China aims to deflect U.S. pressure on yuan
(Reuters)
Updated: 2006-03-01 16:19

China on Wednesday let the yuan rise to its highest level since July's revaluation and restated its commitment to freer capital flows as U.S. officials began new talks aimed at reducing America's big trade deficit with China.

A bank clerk exchanges Chinese yuan for an equivalent amount of U.S. dollars in a bank in Liaocheng, east China's Shandong province, February 28, 2006. [Reuters]

Tensions over the deficit, which on U.S. figures rose to $201.62 billion in 2005, are rising ahead of a visit to Washington in April by President Hu Jintao.

The U.S. Treasury is also due to rule next month on whether China is deliberately manipulating its currency to gain an unfair export advantage.

The yuan rose as high as 8.0374 per dollar. It has now appreciated 0.9 percent since it was revalued by 2.1 percent on July 21.

Washington, under growing political pressure from the trade deficit, wants Beijing to let the yuan move much more freely.

China's People's Daily, said with an eye on the growing protectionist mood in the U.S. Congress, that trade issues should not be politicised.

"China is not deliberately seeking an overly large trade surplus and hopes to achieve a basic balance between imports and exports," the paper said in an editorial in its international edition on Wednesday.

Along with most economists, Washington believes that allowing market forces to work would push the yuan much higher given China's fat balance-of-payments surplus and $819 billion stockpile of foreign exchange reserves, second in size only to Japan's.

China plans to make the yuan basically convertible under the capital account in the near term," Zou Lin, a senior official with the State Administration of Foreign Exchange, was quoted as saying by the Shanghai Securities News.

However, letting more money leave China would work counter to Washington's intentions by easing some of the pressure on the yuan to rise, said Qu Hongbin, an economist with HSBC.

Meanwhile, making the yuan fully convertible, as opposed to basically convertible, would entail allowing local residents to freely invest their yuan savings overseas, Qu said.

"This won't happen until the problems of the domestic financial system are fixed -- a 10-year job, in our view," he said in a note to clients.