WASHINGTON, July 28: As Treasury Secretary Henry Paulson readies another China visit, US lawmakers are toughening their stand on Beijing by moving forward on legislation to punish countries with “misaligned” currencies.

The scenario creates a “good-cop, bad-cop” scheme as Paulson tries to gently nudge Chinese authorities to make bolder moves on economic reform or face the wrath of congressional sanctions, analysts say.

Paulson “is delivering the message that 'I'm your friend, but we have Congress. These guys are serious,' said Jay Bryson, economist at Wachovia Securities.

With Paulson set to open talks in China on Monday, the Senate Finance Committee got bipartisan backing and voted 20-1 on Thursday to approve a bill requiring the Treasury to identify nations with “fundamentally misaligned” currencies, potentially opening the door to economic sanctions.

“For far too long, American workers and business have been hurt by foreign governments that seek an unfair competitive advantage by undervaluing their currency,” said Senator Max Baucus, chairman of the panel.

“There is no doubt that China and other nations have been undervaluing their currency to give themselves an advantage. For too long the game has been rigged against American business,” added Republican Senator Lindsey Graham.

Paulson is to meet with government officials and discuss the US-China Strategic Economic Dialogue (SED) launched last year. This covers a range of economic and environmental issues, although the currency issue is at the forefront.

Paulson said on Friday that lawmakers are sending the wrong message to Beijing by moving toward punishing China.

“We would like to see the Chinese move and show more flexibility,” he said.

But he argued that “the right way to deal with a sovereign nation is not through protectionist actions, but by making the case to them very directly as to why it's in their best interests ... that they proceed with their reforms.” China revalued the yuan by 2.1 per cent from 8.28 yuan in July 2005 and has since then allowed the unit to rise within a range.

But US officials have consistently said China needs to move more quickly on currency policy and other economic reforms.

Alan Holmer, a special envoy for the Strategic Economic Dialogue, said the administration wants tangible results but is not trying to impose a solution on China.

“The (yuan) has appreciated 9.4 per cent since July 2005 but it is our view that China needs to do more and do it more quickly,” he said “But it's also important that members of Congress understand that we get the economic relationship right with China.” Paulson begins his visit on Monday at Qinghai Lake, the largest lake in the country and an example of the environmental challenges faced in China as well as the global nature of these problems, according to Treasury officials.

The Treasury chief then goes to Beijing where he will spend Tuesday and Wednesday meeting with Chinese officials, including President Hu Jintao and Vice Premier Wu Yi.

“This trip is part of an ongoing process to strengthen our strategic economic relationship -- to address long-term issues such as working with China to rebalance its growth and increase the flexibility of its currency, and also to address short-term issues as they arise,” Paulson said in a statement.

Joel Naroff of Naroff Economic Advisors said Paulson is in a delicate situation.

“There are economics and politics intersecting and Paulson is acutely aware of that,” Naroff said.

“The unwillingness for the US administration to get tough with the Chinese is more on the geopolitical side and the need to have China on their side and has nothing to do with Chinese trade.” Naroff said that “without Congress pushing, the administration would do nothing.” Contrary to some perception, Naroff said Washington has considerable leverage on China.

“They (the Chinese) can huff, they can puff, but we can blow the economy down,” Naroff said, noting that about 10pc of the Chinese economy depends on the US.

“If we shut down that 10 per cent, the Chinese economy would collapse,” he said. “We would get hurt in the short run, they would get devastated.” —AFP