US Treasury urges persuasion on China forex reform

WASHINGTON, Mar 30 (Reuters) The U.S. Treasury's top priority is getting China to let its currency rise, a goal more likely be reached through diplomacy than pressure tactics, a top Treasury official said on Wednesday.

Tim Adams, Treasury's undersecretary for international affairs, criticised as ''isolationist'' some senators' demands for retaliation against China over the currency issue.

Adams told the Senate Finance Committee that China is moving in the right direction but has so far been ''far too cautious'' in loosening a rigid currency policy.

''Encouraging China to move more rapidly to a more market-based, flexible exchange-rate regime is Treasury's No. 1 priority,'' said Adams, who along with Treasury Secretary John Snow has visited Beijing repeatedly to urge exchange-rate reforms by the rising Asian trade giant.

While China scrapped a long-standing peg between its yuan and the U.S. dollar in July, and moved to a managed currency float, U.S.

manufacturers and some lawmakers still see the yuan as significantly undervalued, giving an unfair trade edge to China's producers.

More than 50 measures to rein in China trade have been proposed in recent months on Capitol Hill, where election-bound lawmakers see the mushrooming U.S.-China trade gap -- which hit a record 2 billion last year -- as a key issue with voters.

''We do not support these isolationist approaches,'' Adams said.

''They would damage our economy and not achieve our shared goals.'' He said China understood the need to let market forces play a larger role in setting the value of its yuan, also called the renminbi, and said China's central bank recognized the need to move quickly, though political will was lacking.

The dollar eased against the yen on Adams' comments.

More currency flexibility could help cut global economic distortions and could encourage other Asian trading nations to adopt flexible currency regimes, Adams said.

''Our engagement with China on exchange-rate policy is not now about 'whether' but about 'how quickly','' he said.

BEWARE ISOLATIONISM Adams was one of several top officials testifying on China, a topic of lively interest in Washington ahead of a scheduled April 20 visit by Chinese President Hu Jintao amid concerns sparked by China's rising economic and military might.

Later, President George W. Bush told a foreign policy forum he expected fair treatment from China on trade.

''I will make it clear to the president that our relationship is vital on a variety of fronts. One such front is the economy and we expect that country to treat us fairly,'' Bush said. He did not cite the currency issue specifically.

Adams said Hu's visit could affect the outcome of a keenly awaited Treasury report to Congress on currency practices of key trade partners. The report had been due mid-April.

There had been speculation that the Treasury might designate China a currency manipulator, opening the way to additional measures against Beijing. But Adams said no decision has yet been taken.

Senate Finance Committee Chairman Charles Grassley and Democratic Sen. Max Baucus proposed legislation on Tuesday that would alter the Treasury report so it made distinctions between nations whose currencies were ''fundamentally misaligned'' rather than those that purposely manipulated exchange rates.

Adams said such a change might make it easier to seek solutions through forums like the International Monetary Fund.

''It's an emotive term,'' Adams said of the ''manipulator'' label. ''Because we haven't employed it, the threshold becomes higher and higher,'' he added, noting that the United States had not named a country a currency manipulator since 1994.

Deputy U.S. Trade Representative Karan Bhatia said the U.S.-China trade relationship was ''not sufficiently balanced''.

''The administration will not hesitate, when appropriate, to use all tools at its disposal to ensure that China lives up to its (trade) commitments, including dispute settlement at the WTO (World Trade Organization) or the use of trade remedies within our own legal system,'' Bhatia said.

BEEF AN ISSUE Franklin Lavin, the Commerce Department's undersecretary for international trade administration, cited China's refusal to negotiate on government procurement contracts, its ban on U.S. beef imports and too much intellectual property piracy.

''We are looking for China to increase the number of criminal prosecutions for IPR (intellectual property rights) violations,'' Lavin said. ''We want China's cooperation in cleaning up the illegal street markets of pirated goods.'' Adams' testimony was a broad-ranging examination of U.S.-China relations, which he said ''may be the single most important economic relationship of the 21st century.'' He said it is now a global task to persuade China to accept the responsibilities that come with growing economic might.

The United States was enlisting help from other Group of Seven industrial nations, the IMF and the Asia Pacific Economic Cooperation forum to make Beijing understand that, Adams said.

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