* Commission urges comprehensive review of U.S.-China ties
* Accuses Beijing of growing malicious cyber activities
* China said to set stage for yuan's internationalization
By Jim Wolf
WASHINTON, Nov 16 (Reuters) - China's economy is moving up the value chain and its currency could "mount a challenge" to the U.S. dollar in five to ten years, a congressionally created commission reported on Wednesday.
Gone are the days when Beijing was content to be the low-end factory of the world, the U.S.-China Economic and Security Review Commission said in its 2011 report to the U.S. Congress.
China's planners are intent on joining the realm of advanced technology products. high-end research and development and next-generation products, the bipartisan, 12-member body said in a 406-page report.
"Similarly, it no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years," the commissioners said, 10 years after China joined the World Trade Organization.
RMB is short for renminbi, also known as the yuan.
The Chinese authorities are laying the groundwork for internationalization of the currency via bilateral arrangements with foreign companies and financial centers, particulary Hong Kong, the report said.
Goldman Sachs representatives told commissioners that Hong Kong had been tapped to be China's offshore currency platform "because Beijing would be able to fully control the terms of the market," the report said. Hong Kong was returned by Britain to Chinese sovereignty in 1997.
More mainland-based financial institutions will be able to issue RMB-denominated bonds in Hong Kong under plans outlined by Li Keqiang, China's likely next premier, during an August visit to the financial center, the commission said.
It urged the U.S. Congress to mandate a comprehensive White House National Security Council review "to determine the need for changes to address the increasingly complicated and serious challenges posed by China to U.S. international and domestic interests."
The commission was created in 2000 to monitor national security implications of bilateral trade with China and to make recommendations for congressional action.
William Reinsch, this year's chairman, said he did not expect the yuan to "supercede" the dollar in coming years unless Beijing floats its currency and removes capital controls.
However, "certainly what they're doing in Hong Kong suggests an impending challenge," Reinsch, president of the National Foreign Trade Council, a private U.S. business group, said in a telephone interview with Reuters.
On the security side, the commission accused Beijing of continued and growing malicious cyber activities, including facilitating industrial espionage and compromising U.S. and foreign government computer systems.
At least two U.S. environment-monitoring satellites were interfered with four or more times in 2007 and 2008 via a ground station in Norway, and China's military is a prime suspect, the report said.
China's embassy in Washington said it was "obvious that the commission is entrusted with the mission of vilifying China's image and spreading China threat theory by patching up unwarranted allegations against China."
"We urge the commission to stop issuing such reports for the good of increasing mutual trust between our two countries while China will continue to play a responsible role in both the realistic and the virtual worlds," Wang Baodong, the embassy spokesman, said by email.
The command responsible for U.S. military space operations lacks enough data to determine who interfered with the U.S. government satellites.
"What I have seen is inconclusive," Air Force General Robert Kehler, commander of the U.S. Strategic Command, said in a teleconference from Omaha, Nebraska, home to the military outfit that conducts U.S. space and cyberspace operations.
The commission said the anomalous events had not actually been traced to China, but "the techniques appear consistent with authoritative Chinese military writings" that have advocated disabling satellite control facilities in any conflict.
The commission's overarching concern, Reinsch said in a prepared statement, is that China's integration into the world trading system "increasingly seems to be lagging as China's policies focus on short-term gains rather than long term systemic benefits."
Dollar-denominated financial instruments dwarf their yuan-denominated counterparts in terms of new issuances. But the RMB markets have made remarkable progress in less than a year to achieve 11 percent of the daily trading volume of dollar-denominated markets, the report said.
Still, trade in yuan accounts for a mere 0.3 percent of the $4 trillion changing hands daily in international currency markets, the commission said, with the U.S. dollar making up one side of 85 percent of all trades.