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The US Senate has passed a bill to punish China for alleged currency manipulation, a move Beijing slammed as a "time-bomb" that could start a trade war between the world's top two economies.
Long frustrated at the alleged job-killing impact of China's forex regime, Democratic and Republican senators came together Tuesday to pass the bill, but it faces bleak prospects in the Republican-led House of Representatives.
"We are in trade war. But today we're fighting back," said Democratic Senator Sherrod Brown, one of the bill's champions, defying the White House's refusal to back the bill at a time of renewed global economic unease.
The proposal, powered by a tide of US voter frustration at a sour economy and high unemployment ahead of November 2012 elections, envisions retaliatory duties on Chinese exports if the value of the yuan is unfairly "misaligned".
But Republican House Speaker John Boehner has signaled that he will not bring the legislation to a vote, calling it "dangerous" to economic relations.
China, accusing the US senators of scapegoating it during an election year, said the bill flouted World Trade Organization rules and would "seriously" harm relations between the world's number one and number two economies.
"It is a serious breach of WTO rules, which cannot solve the US's own economic and employment issues, and will... seriously interfere with Sino-US economic and trade relations," said foreign ministry spokesman Ma Zhaoxu.
The official Xinhua news agency said "what the US Senate did planted a ticking time-bomb that may ignite a potential trade war between the world's two largest economies."
President Barack Obama last week accused China of "gaming the trade system" in a way that hurts the US economy, but declined to back the legislation and worried it could violate WTO rules.
Many in Washington agree that China keeps the yuan unfairly low against the dollar, giving its goods an edge of as much as 30 percent over similar US products, widening the trade deficit and costing American jobs.
But the measure's opponents, stressing the bill's toll on China ties, also warn that a rise in the yuan would boost manufacturing and jobs in countries such as Vietnam or Malaysia -- and not in the United States.
On Wednesday, China again vowed to loosen currency controls but denied the yuan was overvalued, as policymakers set the central parity rate -- the midpoint of the allowed trading band for the yuan -- at 6.3598 to the dollar.
That represented a depreciation compared with 6.3483 on Tuesday.
The US legislation's backers, an unusual coalition of Democrats and Republicans, have said it is time for Washington to take on Beijing, and predict a boost in the yuan will make Chinese workers wealthier and more likely to buy US goods, thus creating jobs and narrowing the trade gap.
They also say that US law and multinational dispute mechanisms have failed to curb what they call Beijing's unfair practices, including favoring Chinese producers for government contracts and tolerating rampant intellectual piracy.
"This vote showed we will not be bullied by China when it is clear they are in the wrong," Republican Senator Lindsey Graham said, adding: "We ignored the threats and do not apologize for taking this action."
Republican House leaders have pointed out that Obama's Treasury Department has refrained from labeling China a currency cheat and said they have no plans to bring the legislation up for a vote, effectively killing it.
But House aides say it could return to life if the issue were to become a core dispute ahead of next year's elections.
The bill has split the top two Republican White House contenders, with Texas Governor Rick Perry opposing it and former Massachusetts governor Mitt Romney saying he would confront China on his first day in office.
In a Republican debate Tuesday night, the current front-runner Romney said strong action was needed to combat Chinese "cheating" and that if elected he would issue an executive order branding China a currency manipulator.
"I'm afraid that people who have looked at this in the past have been played like a fiddle by the Chinese. And the Chinese are smiling all the way to the bank, taking our currency and taking our jobs and taking a lot of our future," said Romney, a businessman and former Massachusetts governor.
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