The Obama administration faces a tough call Friday whether to label China a currency manipulator, a move long demanded by many U.S. lawmakers but also a potentially big wrench in an important relationship.

The Treasury Department will release its semi-annual report on the currency practices of major U.S. trading partners at 1 p.m., industry sources said.

A desire to look tough on “unfair” trade practices before the U.S. congressional election on Nov. 2, in which Democrats are battling to keep control of Congress, could tempt President Barack Obama to cite China for the first time in 16 years.

But concern about angering the largest holder of U.S. government debt and the need for Chinese support on a host of international issues could mean continuing diplomatic efforts that have resulted in a nearly 2.5 percent rise in the value of China’s yuan against the dollar in recent months.

It is a fine line and many observers think Obama will opt to play it safe with Beijing and give it another pass.

China left little doubt Friday about the rancor that would ensue if it is branded a currency manipulator — a largely symbolic move by the United States that would mandate more consultations with Beijing but no immediate penalties.

“It is entirely wrong for the United States to make an issue of China’s trade surplus and hence put pressure on the yuan exchange rate,” Commerce Ministry spokesman Yao Jian said. “The Chinese yuan should not be a scapegoat for United States’ domestic economic problems.”

China has also come under fire from Europe as arguments over the appropriate exchange rates to set the global economy back on track intensify before two meetings of the Group of 20 leading economies in South Korea.

LETTER OF THE LAW

A U.S. industry official, speaking on condition he not be identified, said he thought chances had increased the Treasury Department will label China as a currency manipulator when it releases the semi-annual report.

“The tone of the rhetoric has changed,” the official said, referring to a recent speech in which Treasury Secretary Timothy Geithner argued forcefully that markets, not governments, should determine exchange rates.

Washington argues that Beijing could bring about better balance in the global economy by reducing its reliance on exports for growth and letting the yuan rise.

This would alleviate the pressure soaring currencies are placing on many emerging market economies, Geithner has said.

China has argued that moving too quickly with currency reforms could devastate its economy. It has placed blame on the United States for an easy monetary policy that has weakened the dollar and put pressure developing economies.

The Treasury Department is mandated by law to issue a report every six months on whether any country is manipulating its currency for an unfair trade advantage.

U.S. lawmakers, including House of Representatives Ways and Means Committee Chairman Sander Levin and Senate Finance Committee Chairman Max Baucus, both Democrats, have long hurled that charge at China.

But the last time any administration — Republican or Democrat — has cited a country under the 1988 currency law was in July 1994, when China was put in the spotlight.

Erin Ennis, vice-president of the U.S.-China Business Council, said given some other governments’ intervention in currency markets, “our recommendation would be to name every country that’s doing it to make sure it’s clear that this behavior is unacceptable from any country.”

“REASONABLE AND BALANCED LEVEL”

The Peterson Institute for International Economics has identified other currencies in East Asia it believes are undervalued against the dollar such as those of Japan, Malaysia, Singapore, the Philippines and Thailand.

Geithner delayed the April 15 report until July 8 to give China more time to act on its own. Shortly before a summit of G20 leaders in late June, Beijing unshackled the yuan from a nearly two-year-old peg to the dollar.

While the move was initially welcomed by the Obama administration, it became a source of irritation when the yuan barely rose in subsequent months.

It has risen more rapidly since two top White House advisers visited Beijing in September but not enough to stop the House from approving legislation allowing the United States to slap duties on imports from countries with fundamentally undervalued currencies.

In an article published on Friday, Chinese central bank governor Zhou Xiaochuan pledged a continuation of yuan reform but only on Beijing’s gradual terms.

“The yuan exchange rate will be basically stable at a reasonable and balanced level,” he wrote in China Finance, a magazine published by the central bank.

Derek Scissors, a research fellow at the Heritage Institute in Washington, said: “The odds still are that Treasury won’t cite.”

But he hedged his bet, saying many in Congress now believe “the yuan only moves when political pressure is high. That argues for finding manipulation this time.”

The Obama administration might also want to cite China in the hopes of reducing the chance the Senate approves the currency bill already passed by the House, out of concern the legislation could spark retaliation from Beijing.

In congressional testimony last month, Geithner suggested it would be meaningless to cite China because it would only trigger consultations under the 1988 law. He noted that the administration was already talking with Beijing.

“I think we can say with certainty that Mr. Geithner is of the view that naming them a manipulator has no practical consequence and therefore shouldn’t be done,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. “The real question is whether or not political forces are going to force him to name China.”