By Doug Palmer

WASHINGTON, March 28 (Reuters) - Two leading U.S. Senate critics of China's currency policy said on Wednesday they expected Congress to pass a "veto-proof" bill forcing Beijing to raise the value of its yuan <CNY=>us;CNY against the dollar.

Sen. Charles Schumer, a New York Democrat, told reporters the bill would be carefully crafted to abide by World Trade Organization rules while forcing "the Chinese to do something they won't do on their own."

Schumer and Sen. Lindsey Graham, a South Carolina Republican, testified before the Senate Finance Committee on what they see as the need for legislation to force China to allow a greater appreciation in the yuan.

Schumer told reporters it was clear Congress could not rely on the Bush administration to get China to move.

"Well-crafted legislation -- WTO-compliant and strong and effective -- is likely to pass with a veto-proof margin during this Congress," Schumer told the panel. "That's the message I hope the Chinese and the Bush administration take away from this hearing."

The bill would have to have two-thirds support in both the U.S. House of Representatives and the Senate to protect it against a veto by President George W. Bush, as that is how many votes are required for Congress to override a presidential veto.

Schumer and Graham pushed legislation through much of 2005 and 2006 threatening to impose a 27.5 percent tariff on imports from China unless that country took steps to significantly raise the value of its currency against the dollar.

Many lawmakers and manufacturers believe the Chinese yuan is undervalued by up to 40 percent, giving Chinese companies an unfair price advantage in international trade.

Schumer and Graham abandoned their bill after agreeing to work this year with Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and former committee Chairman Charles Grassley, an Iowa Republican, on joint legislation.

"Today's hearing showed that China must change its currency regime, and it is capable of doing so. Failing to accelerate exchange rate reform is bad for China, bad for America and bad for the global economy," Baucus said after the hearing.

Stephen Roach, chief economist at Morgan Stanley, told the panel that China should gradually move to a freely floating currency at a rate of 3 percent to 5 percent per year.

But Chinese currency reform by itself will not fix the massive U.S. trade deficit which is driven by other factors, such as the low U.S. savings rate, Roach said.

Morris Goldstein, a senior fellow at the Peterson Institute for International Economics, said China should immediately raise the value of its currency by 10-15 percent as a "down payment" toward further reform.

The U.S. Treasury Department also should formally label China as a "currency manipulator" in its semi-annual currency report, which would make clear the United States' desire for faster action on the issue, Goldstein said.

"The 6.5 percent appreciation of the RMB (renminbi) against the U.S. dollar since June 2005 has not even been sufficient to halt the cumulative improvement in China's competitiveness over the 2002-2007 period -- much less to make a real dent in China's huge external surplus," he said.

Graham told reporters the senators were working with the Bush administration to get them to be more aggressive. Asked if he thought U.S. Treasury Secretary Henry Paulson's strategic economic dialogue with China was yielding any results on currency reform, he answered "no."

"The goal ... is to get the administration off the sidelines, quit playing referee and become an advocate" for fairer trade with the Chinese, Graham said.

There is a consensus among both Republican and Democratic lawmakers that China's currency practices are having a "devastating" impact on U.S. manufacturers, he said.

Schumer was more critical of Bush administration efforts to prod China on the currency issue.

"I think it's pretty clear that we've given up on the administration. Secretary Paulson is a good man, but he's climbing up the same mountain that everyone else did, which is a lot of nice talk and not much action," Schumer said.

Neither senator offered any details on how their bill would confront China's currency regime. They said they would meet with U.S. Treasury officials in April to get their views and craft legislation over the next several months.