Senate Approves Bill to Punish China for Currency

Controversial yuan bill passes first Congressional test.

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WASHINGTON (Reuters) — The Senate approved a controversial bill aimed at forcing China to raise the value of the yuan in an effort to save American jobs, sending it to the House of Representatives where its fate is uncertain.

Beijing has warned the legislation could spark a trade war but the bill has advanced further than similar ones in the past, reflecting widespread frustration with China's trade policies and how U.S. lawmakers have seized on voter anxiety about high unemployment ahead of elections in 2012.

The vote on Tuesday "has put the Chinese on notice: 'Stop your cheating that is costing our country jobs, or you will face the consequences,'" said Democratic Senator Charles Schumer, one of the bill's co-sponsors.

China was quick to respond. The Foreign Ministry said the bill was a protectionist step and warned that its passage could disrupt joint efforts by the world's two biggest economies to prop up the global recovery. It urged the Obama administration to oppose the legislation.

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China's central bank said the yuan is not the primary cause of China's trade surplus with the United States that Washington puts are more than $250 billion.

The People's Bank of China added that any gains in the yuan would not improve the American jobs market, where the unemployment rate remains stubbornly above 9 percent, or help the United States tackle its trade deficit.

Many U.S. economists say China holds down the value of its yuan to give its exporters an edge in global markets. China says it is committed to gradual currency reform and points to a 30 percent rise in the yuan against the dollar since 2005.

The bill would allow the U.S. government to slap duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

The yuan fell against the dollar in early trade on Wednesday, as investors worried a Sino-U.S. trade dispute could cause a Chinese retaliation to stop the yuan's steady appreciation.

The Senate's 63-35 vote puts the bill in the hands of the Republican-controlled House. However, it may never vote on the bill despite rank-and-file support.

House Speaker John Boehner last week said it would be "dangerous" for Congress to get involved with a foreign country's exchange rate.

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That stance prompted House Democratic Leader Nancy Pelosi to accuse Boehner of "thwarting the will of the House."

Even if the House passes the bill, a final decision would rest with Obama. Signing it would anger China, whose cooperation the United States needs both on the economic front and in global hot spots such as North Korea and Iran.

But vetoing the bill would not play well in industrial heartland states like Ohio and Michigan, and could undercut Obama's bid for a second term in next year's presidential election.

'FRUSTRATION'

Secretary of State Hillary Clinton said the fate of the bill was unclear but its message expressed the country's mood.

"I don't know whether this bill in the form that it's passing the Senate will ever end up as a piece of legislation coming from the Congress," Clinton told Reuters in an interview. "But it does reflect a great deal of frustration on the part of the American people."

A leading Republican presidential candidate, Mitt Romney, on Tuesday repeated his vow to crack down on China over currency on his first day in office if elected.

A key provision of the Currency Exchange Rate Oversight Reform Act of 2011 would require the Commerce Department to consider whether undervalued currencies act as an effective export subsidy that would justify the United States applying countervailing duties in response.

Obama, who has preferred dialogue with China to punitive measures, last week said China was "gaming" the international trade system. He has not taken a formal position on the bill and cautioned that it must be compatible with World Trade Organization rules.

Boehner has the power to block the bill, even though its backers say it has 225 House co-sponsors, including 61 Republicans, enough to ensure its passage if it came to a vote.