Panel urges renewed U.S. pressure on China on currency

WASHINGTON (Reuters) - The United States should name China a currency manipulator and take on trade-distorting Chinese policies in the World Trade Organization, a congressional advisory body said on Wednesday.

"China has failed in some notable areas to fulfill the promises it made nine years ago when it joined the World Trade Organization," said Dan Slane, chairman of the U.S.-China Economic and Security Review Commission.

The report focused on areas of deep and growing tension between the rivals -- from economic policy to military power.

It follows months of friction over massive and growing trade imbalances, which U.S. economists and manufacturers blame on China, whose rapid growth has powered it past Japan as the world's second biggest economy.

The commission's 2010 report primarily urged Congress to address Chinese trade policies it said were harming U.S. interests. It also called on lawmakers to pay closer attention to Chinese advances in missile and military aviation that could threaten the United States and its allies in Asia.

Lawmakers have no obligation to follow the 12-member, bipartisan commission's recommendations, which are based on a series of expert hearings and fact-finding trips. Panelists say they aim mostly to focus debate on looming threats.

The U.S. Treasury Department is also under no obligation to follow the commission's recommendations. Treasury has delayed its semi-annual report on whether China, or any country, is manipulating its currency for unfair trade advantage and no new release date has yet been set.

Many U.S. economists and manufacturers say China deliberately keeps its currency, the yuan, undervalued by 20 to 40 percent to keep Chinese exports cheap, taking American jobs and distorting global financial balances.

The Treasury Department's currency report was due October 15, but was postponed until after Group of 20 and Asia Pacific Economic Cooperation meetings. President Barack Obama attended those summit talks but failed to budge China on the currency.

Treasury had delayed the previous report for 10 weeks to give economic diplomacy with China more time to work. In June, Beijing loosened the yuan against a peg to the dollar, but the currency has since risen only about 2.78 percent, galvanizing critics calling for a tougher response.

The U.S. House of Representatives passed legislation in September threatening duties on some Chinese exports to offset currency undervaluation, but the bill will die unless the Senate passes it before adjourning for the year.

With Senate approval in 2010 unlikely, lawmakers will have to make a fresh start in the new Congress in January.

Republican Senator Lindsey Graham, a vocal proponent of currency legislation, said Obama's "disappointing" Asia summits underscored the need to fight against currency manipulation.

"I think you're going to see the Congress get more involved on the currency front after this trip," he told ABC news.

CHINA UNLIKELY TO DUMP T-BILLS

The commission said fears that China might dump its holdings of more than $1 trillion in U.S. debt were overblown, because Beijing had few alternatives to the dollar and would hurt the value of its holdings if it sold off Treasury bills.

"China's purchases of dollar-denominated debt are part of its system of capital controls, designed to keep the renminbi undervalued as an aid to China's exports," it said. "For these reasons, China's threats to dump the dollar are not credible."

The security portion of the 328-page report warned that China was applying to military aviation technological advances it had made in making civilian aircraft -- including with the help of Western joint-venture partners.

China's military modernization also has been accompanied by "renewed forcefulness" in its vast territorial claims in the South China Sea that are disputed by Vietnam, the Philippines and other Southeast Asian states, the report said.

"If you take what we put in this report and then put it in the context of the daily news, there are a lot of reasons to be concerned about China's growing assertiveness in the region," Commission Vice Chair Carolyn Bartholomew said.

(Additional reporting by Doug Palmer and Diane Bartz; Editing by Peter Cooney)