June 10 (Bloomberg) -- Treasury Secretary Timothy F. Geithner said China’s exchange-rate policy prevents a balanced global recovery and called for a stronger yuan that would help officials fend off inflation in the world’s third-largest economy.

“The distortions caused by China’s exchange rate spread far beyond China’s borders and are an impediment to the global rebalancing we need,” Geithner said in testimony to the Senate Finance Committee today. A more flexible yuan would allow China to pursue “a more effective, independent monetary policy, which is particularly important now, with China’s economy facing a risk of inflation in goods and in asset prices.”

The U.S. has been trying to pressure China to allow the currency to strengthen, with Geithner resisting efforts at trade sanctions and hoping talks will lead to a higher yuan. China has kept the yuan pegged to the dollar during the financial crisis, fueling complaints from trading partners and U.S. lawmakers that the world’s biggest exporting nation has an unfair advantage in global commerce.

China’s economy is “fast on its way to becoming the world’s second-largest” after the U.S. and supplanting Japan, the current No. 2, Geithner said. “American firms operating in China should have the same rights enjoyed by Chinese companies, just as Chinese firms have in the United States. This is a simple principle of fairness.”

China’s Exports

A report released earlier today in Beijing showed China’s exports jumped the most in six years and property prices rose at a near-record pace, signs that China is withstanding the sovereign-debt crisis in Europe.

The U.S. lacks a “coordinated” policy on China, said Max Baucus, the committee’s chairman and a Democrat from Montana. “We must craft a holistic strategy, orchestrated and led by the White House, to develop a strong, mutually beneficial U.S.-China economic relationship.”

Senator Charles Grassley, the top Republican on the committee, said China needs to “grow up and be citizens of this world as mature citizens.” China became a member of the World Trade Organization in 2001.

WTO Membership

“Instead of doing everything it can to comply with the letter and spirit of its World Trade Organization obligations, the Chinese government appears to be looking for ways to evade those rules,” Grassley said.

The Senate will vote “soon” on a measure aimed at getting China to raise the value of the yuan, Senator Charles Schumer of New York told Geithner at the hearing.

“This is fair warning,” said Schumer, a Democrat and lead sponsor of the legislation. Lawmakers, “despite the administration asking us not to do it, are going to move forward with our bipartisan legislation to provide specific consequences for countries that fail to adopt appropriate policies.” Schumer said yesterday that the Senate would vote within two weeks.

Geithner, in response, said “I recognize, and I think it’s very important for China to understand,” that Schumer’s legislation “has very broad support” from Democrats and Republicans.

U.S. Trade Gap

The U.S. Commerce Department, in its monthly report on the country’s trade balance, said today that U.S.-China trade totaled $126.5 billion in the first four months of the year, up 19 percent from January through April last year. U.S. imports of Chinese goods exceeded exports to China by $71 billion, a 5.7 percent increase in the bilateral trade gap from the year- earlier period, the report showed.

“We want China to provide a level playing field for the products of American workers and investments by American companies,” Geithner said. “And we want China to change its growth strategy to rely less on exports and more on consumption.” Geithner said the U.S. is “seeing some progress, but we still face many challenges.”

Since July 2008, the yuan has been held by officials around 6.83 per dollar, after Premier Wen Jiabao’s government allowed a 21 percent advance in the prior three years. In April, Geithner delayed the release of a twice-yearly report on whether China or any other country is manipulating its exchange rate.

Currency Report

Under questioning today, Geithner said he hasn’t decided when to release the currency report. “Once we get through the G-20 meeting we’ll take some stock,” he said, referring to a Group of 20 nations leaders’ summit in Toronto later this month.

Geithner told the Senate panel that “reform of China’s exchange rate is critically important to the United States and to the global economy.” It would be “in China’s own interest to allow the exchange rate to reflect market forces,” he said.

China has until the end of the month to strengthen its currency before Congress acts, JPMorgan Chase & Co.’s Rebecca Patterson said today.

“Treasury’s said, ‘We’re going to stay quiet; we’re not going to put any pressure on you,’” Patterson, head of foreign exchange at the private banking unit of JPMorgan, said during a Bloomberg Radio interview today on Surveillance with Tom Keene. “If it doesn’t happen by the end of June, we can’t hold the dogs back much longer -- no offense to the congressmen.”

--Editors: Brendan Murray, James Tyson

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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