* U.S. Treasury’s pass on yuan leaves festering issue
* Geithner now must push at G20 for currency action
* Situation complicated since China is top U.S. creditor
* Angry lawmakers vow to retaliate (Adds lawmaker’s pledge to introduce legislation, paragraphs 5, 11)
By Glenn Somerville and David Lawder
WASHINGTON, Feb 4 (Reuters) - The Obama administration declined to name China a currency manipulator on Friday, even though it said the yuan was “substantially undervalued,” sparking fresh calls for legislative retaliation to try to reduce a swelling U.S. trade deficit.
Treasury said China's yuan CNY=CFXS should rise more quickly but said it lacked evidence to label Beijing a manipulator, a designation that could trigger trade action.
“Treasury’s view...is that progress thus far is insufficient and that more rapid progress is needed,” the report said. “Treasury will continue to closely monitor the pace of appreciation of the (yuan) by China.”
The finding was no surprise and came in a long-delayed report to Congress that Treasury kept under wraps until after a state visit by Chinese President Hu Jintao last month.
One lawmaker said on Friday he would propose legislation next week aimed at forcing China to revalue its currency.
Treasury Secretary Timothy Geithner has been trying to prompt China into letting the yuan -- also known as the renminbi -- rise more swiftly, something that is seen as vital for rebalancing global growth.
A higher-valued yuan would make imports cheaper for Chinese consumers and encourage Beijing to seek more growth through domestic consumption than through exports.
Other countries including Brazil have similarly expressed unhappiness at the impact on their domestic industries from cheap Chinese imports. Geithner is visiting Brazil on Monday and has a chance to seek an ally for making the case at the Group of 20 meeting in Paris later this month that China should speed up yuan appreciation.
The decision in the semi-annual report, which was due last Oct. 15, disappointed and angered lawmakers.
“China has been given a free pass on its currency practices for far too long,” said Max Baucus, chairman of the Senate Finance Committee, which has jurisdiction over trade issues. “We need to hold China and our other trading partners accountable for their actions.”
Democratic Rep. Sander Levin of Michigan said he would reintroduce legislation next week proposing to let the Commerce Department treat an undervalued currency as a subsidy under U.S. trade law. Companies could, on a case-by-case basis, seek countervailing duties against competing Chinese imports.
U.S. manufacturers have long complained that Beijing keeps the yuan deliberately undervalued in order to gain an unfair trade advantage that has put millions of American out of work.
China contends the yuan’s value is not the main cause of the United States’ mounting trade deficits and that if the currency did appreciate swiftly the effect would only be to shift production from China to other lower-cost countries.
The United States had a trade deficit of $252 billion with China during the first 11 months of 2010. Some of the largest U.S. retail chains source the vast majority of their products from Chinese factories.
The United States also relies on China to buy the bulk of the weekly flood of debt securities that Treasury sells.
Beijing announced last June that it would permit more flexibility in setting currency values but the Treasury report said that appreciation since has been inadequate.
The yuan now risen 3.53 percent against the dollar since it was depegged from the greenback last June.
Spot yuan CNY=CFXS ended at 6.5938 against the dollar last Tuesday compared with 6.6030 at Monday's close.
NEED CHINA‘S MONEY
The report urged Beijing to let its currency rise both against the dollar and currencies of other major trading partners.
“If it does not, China will face the risk of more rapid inflation, excessively rapid expansion of domestic credit, and upward pressure on property and equity prices, all of which could threaten future economic growth,” Treasury said.
The usual tool for controlling inflation is higher interest rates, but higher rates attract more capital inflows that in turn require more foreign exchange purchases to keep a stable yuan.
The Treasury report also said that a lower-valued yuan was causing other emerging-market nations to hold off on allowing more flexibility. (Reporting by Glenn Somerville and David Lawder; Editing by Leslie Adler)