WASHINGTON – In its strongest criticism yet of China’s exchange rate policy, the Bush administration yesterday warned China to stop undervaluing its currency amid renewed congressional calls for trade sanctions if the policy is not changed.

Chinese currency practices are “highly distortionary” and “pose a risk” to its economy, trading partners, and global economic growth, states a Treasury Department report to Congress.

The official admonishment stopped just short of accusing China of “manipulating” its currency by fixing it at a low level, a charge that could open the door to potential trade sanctions against the powerhouse economy.

“It is incumbent on China to address concerns” before calls for retaliation by other countries threaten the international trading system, Treasury Secretary Snow said.

Members of Congress from both parties have long been critical of China’s 10-year-long practice of fixing its currency at 8.28 yuan to the dollar, and they have called on the administration to pressure China to float its currency in the open market.

The low price of the yuan relative to the dollar – estimated to be undervalued by 15% to 40% – harms American manufacturers and exporters while flooding the American market with cheap Chinese goods, the policy’s opponents say.

Senator Schumer, a leading critic of China’s policy, yesterday said the administration was too soft on China.

While this is the administration’s toughest report on China so far, “it’s not tough enough,” said Mr. Schumer. “They are manipulating their currency, and for the report not to find that is kind of strange.”

The Treasury Department’s pledge to monitor China’s policy “very closely” for the next six months is an insufficient response, he said.

“I don’t think the Senate will rest until there is actual action,” said Mr. Schumer, who reintroduced legislation yesterday to give a clear definition of “manipulation.”

The senior Democrat on the House Ways and Means Committee, Rep. Charles Rangel of Manhattan, gave a blistering assessment of the report.

“It’s not that the administration seems to not care about China that bothers me. What bothers me is that they don’t seem to care about the $162 billion trade deficit last year, or the workers and businesses getting hurt by China’s unfair currency policy. They deserve more than lip service from Secretary Snow, but he confirmed again today that’s all they’ll get,” he said.

A Republican critic of China’s policy, Senator Graham of South Carolina, also called on the administration to take a firmer line against China, but he put a positive spin on the report.

“The good news is that this is the first time the administration has called China’s practices for what they are – distorted and … cheating and manipulative,” said Mr. Graham at a joint press conference with Mr. Schumer.

“Our hope is that between now and July, the administration will build on this report and take it to China in a very direct way that no one will misunderstand – that their currency practices must change, and that if they don’t change, they can expect major pushback from the United States,” said Mr. Graham.

Sixty-seven senators are on record stating the current system creates an unfair advantage for China.

A member of the Senate Banking Committee, Senator Stabenow, a Democrat of Michigan, blamed China’s “unfair trade practices,” including currency manipulation, for the loss of 1.5 million American jobs.

China’s surplus on trade in goods with America expanded to $83.5 billion in the second half of 2004, from $70.2 billion a year earlier.

The report concluded that China has not met the criteria to be in violation of the Omnibus Trade and Competitiveness Act of 1988, legislation that would require the administration to negotiate an end to the practice. Such negotiations could include the threat of trade sanctions.

“If current trends continue without substantial alteration, China’s policies will likely meet the statute’s technical requirements for designation,” the report states.

“The difference between us is that we think they have arrived, and the administration says they are about to get there,” said Mr. Graham of the report’s conclusion that the country is not an official currency manipulator.

The Treasury Department is “actively engaged” with China and other countries to promote more flexible exchange rates, the report said.

It emphasized that China’s policy will harm its own economy by triggering price inflation, speculative money flow, and overinvestment in inefficient industries.

Chinese officials have publicly acknowledged the need to move to a more flexible system, have repeatedly vowed to do so, and have undertaken the necessary and appropriate steps to prepare for such a move, Mr. Snow said, adding that he has “little doubt” that China “is now prepared to begin reform of the currency regime.”

The Treasury secretary said America wants China to take an “intermediate step” but is not calling on China to immediately allow its currency to float freely – a step he said would be a “mistake at this time” because “China’s banking sector is not prepared.” Some members of Congress yesterday said the administration should go much further by designating China to be in violation of its responsibilities under the World Trade Organization. Then Congress could ultimately limit Chinese access to the American consumer market by imposing tariffs equal to the damage caused to the American economy by China’s undervaluation of its currency.