Two top U.S. senators on Tuesday proposed legislation to force the Bush administration to get tough on China over its currency while another pair of lawmakers sidelined a bill with a similar goal.

US Senator Charles Grassley is seen in Lamoni, Iowa, February 21, 2006. [AP]
Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, and Sen. Max Baucus, a Montana Democrat, launched a bill that urged Treasury to create an assistant secretary post focused on currency issues.

It also said the administration should turn to the International Monetary Fund and other nations on ways to punish countries with "fundamentally misaligned" currencies that hurt the U.S. economy.

"There is a very real sense among Americans that our trading partners -- China in particular -- do not play by the rules," Baucus said in a statement. "People also understand that the U.S. government is not doing all that it can to make sure that China and other countries do."

Less than two hours after Baucus and Grassley launched their bill, Sens. Charles Schumer and Lindsey Graham said they would delay until September 29 at the latest a vote on separate legislation to impose stiff tariffs on China for failing to address the yuan issue.

Schumer and South Carolina Republican Sen. Graham, both fresh back from a visit to China, told a news briefing they thought their legislation had served its purpose and they were hopeful China was ready to act.

"We believe if we hadn't introduced this strong medicine, nothing ever would have happened. But we also believe that now that we're on the path to progress, we don't have to fire this so-called nuclear weapon, but can hold it in abeyance as we carefully watch and wait and expect continued progress." said Schumer, a New York Democrat.

CRUCIAL JUNCTURE

This is a sensitive time for U.S.-China relations. Chinese President Hu Jintao visits Washington on April 20 amid a heated atmosphere surrounding the record U.S. trade gap with China in a congressional election year.

Further complicating the issue is China's role as a major source of the billions of dollars the United States must borrow each day to keep up with daily business like national defense.

The money China lends to the United States through its purchase of U.S. government bonds is the proceeds of the flood of consumer goods that Chinese factories sell into insatiable U.S. markets, a demand that has led to a mushrooming Sino-U.S. trade gap.

Treasury, which has thus far loathed to use its main tool -- designating China a foreign exchange manipulator in its semiannual currency report -- this year urged the IMF to toughen surveillance of nations' currency practices.

"We need a good system in place with real teeth and hard triggers for action when our trading partners haven't lived up to their end of the bargain," Grassley said.

Grassley and Baucus's bill would modify Treasury's currency report to focus on misaligned currencies rather than manipulation, making it easier to bring the authority of global institutions like the IMF to bear on countries that do not let financial markets set relative currency values.

Treasury is currently weighing whether to name China a manipulator in the latest incarnation of the report, which had been scheduled for mid-April but has been delayed.

One banking source on Tuesday said Treasury officials were seeking advice from currency trading firms on how markets would react to Treasury designating China a manipulator.

Initial reaction from Wall Street to Grassley-Baucus proposals was muted. Jason Bonanca, director of foreign exchange with Credit Suisse in New York, said the bill "is not seen as anything more than posturing" by lawmakers.

Earlier on Tuesday in Shanghai, the yuan rose modestly, a climb traders said had gained momentum in recent weeks.

There currently is wide-ranging discussion among IMF members, much of it fueled by the U.S. Treasury, about reforms to give the lender a more active role in the global economy.

One much-discussed proposal envisages the fund taking a tougher and more specific line on foreign exchange and adopting yardsticks against which currency policies can be measured.

Under Grassley and Baucus's legislation, international lenders like the Asian Development Bank might turn down loans to countries that do not let their currencies float freely.

The Grassley-Baucus proposals also proposes such penalties as refusing violators additional voting power, a significant measure coming in a year when the fund's strongest shareholders are seeking to give emerging market countries a greater say.

Measures adopted to bring down surplus
China will need up to three years to achieve a trade balance and the surplus will be brought down by means other than currency adjustments, the central bank's chief has said.

"We reckon China may need two to three years to achieve a balance in international trade" after a mix of measures were introduced, Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said in a speech delivered on March 20 but published on the bank's website yesterday.

The expectation is based on a combination of measures China has started to apply, including expanding domestic demand, lowering the savings rate, opening up the market, floating the exchange rate and increasing imports.

But even if China rebalances its global trade, the United States might still incur large deficits and it would still be very difficult to achieve a bilateral trade balance, the governor said. "So the ball is not in China's court."

"Some US economists assume that the exchange rate is the key to fixing the trade imbalance However, such assumptions failed in statistical tests by using the trade data and the real effective exchange rate recorded in China over the years," Zhou said.

The governor said joint efforts are needed to address the Sino-US trade imbalance.

Chinese Commerce Minister Bo Xilai last week called on the United States to lift some existing trade restrictions on China.

"China hopes the US will quickly scrap restrictions on US exports of high-technology products to China as this would bring more trade opportunities for the US," he said.

PBOC spokesman Li Chao said in an interview, also posted on the bank's website yesterday, that China would further improve the yuan's exchange rate mechanism and develop the foreign exchange market.

China allowed the renminbi to appreciate by 2.1 per cent against the US dollar to 8.11 and linked it to a basket of foreign currencies instead of only the greenback on July 21 last year.

Market forces will be key to gradually let the currency move freely and China doesn't plan one-off adjustments of the yuan's value in the future, Li reiterated.

Instead of another revaluation, the government will allow demand for the yuan and changes in the value of other currencies play a bigger role in setting its value, Li said.