China's signal that it will ease its currency's 23-month-old peg to the dollar will spare the country from U.S. lawmakers' wrath only if it opens the door to significant upward movement in the yuan.

Without quick follow-up by China to its terse announcement on Saturday, Democrats and Republicans eager to show voters they are looking out for U.S. jobs before congressional elections in November will renew a drive to punish China for currency manipulation.

U.S. President Barack Obama could still formally label China as a currency manipulator that suppresses the value of its yuan for unfair trade advantages and the United States could treat China's currency as a subsidy warranting U.S. duties on more Chinese imports.

Beijing's new currency regime does little to stop efforts in the U.S. Congress to slap duties on Chinese imports, although time might be running out for lawmakers restricted by a busy agenda that includes a major reform of financial regulations and perhaps an energy bill.

Many legislators will start campaigning around September for the elections in November.

Just days before leaders of the Group of 20 major developed and developing nations meet in Toronto, China's central bank said it would gradually make the yuan's exchange rate more flexible, in a possible return to policies it pursued from 2005 to 2008.

But Beijing all but ruled out a one-off revaluation or major appreciation sought by critics such as Democratic Senator Charles Schumer, leader of a bipartisan group of lawmakers threatening to pass legislation to prod China to move.

Congress and the U.S. Treasury Department should hold fire and see how China implements the policy and, critically, how Beijing responds to any yuan rise in financial markets, said a prominent critic of Chinese currency policies.

If they let the rate start going up on a one-shot basis, that is significant, or look like letting it go up consistently -- by say a percent or so a month. Either of those should be enough for the Treasury or the Congress to say 'OK, this is now moving in the right direction,' said C. Fred Bergsten, head of the Peterson Institute for International Economics.

But if this is just a statement of principle and nothing much happens for a couple weeks or a couple months, then you have to resume the pressure.

STRONG LEGISLATION

China said on Sunday it will keep the yuan's exchange rate at a basically stable level, prompting criticism from Schumer, the main hawk on China in Congress.

Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off, Schumer said, calling for strong legislation by Congress.

China has held the yuan at roughly 6.83 to the dollar since July 2008 in an attempt to insulate the fastest-growing major economy from the ravages of the global financial crisis.

For the three years before that, it loosened the peg and gradually let the yuan rise about 21 percent in value, which took the steam out of anger in Congress, although many lawmakers and manufacturers were upset it did not rise more.

Sander Levin, chairman of the House of Representatives Ways and Means Committee, indicated Congress would not be mollified if China only tinkered with its exchange rate.

We have seen actions like this before and it is clear that China did not allow enough appreciation the last time it adopted a policy like this one, from 2005 to 2008, he said.

Many Western economists estimate the yuan is still undervalued by 25 percent to 40 percent, giving Chinese companies a huge price advantage in international trade.

A U.S. manufacturing group that blames China's currency for the loss of more than a million jobs said its members still want Congress to keep up the pressure on China.

Unless the move is rapid and significant, China's announcement is nothing more than a cynical ploy ahead of the G20 and in the wake of mounting congressional pressure, said Scott Paul, executive director of the Alliance for American Manufacturing.

BRIEF COOLING-OFF PERIOD

Anger about the exchange rate has coalesced behind a bill advanced by Schumer in the Senate and others in the House that would require the Commerce Department to treat currencies seen as undervalued as a subsidy so that firms could seek duties against them.

The bill is a much milder version of legislation Schumer and colleagues sponsored several years ago that would have hit all Chinese goods with a 27.5 percent tariff.

The latest bill would probably add to the 3 percent of U.S. imports from China already covered with countervailing or anti-dumping duties.

Chinese leaders now have put the onus on Obama and Treasury Secretary Timothy Geithner to gauge if they can credibly tell Congress that Beijing is not manipulating its currency.

Obama complained loudly about Chinese currency manipulation during his 2008 presidential campaign but resisted labeling Beijing as a currency manipulator in two semi-annual Treasury reports issued during the peak of the global crisis.

As the world economy began to stabilize, U.S. complaints about China's exchange rate policies resurfaced.

Geithner postponed the Obama administration's third review of China's currency practices, which was due on April 15, in effect giving Beijing until the G20 leaders' meeting to act.

Schumer and like-minded lawmakers are also pressing the Commerce Department to begin slapping countervailing duties on some Chinese goods even without new legislation.

In two cases involving coated paper and an aluminum product, U.S. officials are weighing arguments that China's undervalued currency is itself a trade subsidy.

Raghuram Rajan, economics professor at the University of Chicago and former chief economist at the International Monetary Fund, said Beijing's announcement will allow both China and the U.S. to cool off before either side does something to precipitate a trade war.

But U.S. politicians do not want to be seen as weak on China before the congressional elections in November.

Even if Washington gives China a pass in the delayed currency manipulation report, now expected by early July, the next semi-annual report is due on October 15, just weeks before election day.

(Additional reporting by Emily Kaiser; Editing by John O'Callaghan)

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