By David Lawder

BEIJING (Reuters) - China's excess industrial capacity will have a "corrosive" impact on its future growth and efficiency unless it is reduced, U.S. Treasury Secretary Jack Lew said on Sunday, adding that it was also causing distortions in global markets.

Lew, speaking to students in Beijing, said he hoped to make progress on the excess capacity issue in bilateral meetings with senior Chinese officials starting on Monday in Beijing. He noted that past discussions had eased currency tensions between the world's two largest economies.

"Excess capacity is not just a domestic issue in China," Lew said at Tsinghua University. "The question of excess capacity is one that literally has an enormous effect on global markets for things like steel and aluminum, and we're seeing distortions in global markets because of excess capacity."

A flood of Chinese steel into the United States has prompted the U.S. Commerce Department to impose anti-dumping and anti-subsidy duties on a wide-range of Chinese steel products, while U.S. business groups have complained about new Chinese regulations they say favor local firms.

China, which now produces more than half of the world's steel, has criticized U.S. anti-dumping duties targeting Chinese steelmakers as irrational and harmful to diplomatic ties. Beijing has said it needs time to address its excess capacity problem.

Lew said excess Chinese steel capacity was causing problems for steel-producing economies worldwide, and government subsidies were at the root of the problem by encouraging overbuilding.

"Excess capacity ultimately is corrosive of an economy's efficiency," Lew said. "It means you have misallocation of resources, it means that ultimately, the only way to clear the market is to sell things at a price that is below what the world market price would otherwise be."

Lew credited past sessions of the annual U.S.-China Strategic and Economic Dialogue talks with helping to reach understandings that have made currency less of an irritant for the two countries. The Treasury did not designate China as a currency manipulator in its recent currency report because it found that China's recent interventions were not problematic, he said.

China's latest interventions have been aimed at supporting the yuan's value, not pushing it down.

"It's fundamentally in China's interest not to have an undervalued exchange rate," Lew said, adding that a market-driven yuan would benefit Chinese consumers' purchasing power.

"Having a strong consumer in China is central to the future of China's growth," Lew added.

Lew also said he hoped to make progress on market access, including efforts to open China's financial services and health care markets.

(Reporting by David Lawder; Writing by Ben Blanchard and Megha Rajagopalan; Editing by Andrew Bolton)