Any rise in the yuan's exchange rate will be gradual, China's trade chief said on Monday in comments that underline the competing interests at the heart of Chinese policy-making.
Commerce Minister Chen Deming said a halt to the yuan's appreciation since mid-2008 was part of a panoply of pro-growth policies to prop up the economy during the global credit crunch.
Exiting from the stimulus does not mean all these measures will disappear. They will still be there, but there will be some fine-tuning, Chen told Reuters on the sidelines of the country's annual session of parliament.
China has effectively re-pegged its exchange rate at around 6.83 yuan per dollar since mid-2008 to help its exporters during the global financial crisis and is under intense pressure from the United States and Europe to abandon the peg.
The movement and degree of stability in the yuan in times of crisis ought to be different from when there is no crisis, he said. But he added: The direction of yuan reform will be gradual and controlled.
Central bank governor Zhou Xiaochuan, speaking on Saturday, also stressed the need for policymakers to proceed with caution.
But Zhou broke new ground by stating that exiting the stimulus would sooner or later spell the end of the special yuan policy adopted to counter the financial crisis.
This is the most explicit comment on the renminbi's exit from current de-facto peg made publicly by top Chinese policymakers so far, HSBC's chief China economist, Qu Hongbin, said in a note to clients. The yuan is also called the renminbi.
He said stronger economic growth, rebounding exports and the emergence of inflationary pressures supported his view that China would move away from the yuan's peg as early as next quarter.
Yet the pace of appreciation will likely be gradual. We expect USD/CNY exchange rate at 6.50 at the end of this year.
DON'T GET CARRIED AWAY
The yuan rose modestly in the offshore non-deliverable forwards (NDFs) market in response to Zhou's remarks.
The one-year dollar/yuan NDF hit a five-week low of 6.6200, falling from Friday's close of 6.6500. It recovered to 6.6420 in late afternoon, implying appreciation of about 2.85 percent over the next 12 months.
A dealer at a European bank in Shanghai cautioned against over-reacting to Zhou's comments.
The central bank, eager to curb inflation and achieve a better-balanced economy, may want a stronger exchange rate. But other parts of the government, including the Ministry of Commerce, care more about protecting exports, he said.
So I think NDFs should not over read Zhou's comments to predict an immediate and steep rise in the yuan, he added.
Indeed, Chen said Chinese exports would not truly recover until the global economy had put the crisis fully behind it.
If external demand has not recovered yet, how can we have a fundamental recovery? Chen said.
Wu Xiaoling, a former central bank vice governor, agreed that China would not focus on medium-term market-oriented reforms, including greater yuan flexibility, until global markets have stabilized.
Wu, a parliamentary delegate, mused that the yuan might not necessarily be undervalued if China's natural resource and labor costs matched global levels.
A country's currency rate is decided by market supply and demand in the short term. Fundamentally, it has also something to do with domestic prices, she told a news briefing.
BACK THE DOLLAR
Speaking separately to reporters, a top state banker said any speculation that China might stop supporting the dollar in the next few years was absolute nonsense.
Li Ruogu, chairman of Export-Import Bank of China, a lender tasked with supporting the country's foreign investments, said China should aim to stabilize the dollar and preserving its status as the leading global currency.
China has $2.4 trillion in official reserves, the largest stockpile in the world, and bankers believe about two-thirds of the total is invested in dollar assets.
I believe that, for now, supporting the dollar's stability and its international currency status is good for China, Li, a former deputy central bank governor, said in a group interview.
As China has a huge sum of foreign exchange reserves, a dollar collapse would bring nothing good to China, he added.
(Additional reporting by Zhou Xin in Beijing and Chen Yixin in Shanghai; Writing by Alan Wheatley; Editing by Tomasz Janowski)