevent a blowout and respond adequately to any new disaster. Expect oil companies' shares to rise when the ban is scrapped. The moratorium has had little effect on the price of oil.

CLIMATE CHANGE LEGISLATION

-- An uphill effort to pass climate change legislation would become even more difficult, but not impossible, if Republicans do well in November. Some factors might even help chances next year. Some Republican senators, such as John McCain, who were constrained from cooperating on climate-change legislation because of re-election concerns, could have more latitude to cooperate after the midterm vote. Also, the first Environmental Protection Agency rules governing greenhouse gases take effect in 2011. That could jolt the next Congress into action.

-- Congress might approve clean energy initiatives in the oil spill bill, such as energy efficiency programs and incentives for heavy trucks to run on natural gas. Alternative energy companies like First Solar (FSLR.O), SunPower Corp SPWRA.O, Germany's Solarworld (SWVG.DE) and China's Suntech Power (STP.N) are likely to benefit, as are GE and Siemens, which makes electronics and does engineering for low-carbon energy sources.

-- Lawmakers have shied away from plans to put a price on carbon emissions blamed for global warming but the issue might resurface later in the year. That could affect electric utilities, oil companies, natural gas producers and users such as chemical companies and the auto industry. One suggestion for a future climate change bill is to include a cap for electric utility companies on emissions of carbon dioxide. That could hit shares in American Electric Power (AEP.N), the largest coal consumer in the country, and Southern Co (SO.N). (Written by Alistair Bell. Additional reporting by Rick Cowan, Paul Eckert, Emily Kaiser, Matthew Daily and Tim Gardner; Editing by Howard Goller and John O'Callaghan)