| IMF economists say China's currenty is still undervalued at 5-27 per cent [File: EPA]
The US House of Representatives has approved legislation that would allow Washington to seek trade sanctions against China, a move aims at pressuring beijing to let its currency rise faster.
The move on Wednesday comes amid long-running dispute between the countries over trade and jobs.
The bill, passed by 348 to 79, treats China's exchange rate as a subsidy, opening the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.
To become a law, the measure has to be adopted by the Senate, where its prospects are unclear. Senate supporters hope to get a vote on a similar proposal after Congress returns following the November congressional elections.
"China's persistent manipulation of its currency contributes to the outsourcing of American jobs and poses a very serious problem that requires real action," said Sander Levin, the chairman of the House Ways and Means Committee.
House Speaker Nancy Pelosi said the bill would give president Barack Obama leverage in talks with China and "make it clear that if China wants a strong trading relationship with the United States, it must play by the rules."and may hope that just the threat spurs more movement from China.
Before the vote, China's central bank reaffirmed its pledge to increase the flexibility of the yuan and improve the way it manages the exchange rate.
US politicians have long threatened trade retaliation for what they see as China's policy of undervaluing the yuan to give its exports an unfair advantage.
But they have never sent the president any legislation to sign into law.
Obama and Chinese premier Wen Jiabao talked about China's currency and huge trade surplus with the US on the sidelines of the UN General Assembly last week.
"The reason that I'm pushing China about their currency is because their currency is undervalued," Obama said on Wednesday.
"That's not the main reason for our trade imbalance but it's a contributing factor."
Despite the yuan's modest gains against the dollar since Beijing allowed more movement in June, International Monetary Fund (IMF) economists estimate the yuan is 5-27 per cent undervalued.
China's tight leash on the yuan is under intense scrutiny as countries around the world look to export their way back to economic recovery, raising concerns they will intentionally weaken their currencies to gain an edge.
Japan intervened this month to weaken the yen for the first time in six years.
The US move is certain to further roil relations with Beijing, which resents the criticism and says the decision about the speed of currency reforms is its alone.
China, the largest foreign buyer of US government debt with holdings of nearly $847bn as of July, also says its big trade surplus with the United States is due to Americans saving too little and no longer making the goods China sells.
While Obama has not taken a position on the legislation, House majority Leader Steny Hoyer said politicians worked with the White House to ensure the bill did not violate World Trade organisation (WTO) rules.
After holding the yuan steady against the dollar through the financial crisis, Beijing began to allow for an upward drift against the dollar on June 19.
Since then, the yuan has hit its highest level against the dollar in more than five years but, at just over 2 per cent.