The U.S. Commerce Department could decide this week whether to launch a groundbreaking investigation into charges China is subsidizing exports of an aluminum product by undervaluing its currency, a government official said on Monday.

In a case that could further strain U.S.-China trade ties, U.S. producers of molded aluminum extrusions used by the automobile and construction industries filed a petition recently asking for steep duties on imports from China.

The petition's many complaints include a charge China subsidizes exports of aluminum extrusions by undervaluing its currency. It asks the Commerce Department to impose countervailing duties to offset that.

The Commerce Department has declined to investigate similar currency complaints in 10 previous cases covering a variety of manufactured products.

But industry groups have continued to include the charge in their petitions, arguing that Beijing gives exporters a subsidy by undervaluing its currency.

If Commerce agrees to investigate the matter, it would be several more months before it has to decide if China's currency practices are an illegal trade subsidy, and if so, how high a duty it should impose to offset them.

China, which defends its currency practices as an internal matter, would likely be upset by a formal Commerce Department decision to investigate whether its exchange-rate actions constitute a countervailable subsidy.

In recent weeks, the Treasury Department delayed a decision on whether China was manipulating its currency for an unfair trade advantage, in part to give Beijing more time to revalue its currency without being hit with that label.

Tim Truman, a spokesman for the Commerce Department's International Trade Administration, said he couldn't comment on specific details of the aluminum extrusion case.

But we will be announcing our initiation decision on the petition as a whole on Wednesday, Truman said of the decision whether or not to launch an anti-dumping and countervailing duty investigation.

Gilbert Kaplan, an attorney at King & Spalding representing the U.S. aluminum extrusion producers, said China's undervalued currency met the three major tests of a subsidy because it is financial contribution from the government that provides a benefit to a specific industry.

The last element of that definition could be the most important since China says it manages its currency for its entire economy and not any specific sector.

Kaplan said his law firm submitted a study showing 70percent of all currency transactions in China are done by exporters and that is specific enough under U.S. trade law for the United States to impose a countervailing duty.

This satisfies the kind of test that Commerce has been using for many, many years to show specificity. We put in strong economic evidence that it is specific, he said.

In February, a bipartisan group of 15 U.S. senators urged Commerce Secretary Gary Locke in a letter to treat China's currency practices as a subsidy under U.S. trade law.

Department officials subsequently said they would look at the issue again in an investigation started last year on imports of coated paper from China.

On Monday, a coalition of labor and manufacturing groups urged Locke to initiate currency probes in both the aluminum extrusion and coated paper cases.

There can be no doubt that China's large-scale intervention in the currency markets and the significant undervaluation of its currency acts as a subsidy to Chinese exporters to the U.S., said Scott Paul, executive director for the Alliance for American Manufacturing.

Kaplan said he expected Commerce to announce its decision whether to investigate in both cases this week.

(Reporting by Doug Palmer; Editing by Andrew Hay

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