Q+A: What is causing tension between U.S. and China?

NEW YORK (Reuters) - Treasury Secretary Timothy Geithner has sharpened his criticism of China's exchange rates lately, telling lawmakers that the undervalued yuan currency was hurting the U.S. economy.

The issue is one of a lengthening list sparking tension between the two countries as President Barack Obama meets Chinese Premier Wen Jiabao on Thursday on the sidelines of the annual U.N. General Assembly.

Here are some questions and answers about the U.S.-China relationship, which is growing more fractious as the two huge powers jostle for political and economic influence around the world.

HOW IMPORTANT IS THE RELATIONSHIP?

Obama has said the U.S-China relationship will shape the 21st Century, and on nearly every front that is happening.

Trade between the two countries is flourishing, cross-border investment is increasingly a two-way street and Washington and Beijing are taking halting steps toward diplomatic cooperation on issues such as Iran's nuclear program and the stand-off with North Korea.

The two have squared off over the future of the Internet, the military balance in East Asia, human rights and climate change.

The breadth of the relationship has led some commentators to predict that China and the United States will ultimately become a "Group of 2," setting the global agenda and sidelining the Group of 20 which includes a broad range of developed and developing countries.

That notion alarmed some of their traditional allies, though neither the United States nor China has embraced the idea.

But it is clear that their uneasy partnership will continue to deepen and grow more complicated as the leaders of the world's largest economy and the world's fastest growing economy seek to figure out the road ahead.

WHAT IS THE CURRENCY DEBATE ABOUT?

Many U.S. lawmakers have charged that China has engineered its economic rise in part by keeping its currency, the yuan, artificially low against the U.S. dollar -- an accusation that Beijing rejects.

But the U.S. trade deficit with China is projected to approach $250 billion this year, and U.S. manufacturers say the yuan needs to appreciate by as much as 25 percent to 40 percent to level the playing field.

Political debate over the currency issue has complicated Obama's efforts to smooth relations with Beijing. While the White House has urged China to take steps to allow the yuan to move more freely, it has stopped short of officially labeling China a currency manipulator, a designation that could lead to possible trade sanctions.

With U.S. voters already frustrated by the struggling economy and stubbornly high unemployment rate near 10 percent, the China currency issue has heated up as Obama's fellow Democrats brace for possibly large losses in the November 2 congressional elections.

Hearings this week at the House Ways and Means, and Senate Banking committees, could result in calls for tough new legislation to punish China. But many analysts say this is a risky approach that could backfire if China retaliates against U.S. exporters seeking to expand in the world's most populous country.

The U.S. dollar is also a hostage to the debate. China's huge $2.45 trillion pile of foreign exchange reserves are almost two-thirds in U.S. dollars, giving Beijing a powerful lever over the dollar's value should it decide to make significant changes.

SIGN OF BROADER PROBLEMS?

Officials in both Washington and Beijing have tried hard to isolate the currency issue, and vowed it would not harm cooperation on other fronts.

There have been signs it is working. The United States lobbied successfully for China to back new U.N. sanctions against Iran over its nuclear program, overcoming Beijing's usual reluctance to support punitive measures against one of its key oil suppliers.

China has also cooperated to some degree on North Korea, although progress here has been slower.

Beijing -- the only major ally of Pyongyang's isolated communist government -- has urged North Korea to abandon its nuclear weapons and supported U.N. sanctions over North Korea's atomic violations.

Beijing has also hosted six-party talks with North and South Korea, the United States, Japan and Russia in a bid to resolve the impasse. Those talks stalled in 2009, however, and the issue was further complicated in March when a South Korean naval ship was sunk in what both Seoul and Washington say was a North Korean attack.

Despite heavy U.S. pressure, China stopped short of blaming North Korea for the incident, and it is unclear whether the talks can resume soon, as Beijing hopes.

China and the United States are also divided over proposals to fight global climate change -- another Obama priority -- with Beijing saying the developed world should take the lead in cutting carbon emissions.