By JEANNINE AVERSA, AP Economics Writer 38 minutes ago http://news.yahoo.com/s/ap/20050517/ap_on_go_ca_st_pe/us_china_currency_6 WASHINGTON - The Bush administration, in its hardest stance yet, warned China on Tuesday that it likely will be accused of manipulating its currency to gain an unfair trade advantage over the United States â unless Beijing acts swiftly to overhaul its currency system. The administration has been prodding China in earnest over the last two years to stop linking its currency, the yuan, to the U.S. dollar. Manufacturers and other critics, including Democratic and Republican lawmakers in Congress, contend that China's currency system puts U.S. companies at a big competitive disadvantage and has contributed to the loss of U.S. factory jobs. The Treasury Department issued the warning as part of its twice-a-year report to Congress. However, it stopped short of finding that China â or any other major trading partner of the United States â was engaging in unfair currency practices. But the administration clearly stepped up the pressure on China, saying it could be branded a manipulator of currency if the country doesn't switch soon to a flexible exchange system â something advocated not only by the United States but also by other economic powers. A 1988 law requires the department to analyze countries' exchange rate policies and determine whether manipulation to gain unfair trade advantages is occurring. The law has economic sanctions that can be imposed on countries found in violation. "If current trends continue without substantial alteration, China's policies will likely meet the statute's technical requirements for designation" of currency manipulation, the Treasury Department's report said. American manufacturers say this system has undervalued the yuan by as much as 40 percent. The weaker yuan makes Chinese goods cheaper in the United States and American products pricier in China. "While China's 10-year-long pegged currency regime may have at times contributed to stability, it no longer does," the Treasury report said. The report called China's currency policies "highly distortionary" â posing a risk to, among other things, China's trading partners and global economic growth. The administration said it will monitor China's progress on moving toward a flexible exchange system "very closely over the next six months" in advance of the Treasury's next currency report that will be sent to Congress later this year. American manufacturers have pushed for China to be branded a currency manipulator, a designation that could ultimately lead to economic sanctions against that country. The administration has come under increasing pressure as America's trade deficit with China has soared to record levels, hitting $162 billion last year, the biggest deficit ever recorded with any country. Until recently, the administration had insisted its efforts at financial diplomacy were working to get China to allow its currency's value to be set by currency markets rather than controlled by the government. However, last month, the Senate by a lopsided 67-33 vote cleared a procedural hurdle that sets the stage for a vote on legislation that would impose across-the-board 27.5 percent penalty tariffs on all Chinese imports into the country unless China changes its currency system. Fearing the erection of protectionist barriers, the administration then began taking a tougher approach in its public comments. "It is widely accepted that China is now ready and should move without delay" to a flexible currency system, the Treasury report said. That echoes comments made recently by Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan that the time for China to act is now. For their part, the Chinese still insist they need more time to shore up their banking system so it can withstand the volatility that a flexible currency would introduce.