US Treasury Secretary nominee Timothy Geithner told lawmakers Obama believed "China is manipulating its currency" to keep it artificially low, prompting talk that a trade war is looming between the two powers.

"The Chinese government has never used so-called currency manipulation to gain benefits in its international trade," the Chinese commerce ministry said in a statement faxed to AFP.

"Directing unsubstantiated criticism at China on the exchange rate issue will only help US protectionism and will not help towards a real solution to the issue," said the statement.

Other Chinese economists said the comments were mostly aimed at the lawmakers whose support Obama needs to pass his 825-billion-dollar economic rescue plan.

"Obama took power during bad times both at home and abroad. Obama has to solve problems and they want to send a signal that they want to negotiate with the Chinese government on this issue," said Zhang Ming, an economist with the Chinese Academy of Social Sciences.

China's currency has long been a source of tension between the countries. Under the Bush administration, the treasury stopped short of accusing China of manipulation but did say the yuan was relatively undervalued against the dollar.

The yuan's nominal effective exchange rate, against a basket of currencies, appreciated by 12.66 percent last year, compared to a 1.69 percent rise in 2007 and a 1.55 percent fall in 2006, according to economists.

The yuan is widely expected to continue a slow and steady rise through 2009.

Depreciation talk flared up December 1 when the yuan posted its biggest single day fall against the dollar since it was allowed to trade within a narrow band in July 2005.

Beijing likely engineered the move to send a message on the eve of its final Strategic Economic Dialogue meeting with Bush administration officials, that it preferred Bush's strategy of prodding Beijing in private over Obama's tough words in public, JP Morgan wrote in a research note.

However, China knows reversing the yuan's climb "could spark a destructive round of competitive depreciation in Asia -- and possibly across all emerging markets -- that would destabilise world financial markets and economies even more," JP Morgan said.

China, the bank's analysts said, knows its falling exports are due to weak demand not because they are too expensive -- a problem a weaker yuan would not solve.

US lawmakers have long argued Beijing artificially depresses the yuan to boost Chinese exports, many of which end up on US retail shelves.

Geithner, who is expected to be confirmed as treasury chief, suggested tighter currency manipulation laws would ensure "countries like China cannot continue to get a free pass for undermining fair trade principles".

China has benefited from the historically undervalued yuan but fears that it is trying to depreciate the yuan could intensify the flow of money out of the country and put strain on the banking system, Logan Wright, a Beijing-based analyst at economic-researchers Stone & McCarthy.

"These forces, as well as the likely international political reaction from any currency depreciation, create powerful political and economic incentives to maintain the yuan's stability against the dollar over the next several months," Wright wrote.

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