China on Wednesday rejected criticism of its exchange rate policies and said it was being made a scapegoat after the U.S. Congress threatened to slap duties on Chinese goods unless it revalues its yuan.

Many U.S. lawmakers, with strong backing from economists, believe the yuan is undervalued by at least 25 percent, giving Chinese companies an unfair edge in trade -- one seen as more critical now that the U.S. economy is struggling to recover from the worst downturn since the 1930s.

The heat is rising quickly in the long-running dispute over China's exchange rate regime, with a bipartisan bill introduced on Tuesday in the U.S. Senate that aims to press Beijing to let its currency rise in value.

With key committees of the U.S. Congress setting hearings this month on the currency issue, the bill's co-author, Democratic Senator Charles Schumer, said his move to wake up this administration enjoyed broad support in Congress.

The time is right. Everyone is fed up, he said.

Now everyone knows that China is stonewalling, he told Reuters, contrasting his new effort with a 2005 push for a bill that was set aside as Washington tried dialogue with Beijing.

The managing director of the International Monetary Fund, Dominique Strauss-Kahn, added to the pressure on Beijing, saying that the yuan is undervalued.

Focusing on the yuan will not help to solve problems in the Sino-U.S. bilateral trade relationship, a Chinese Commerce Ministry official told Reuters.

We oppose the over-emphasis on the yuan's exchange rate, the official said, when asked about the bill. The yuan's exchange rate is not a magic potion for solving global economic imbalances.

In Geneva, a senior China diplomat said the U.S. lawmakers were unfairly blaming Beijing for their own woes.

They should not blame the problems they have by finding a scapegoat in China, He Yafei, China's new ambassador to the United Nations in Geneva, told a briefing.

The apparent hardening of positions drove the yuan to a three-week low against the dollar in the offshore forwards market, implying just 2.4 percent of appreciation over the next 12 months.

Ding Zhijie, a professor at the University of International Business and Economics in Beijing, said U.S. pressure on the exchange rate was totally counter-productive.

With such heavy pressure from the United States, any move would look like giving in to foreign pressure -- for both the Chinese government and the Chinese public, it would be unacceptable, said Ding, who provides advice to the government.

China's official Xinhua news agency said Washington was making Beijing unfairly carry the blame for U.S. economic woes ahead of Congressional elections in November.

Focusing on China's yuan currency can create a clear target, offering an explanation to the unemployed of why they lost their jobs, it said.

U.S. concerns about the yuan in fact go back more than five years, but some American analysts argue that it is unwise for Washington to confront Beijing on its own when many countries have the same complaints about Chinese policy.

The U.S. should avoid actions that would re-frame this legitimate multilateral concern, best approached in the context of the G20's commitment to address global imbalances, into a bilateral US-China issue with escalating recriminations on both sides, Daniel Price, a lawyer at Sidley Austin who was President George W. Bush's international trade adviser.

SHIFTING CIRCUMSTANCES

The World Bank weighed in, recommending a stronger exchange rate and a tighter monetary policy to restrain inflation expectations and asset bubbles in China.

The case for greater exchange rate flexibility had, on balance, increased over the last year, Ardo Hansson, the bank's lead economist in Beijing, told a news conference.

If there is a concern about inflation, if there is a concern about sensitive capital inflows, this is part of the arsenal for dealing with these policy issues, he said.

IMF chief Strauss-Kahn said a stronger focus by China on domestic-led growth would help the yuan appreciate.

Some currencies in Asia are undervalued, especially the renminbi, he told a committee of the European Parliament in Brussels. The renminbi is another name for China's yuan.

In Beijing, the government's stance on the yuan has been consistent and was unchanged, the Chinese official said.

He cited Premier Wen Jiabao and Commerce Minister Chen Deming, who have said a stable yuan has contributed to both the Chinese and the global economic recovery.

FRICTION OVER DEFICIT

China has in effect pegged the yuan near 6.83 to the dollar since mid-2008 to cushion its exporters from the global financial crisis.

Rising inflation and exports fueled market expectations Beijing was on the cusp of resuming the gradual path of appreciation it followed for three years starting in mid-2005.

Wen on Sunday recommitted China to pushing ahead with reform of the yuan's exchange rate mechanism, leaving the door open to reintroducing exchange rate flexibility.

But the premier also said that the yuan was not undervalued and said calls for appreciation were tantamount to protectionism.

Schumer said Premier Wen's comment on Sunday denying that the yuan was undervalued was the straw that broke the camel's back in his decision to move on his legislation.

The U.S. trade gap with China narrowed to $226.8 billion in 2009 from a record $268.0 billion in 2008.

But with the administration of President Barack Obama keen to expand exports and jobs, the deficit remains a point of friction between the two powers, which have also been at odds over human rights, Tibet and U.S. arms sales to Taiwan.

Obama's administration must decide whether to label China as a currency manipulator in a semi-annual Treasury Department report due on April 15.

(Additional reporting by Doug Palmer, Zhou Xin, Alan Wheatley and Chris Buckley in Beijing, Jan Strupczewski in Brussels and Jonathan Lynn in Geneva; Editing by Jeremy Laurence, Sanjeev Miglani and Chizu Nomiyama)

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