UPDATE 1-Paulson: US taking required steps on China currency

(Adds details, comments from other stories)

By David Lawder

LONG BEACH, Calif., Dec 19 (Reuters) - The United States is already pursuing negotiations with China over its currency, the same steps required if it were to brand China a currency manipulator, U.S. Treasury Secretary Henry Paulson said on Wednesday

Paulson, speaking at a trade forum here, declined to comment directly on the Treasury's currency report due later on Wednesday, but said it was important not to upset economic relations with China.

"There's a fair amount of tension in U.S.-China trade relations but it is very, very important that we keep this relationship on an even keel," Paulson said.

China is the fastest growing market for U.S. exports and is especially important to California, Paulson said.

The Treasury has consistently failed to designate China as a currency manipulator in its semi-annual report, pursuing instead Paulson's strategy of high-level "strategic economic dialogue" talks with Beijing.

Designating China a currency manipulator would require a finding that Beijing deliberately intended to seek a trading advantage.

Although the yuan has strengthened against the dollar by around 10 percent in the past two years, many U.S. lawmakers and manufacturing firms say this is not enough and it gives Chinese firms an effective trade subsidy of as much as 40 percent.

"What we've said before in the report ... is if we were to designate China as a manipulator, the remedy would be to negotiate with China directly and through multilateral bodies including the IMF, which is exactly what we've been doing for some time," Paulson said. "We've been making the case as strongly as we know how."

He repeated his mantra that China needs to move faster toward a market-determined currency exchange rate based on the country's strong economic fundamentals. Faster yuan appreciation, he said, would allow China to better manage challenges in its economy, such as inflation and other symptoms of overheating.

California Gov. Arnold Schwarzenegger, who chaired the forum, said he intended to pursue more public-private partnerships to fund massive infrastructure rebuilding projects, such as ports, highways and other transportation links to boost trade.

"We need to prepare the state to increase trade so we can operate on all 12 cylinders economically," Schwarzenegger said.

Paulson told the forum that there was strong appetite among foreign investors to provide capital for infrastructure projects, but such investments must be weighed against public perceptions.

"You can attract foreign capital, but you have got to ask the question how will the public look (at it) if foreign capital is invested in your ports or in other things. It's an issue," Paulson said. (Reporting by David Lawder, Editing by Leslie Adler)