The growing sentiment in the US Congress to penalize China for its currency policies might lead to serious consequences for both countries, economist said.

US lawmakers Wednesday unveiled legislation which would punish countries with "misaligned" currencies, hours after the Treasury stopped short of branding China a "currency manipulator," a designation that could lead to economic sanctions.

The Treasury report said the policies have left the Chinese yuan undervalued but that US officials could not conclude that this was a result of a deliberate effort to gain an unfair trade advantage.

This failed to assuage lawmakers who claim the yuan is undervalued by as much as 40 percent, and contend this is a key factor in the loss of US manufacturing jobs and a 232.5-billion-dollar bilateral trade deficit last year.

"This bill requires the Treasury Department to take firm but fair action when other nations play games with the US dollar," said Senate Finance Committee chairman Max Baucus.

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The committee's top Republican, Senator Charles Grassley, denied the bill was specifically targeted at China.

"We are not picking a fight with anyone. Twenty years ago this legislation could have applied to Japan, tomorrow it could apply to country 'X.'"

Many economists say such measures would be counterproductive and threaten the growing ties between the two economies on trade and investment.

"These kinds of punitive measures would be shooting ourselves in the foot," said Nariman Behravesh, chief economist at the research firm Global Insight.

"It would hurt our trade relationship, and hurt the willingness of the Chinese to invest in the US. There's no question that China has become the favorite scapegoat in the same way Japan was 20 years ago."

Beijing has promised to "respond" to any new measures, and some fear a downward spiral of protectionism if the bill succeeds.

"Protectionism begets protectionism, and any attempt by the United States to limit market access or impose higher costs on imports is likely to provoke similar measures from other parts of the world," said Joseph Quinlan, market strategist at Bank of America.

"Tit-for-tat protectionism would benefit no one, especially not the US multinationals presently enjoying the best of both worlds."

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