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WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner vowed on Thursday to rally other world powers to push China for trade and currency reforms as he was grilled by lawmakers demanding a crackdown on Beijing's policies.
China warned that pressure from Washington could backfire.
Raising the stakes as part of a tougher line on China's policies, Geithner said the United States would use a Group of 20 summit in Seoul in November to try to mobilize trading partners to get Beijing to let the yuan strengthen faster.
U.S. lawmakers are weighing new legislation to punish China for practices they say keep the yuan artificially low, hurting American jobs and competitiveness, as they grow impatient with a diplomatic approach that has yielded little so far.
Even as Geithner talked tough in testimony before two key congressional panels, saying he shared lawmakers' frustrations, he urged caution over any measures that might further strain U.S.-China relations.
"This process of adjustment in their exchange rate is going to have to happen over time," he said. "We are using every approach we can find."
U.S. lawmakers are weighing whether to push ahead with action against China before a November 2 congressional election that will hinge on voter concerns about the weak economy.
The consensus in Congress seems stronger than ever for new rules targeting China but the tight legislative calendar leaves little time to pass a bill in coming weeks. Some analysts see the outcry as politicians trying to curry favor with voters.
Geithner, walking a fine line in testimony to the House of Representatives Ways and Means Committee, said the Obama administration had not endorsed the House bill, which is tougher than the Senate version and would slap duties on goods from countries with "fundamentally misaligned" currencies.
But he said "we are carefully looking at it" and wanted to be sure it was compatible with World Trade Organization rules.
Sander Levin, chairman of the House panel, said he would consult Democratic leaders in coming days and decide next week what, if any, steps to take on the China currency issue.
The threat to make China's currency system a focal point of the G20 summit could buy time to show that President Barack Obama's administration is serious about Geithner's pledge to use "all tools available" to remedy the situation.
But it is also sure to stoke tensions before and during the gathering of leaders of the top industrial and developing economies, including Obama and Chinese President Hu Jintao.
"We expect there to be a significant focus of attention ... on China's exchange rate policy," Geithner told the Senate Banking Committee. "It's about the broad interests of all of China's trading partners in a level playing field."
But he acknowledged that countries have shown reluctance to take on China, which has become increasingly assertive as its global economic might has grown.
Complicating the situation was Japan's first intervention in six years on Wednesday to push its own currency down from 15-year highs against the dollar as Tokyo struggles to support its export-led economy.
Giving Japan a free pass to intervene could make it harder to get China to curtail such activity, analysts said.
Geithner, striking his sharpest tone yet in what has long been a flashpoint in U.S.-China relations, said the yuan was strengthening too slowly and the Obama administration was looking for ways to get Beijing to move faster.
Democratic Senator Charles Schumer, calling China's yuan policy a "boot to the throat of our recovery," joined Republicans in pressing Geithner to declare Beijing a "currency manipulator" when the Treasury Department's next foreign exchange report is due on October 15.
But Geithner cast doubt on the effectiveness of such a move, saying it would not guarantee concrete results.
"We share your frustration," he said, though he tempered his remarks by saying China's exchange rate policy does not pose a systemic risk and he did not cite any specific new measures under consideration.
China's Foreign Ministry said pressure over the exchange rate "not only would fail to solve the problems; on the contrary, it could have the opposite effect."
With the U.S. jobless rate near 10 percent as China runs up big trade surpluses, some analysts say legislation cannot be ruled out. But with both chambers due to recess by mid-October to prepare for the congressional election in early November, prospects look dim for a vote before then.
"Congress might push a bill but my sense is this is largely rhetoric and political posturing designed primarily for a domestic audience," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
Geithner said China, whose yuan has risen only slightly against the dollar since it announced the end to its currency peg in June, needs to do more.
Senate Banking Committee Chairman Christopher Dodd told Geithner the time for action was "long overdue."
"China does basically whatever it wants while we grow weaker and they grow stronger. We clearly need concrete action here," Dodd said.
Senator Richard Shelby, the committee's most senior Republican, said: "There is no question that China manipulates its currency in order to subsidize its exports. The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?"
Geithner made clear that U.S. patience on China's currency was wearing thin but said only that the valuation of the yuan would be taken into account when the Treasury issues its next report on the currency practices of U.S. trading partners.
The report is often delayed. But Geithner, speaking to the House committee, promised the one due in mid-October -- before the G20 summit -- would be issued in a "timely fashion."
The administration has so far refrained from officially accusing China of manipulating its currency for unfair advantage, which could open the door to U.S. trade sanctions.
Geithner also appeared to be looking for breathing room to try to squeeze concessions from the Chinese before frustrated lawmakers press ahead with a bill that would force its hand.
China's move to free the yuan from a nearly two-year-old peg to the dollar in June came a week ahead of a G20 meeting in Canada where U.S. officials had vowed to highlight the issue.
China could retaliate if Congress actually passes legislation. A trade war between the world's two largest economies would be a serious blow to Obama's effort to ease strains on a range of economic and foreign policy disputes.
The yuan has risen only about 1.25 percent against the dollar since the peg was broken in June. But in the past six days, the currency has made its fastest rise since February 2008 -- a move that some analysts view as a response to growing U.S. rhetoric.
The Obama administration faces a balancing act. It is sensitive to anti-China sentiment among U.S. voters as it tries to avert big Democratic losses in the November election.
But it wants to avoid alienating Beijing, whose support is vital to tackle nuclear standoffs with Iran and North Korea. Washington is also mindful that China holds massive amounts of U.S. debt.
Additional reporting by Paul Eckert, Emily Kaiser and Richard Cowan in Washington, Steven Johnson in New York and John O'Donnell in Brussels; Writing by Matt Spetalnick; Editing by John O'Callaghan