U.S. Treasury Secretary Timothy Geithner said on Thursday that reform of China's exchange rate is critically important to the U.S. and global economies and a more flexible yuan was in China's interest.

Geithner, in testimony prepared for a hearing of the U.S. Senate Finance Committee, said Beijing's shackling of the yuan to the dollar was causing other Asian countries to intervene in foreign exchange markets at record levels.

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. A more flexible RMB (yuan) will allow market forces to play a more active role over time in facilitating strong, balanced and sustainable growth globally.

Geithner's remarks were his most critical on China's yuan exchange rate policies in months and were made at a hearing attended by a number of senators who have proposed punitive trade legislation aimed at China.

The U.S. Treasury secretary since early April had taken a softer approach toward China, delaying a much-anticipated report on whether Beijing manipulates the value of its yuan. Instead, Geithner chose to wait for a series of international meetings, including U.S.-China bilateral talks in Beijing at the end of May, and a Group of 20 leaders summit in Toronto later this month.

CHINA EXPORTS JUMP

But new Chinese data released on Thursday showed a big jump in exports in May, putting pressure on President Barack Obama to placate critics.

In his testimony, Geithner said the Obama administration wanted China to change policies that disadvantage American companies and to provide a more level playing field for U.S. products and investments.

He vowed the administrion would apply forcefully all remedies available under U.S. law to curb China's unfair trade practices, including anti-dumping and countervailing duty complaints.

But, echoing a refrain he has used since April, he said Beijing would find it in its own interest to have a more flexible yuan, also known as the renminbi.

A stronger renminbi would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export, he said. A more market-determined exchange rate also means that China will be able 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. (Reporting by David Lawder, Editing by Chizu Nomiyama)

Barack obama Timothy geithner U.S. China