An adviser to China's central bank flashed mixed signals on Thursday about the outlook for the yuan ahead of a hurried visit to Beijing by U.S. Treasury Secretary Timothy Geithner.
Geithner is likely to make the case in talks with Vice Premier Wang Qishan that it is in China's, as well as the world's interest, to permit a renewed rise in the currency.
Beijing has pegged the yuan near 6.83 to the dollar since mid-2008 to help its exporters weather the global crisis, drawing increasing complaints from Washington that the yuan is seriously undervalued, handing Chinese firms an unfair trading advantage.
Xia Bin, a recently appointed member of the central bank's monetary policy committee, said China should return to its pre-crisis way of managing the yuan as soon as possible.
Between July 2005 and 2008, China operated a managed float that saw the yuan gradually gain 21 percent against the dollar.
But Xia that a big rise in the yuan would harm the global economy and U.S. consumers, who would have to pay more for goods imported from China.
"If China's economy cools off due to a large one-off appreciation, it will not benefit the world economy or U.S. consumers because costs will rise," Xia told a conference in Shanghai.
Yuan appreciation over the next 12 months implied by offshore forward markets inched down to 2.83 percent on Thursday from 3.00 percent at the previous close.
Chinese policymakers have repeatedly stressed the gains that currency stability has delivered during the crisis, not least by allowing Beijing to bend its efforts to reviving the world's third-largest economy.
Xia said Chinese demand had accounted for half of global growth last year. Beijing also argues that America's $227 billion trade deficit with China reflects low U.S. savings — something that cannot be addressed just by tweaking exchange rates.
"The core interest of the U.S. government at the present is not the issue of yuan appreciation. They all understand that a moderate rise in the yuan's exchange rate will not resolve the fundamental problems of the U.S. economy, nor high U.S. unemployment," Xia said.
China chalked up double-digit growth in the fourth quarter of 2009 and grew 8.7 percent for the year as a whole.
It remains wary, however, of declaring victory over the crisis, fearing the global recovery will fade and hit Chinese exports anew.
"Against the current global economic backdrop, we cannot open up the exchange rate given the structure of China's economy," Xia said.
While stressing the merits of currency stability, Xia acknowledged the merits of letting the yuan float more freely at some point.
"In the long term, the yuan's exchange rate should be more flexible," he said. Xia proposed that, in a few years, China should steer the yuan according to a basket of currencies.
Under the July 2005 reforms, Beijing ostensibly already refers to a basket of currencies in managing the yuan. But in practice, economists say, it is only the dollar that counts.
China has been dropping hints that it is preparing to abandon its de facto dollar link.
Central bank chief Zhou Xiaochuan has called the peg part of a special policy to respond the crisis, while various government departments have been asking exporters how much of a rise in the exchange rate they could cope with.
Speculation that Beijing will let the yuan rise before long has been fuelled by a recent easing of Sino-U.S. tensions over the currency.
Geithner said at the weekend he was delaying an April 15 report on whether China manipulates its currency.
A finding to that effect would have been a slap in the face to President Hu Jintao, who visits the United States for a nuclear security summit next week.
Washington and Beijing are trying to patch things up after U.S. arms sales to Taiwan and China's dispute with Google over Internet freedom made for a rocky start to 2010.
Geithner was holding talks in Hong Kong on Thursday with government officials and did not speak to reporters.
He is expected to pay a brief evening visit to Beijing.
The surprise meeting with Wang was arranged on Tuesday and announced by Geithner's aides in Mumbai on Wednesday.
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