- Associated Press - Thursday, September 30, 2010

BEIJING | Beijing warned Washington Thursday that economic ties might be damaged after American lawmakers escalated the conflict over China’s currency controls, inching the two economic giants closer to a trade war.

The Commerce Ministry said a measure approved Wednesday by Congress to allow Washington to penalize governments that manipulate exchange rates violated free-trade rules.

It gave no indication whether Beijing might retaliate, though it has imposed anti-dumping duties in recent months on imports of U.S. chicken, steel and nylon.

After years of friction, the bill is the first vote by American lawmakers for measures to respond to complaints Beijing keeps its yuan — also known as the renminbi — undervalued, giving China’s exporters an unfair price advantage and costing U.S. jobs.

Passage by a 348-79 margin in the House of Representatives came ahead of November elections in which the economy and 9.6 percent unemployment are key voter concerns.

“This is a step toward a trade war,” said economist Dariusz Kowalczyk at Credit Agricole CIB in Hong Kong. “It’s just one step, but it increases the odds.”

Pressures over trade are mounting as the global recovery falters. Washington, Beijing and other governments have pledged to avoid protectionism that might hamper a revival of growth, but U.S. and Chinese authorities have imposed anti-dumping and other duties on a range of each other’s goods, including poultry, steel pipes and tires.

“Exercising protectionism against China under the excuse of the renminbi exchange rate will only severely damage Chinese-U.S. trade and economic ties,” Foreign Ministry spokeswoman Jiang Yu said at a news briefing.

In a separate statement, Commerce Ministry spokesman Yao Jian said, “You cannot say the renminbi exchange rate is undervalued because of the U.S. trade deficit with China and impose such protectionist measures based on this.”

There was no immediate reaction from financial markets, where traders were focused on fading U.S. growth and European street protests over austerity measures.

The U.S. bill would not impose automatic penalties but would expand the definition of improper subsidies to include currency manipulation to gain a trade advantage. The U.S. Commerce Department would decide whether to sanction China or another government.

The measure requires Senate approval. Action there is not expected until after November elections, when analysts say pressure to pass the measure is likely to diminish.

Years of U.S. impatience with China’s currency policies flared anew in recent weeks after China promised in June to allow more exchange-rate flexibility but allowed the yuan to rise only about 2 percent since then.

The Chinese central bank said this week it will increase the role of market forces in setting the exchange rate but announced no major changes that might defuse American anger.

Premier Wen Jiabao, China’s top economic official, promised to allow a stronger yuan in talks this month with President Obama. But in a speech in New York ahead of that meeting, Mr. Wen rejected a rapid rise, saying that would drive many Chinese companies out of business and destroy jobs.

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