President Barack Obama, with, from left, Sen. Charles Schumer, D-N.Y., Sen. Patty Murray, D-Wash., Sen, Byron Dorgan, D-N.D., and Senate Majority Whip Richard Durbin, D-Ill., listen to remarks at the Democratic Policy Committee Conference at the Newseum in Washington, D.C., Feb. 3, 2010.

President Obama on Wednesday raised the issue of China's dollar-pegged currency at a time of rising tensions with the key trading partner.

In response to a question from Senator Arlen Specter  on "China violating international law with subsidies and dumping," which he termed "a form of international banditry," the President said he would not be in favour of revoking the trade relationships that have been established with China.  "I have shown myself during the course of this year more than willing to enforce our trade agreements in a much more serious way," he said.

"I also believe that our future is going to be tied up with our ability to sell products all around the world, and China is going to be one of our biggest markets, and Asia is going to be one of our biggest markets.  And for us to close ourselves off from that market would be a mistake," he said and added "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price.  That puts us at a huge competitive disadvantage."

China is America's second biggest trading partner after Canada.

China has effectively pegged the yuan at about 6.83 per dollar since July 2008 to assist exporters and in 2009, overtook Germany as the world’s No. 1 exporter of goods, despite experiencing its first annual decline in shipments in more than 25 years.

Between 1995 and mid-2005, China maintained  a 8.28 renminbi/yuan (renminbi: Mandarin for "people's currency"; yuan (Mandarin for "unit") peg to the dollar, which helped restore price stability.

China's foreign currency reserves (ex-gold) were $146bn in 1999; by 2006, they had topped $1trn and in April 2009, topped $2trn.

China held $790bn worth of US Treasuries in Nov 2009 --  up $77bn in a year.

Last year, the Petersen Institute for International Economics, a Washington DC think-tank, estimated that the Chinese currency was undervalued as much as 40% against the dollar. 

About half of China's exports are made by foreign-owned firms or joint ventures.

Last October, a US Treasury Department report, noted that of 17 currencies examined, two (the Saudi Arabian riyal and the Venezuelan bolivar) were officially fixed against the US dollar.

Over a six-month period, the value of every other currency, with the exception of China's had changed.

SEE: Finfacts articles:

July 2009: China has pegged currency to US dollar since July 2008 to help exporters; Emerging markets expected to keep currencies undervalued as crisis risks recede

Dec 2009: Obama may have to play the Nixon card with China in 2011

President Barack Obama listens to a question from Sen. Arlen Specter, D-Pa. Watching, from left are, Sen. Byron Dorgan, D-N.D., Senate Majority Whip Richard Durbin, D-Ill., and Senate Majority Leader Harry Reid, D-Nev.

Also on Wednesday, a Republican senator urged President Obama to formally label China a currency manipulator.

"China is a big beneficiary of international trade, yet it fails to allow its currency to float freely,"Senator Charles Grassley, a ranking member of the Senate Finance Committee, said in a statement, pointing out that he had criticised former President George W. Bush for deciding not to label Beijing a currency manipulator.

"President Obama has the opportunity to change course. His administration can label China a currency manipulator in its upcoming biannual report ... Maybe that will finally get China's attention and lead to a more level playing field for U.S. exporters,"Grassley said.

Other current points of tension between Washington and Beijing include President Obama's approval of a $6.4bn US arms deal with Taiwan, which has evoked threats of sanctions against US arms companies and a senior Chinese official said on Wednesday that an expected meeting this month between Obama and the Dalai Lama, the Tibetan spiritual leader, was not in the interests of the US at a time when it was trying to recover from the financial crisis.

"If the US leader chooses this period to meet the Dalai Lama, that would damage trust and co-operation between our two countries, and how would that help the United States surmount the current economic crisis?" said Zhu Weiqun, a vice minister who handles Beijing's contacts with the Dalai Lama.

On Tuesday, US senators voted unanimously to condemn the cyberattacks on Google and other companies that caused the search engine group to threaten to quit China.