By Doug Palmer and Glenn Somerville
WASHINGTON, July 6 (Reuters) - The Obama administration likely won't risk a diplomatic spat with China by calling it a currency manipulator in an overdue Treasury report, leaving it to Congress to decide whether to get tough with Beijing.
Analysts say politics, and a desire to not stop yuan reform in its tracks, now drives the U.S. decision on whether China is deliberately undervaluing the yuan.
But even if the Senate presses forward with a vote on legislation threatening China with duties on its exports, President Barack Obama can count on the House of Representatives to stop a bill from reaching his desk, analysts said.
U.S. law requires the Treasury Department to decide every six months whether any country manipulates the value of its currency to gain an unfair trade advantage, and many lawmakers and economists believe that China is doing just that.
The latest determination could come as soon as this week.
Even with China's June 19 decision to end a peg between the dollar and the yuan, U.S. trade groups say the Chinese currency is 25 percent to 40 percent undervalued when compared with the dollar. They claim that has give an edge to the Asian export giant that has cost millions of U.S. manufacturing jobs.
Following the pattern set by former President George W. Bush, Obama has resisted formally labeling China a currency manipulator while publicly pressing it to allow market forces a greater role in setting the yuan's value.
"If you look at this report over the past six or seven years -- in the period when concern about China's currency practices was growing most quickly -- you can see that it is no longer an economic analysis, it's a politically driven report," said Morris Goldstein, senior fellow at the Peterson Institute for International Economics.
The United States needs China's help on issues ranging from North Korea to Iran. Calling Beijing a currency manipulator could make it less likely to cooperate, even though that label carries no immediate penalty.
But the tensions over the yuan are part of broader dynamic, with many U.S. companies frustrated over China's continued failure to stop widespread piracy and counterfeiting of U.S. goods while pursuing industrial policies that discriminate against foreign suppliers.
The latest Treasury report was due April 15, but Treasury Secretary Timothy Geithner announced in early April he was delaying it until after a summit of the Group of 20 leading economic powers in late June to give China more time to act.
One week before the G20 meeting, Beijing loosened the yuan from its two-year-old peg to the dollar. Since then the yuan has appreciated about 1.13 percent.
Although that's much less than U.S. lawmakers want, Obama is unlikely to rile Beijing by calling China a manipulator.
"It's not in the cards," said Goldstein. "Treasury has been pretty consistent in saying that it didn't want to go that way in trying to influence China."
But with congressional elections fast approaching in November and the U.S. trade deficit with China on track to exceed $200 billion again this year, lawmakers may not be content to let the matter end there.
Senator Charles Schumer, a Democrat, has repeatedly said he wants a Senate vote on a bill threatening China with duties on its exports if doesn't significantly raise the value of its currency.
"Schumer's going to keep bothering people until he gets a vote on this," said Bill Reinsch, president of the National Foreign Trade Council, one of several U.S. business groups opposed to the Schumer bill.
"It's a political year. He's running. (Senate Majority Leader) Harry Reid's running. Everybody's running. And if Schumer wants a vote on it, eventually I think they'll find a way to give it to him," Reinsch said.
But leaders in the House have more control over what reaches the floor, he said.
"On a matter like this that's highly sensitive," said Reinch. The House "leadership is going to listen to what the administration says" and not allow a vote even in the likely event the Senate passes a bill.
Goldstein said he believed China would continue to give just enough on the yuan to head off legislation.
"Congress is going to do a lot of huffing and puffing on this but the signs are China sees Congress as a paper tiger on this issue and has learned how to work Congress," he said. (Editing by Leslie Adler)