WASHINGTON, June 23: The captains of US economic policy on Thursday strongly warned lawmakers clamouring for China to be punished over its currency regime not to retreat to a dangerous “protectionism”.

US Treasury Secretary John Snow and Federal Reserve chief Alan Greenspan reaffirmed their belief that it is in Beijing’s own economic interest to revalue its currency against the dollar.

But Greenspan was frank in rejecting talk that a yuan revaluation would be a panacea for US industries struggling to fend off fierce competition from lower-cost rivals.

There is “no credible evidence” that it would bring back hundreds of thousands of lost manufacturing jobs, the Fed chairman told a special Senate finance committee hearing on US-China economic relations.

The yuan has been tied to the US dollar for the past decade at around 8.28. That rate, according to the view in Washington, makes Chinese goods far cheaper overseas to the detriment of foreign rivals.

Two US senators are sponsoring a bill that would slap a 27.5 per cent tariff on Chinese imports if Beijing does not take meaningful steps to revalue the yuan.

Greenspan issued a stern warning against the tariff option, implying that China would retaliate and set off a debilitating trade war.

“A return to protectionism would threaten the continuation of much of the extraordinary growth in living standards worldwide, but especially in the United States, that is due importantly to the post-World War II opening of global markets,” he said.

Snow reaffirmed US government policy that China’s currency system is now “highly distortionary”, but that it does not yet meet the requirements to incur US retaliation.

He said he sympathized with members of Congress angry at Chinese policies, warning that Beijing must play by the rules of international trade including protection of intellectual property rights.

“But I cannot overstate my firm belief that resorting to isolationist trade policies would be ineffective, disruptive to markets and damaging to America’s special role as the world’s leading advocate for open markets and fair trade,” he told the committee.

Pressure is mounting in the US Congress for Washington to get tough over the yuan issue. Snow was attacked by some committee members for judging that Beijing does not yet qualify as a “currency manipulator” in US law.

Democratic Senator Charles Schumer, one of the co-sponsors of the tariffs bill, rounded on the administration stance.

“The opponents of our bill are protectionist. They are protecting China from joining the community of free trading nations,” he said. “How long can we continue to talk without action?”

Senator John Kerry asked Snow pointedly “are we powerless, are you oblivious, or is it a combination of the two?”

The lively exchanges coincided with news that the state-owned China National Offshore Oil Corp. is launching the biggest ever takeover offer by a Chinese group with an $18.5 billion cash bid for US oil major Unocal.

“Would the Chinese freely allow a US company to take over a Chinese company?” Schumer asked at the hearing.

Greenspan said that to defend the yuan rate, Beijing has made itself vulnerable to a US financial shock by buying vast amounts of dollar assets, and left its financial system awash in excess cash that gets dumped on unproductive industries.

So, the Fed chief argued, the sooner China moves to a flexible exchange rate “in their own self-interest ... the better for all participants in the global trading system”.—AFP