U.S. Treasury Secretary Timothy Geithner will hold talks in Beijing on Thursday against a background of fresh signals from Chinese policymakers that they might be paving the way to let the yuan resume its rise.
Washington has been pressing Beijing to lift the value of the yuan and many U.S. lawmakers say that by deliberately holding down the yuan China is giving its firms an unfair export subsidy that costs jobs in many countries.
China's National Development and Reform Commission (NDRC), the nation's top economic planner, said on Tuesday that it would monitor exchange rate risks facing exporters, while an economist from the agency said Beijing should edge toward a more flexible yuan.
We should keep the yuan basically stable at a balanced and reasonable level, while strengthening analysis and monitoring and making announcements about risks in a timely manner to reduce exporters' risks and losses, the NDRC said in a policy overview issued on the central government's website, www.gov.cn.
The statement suggested policymakers are weighing what may happen if they let the yuan recommence its climb after keeping it yoked to the dollar since mid-2008.
On Wednesday China's central bank set the yuan's mid-point at 6.8259 per dollar, the strongest for the yuan in 10 months.
Dealers have been rushing to buy Asian currencies that may strengthen as well if China lets the yuan appreciate against the dollar. For example, the dollar fell to a near 23-month low of 3.1930 Malaysian ringgit on Wednesday.
The yuan will presumably be at the top of Geithner's agenda when he meets Chinese Vice Premier Wang Qishan on Thursday on his way home from financial partnership talks in India.
A U.S. Treasury spokesman, accompanying Geithner in Mumbai, declined to talk about the subject matter of the meeting in Beijing and said there would be no further statements.
The secretary and the vice premier have been working together to find an opportunity to meet in person for some time. The meeting was confirmed yesterday, he said.
U.S. Democratic Senator Charles Schumer, author of legislation aimed at forcing China to revalue its currency, issued a statement urging Geithner to be tough with Wang.
Every administration has thought it could get something done by talking to China. But years of experience have shown that the Chinese will not be moved by words; they only respond to tough action, said Schumer.
Schumer's bill threatens China with tariffs on some of its exports to the United States if Beijing does not allow the yuan to rise significantly in value.
Zhang Yansheng, director-general of the Institute for International Economic Research, a think-tank under the NDRC, said China wanted a freer-floating currency but was also wary of the potential pitfalls.
We also want the yuan exchange rate to be more flexible and based on market supply and demand relation, but the U.S. should be clear that it is a gradual process, he told Reuters.
Currently, Chinese enterprises do not have the capacity to hedge against currency risks and China also lacks an established system to manage foreign exchange risks.
Beijing let the yuan rise 21 percent against the U.S. dollar between July 2005 and July 2008 before effectively re-pegging the currency near 6.83 to the dollar to help its exporters surmount the global financial crisis.
The White House said on Tuesday that President Barack Obama would raise the currency issue with President Hu Jintao on the sidelines of a nuclear security summit in Washington next week.
Vice Foreign Minister Cui Tiankai told reporters that Beijing did not want economic disputes to get out of hand.
Of course between China and the United States, including in the sphere of economics and trade and finance, there are sometimes differing points of view. But above all, our two countries have very important common interests in these important areas that are constantly strengthening, said Cui.
Speculation Beijing will let the yuan start climbing before long has been fueled by an easing of Sino-U.S. tensions over the currency in recent days.
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 infuriated Beijing.
Speaking in India, Geithner said on Wednesday that the yuan would take a broader international role, calling that a healthy, necessary adjustment.
While Washington's delay of the currency manipulator report may give Beijing the space needed to resume yuan appreciation, most analysts think it will allow only a small rise, because it remains worried about the solidity of the global recovery.
Figures due this Saturday are expected to show China's first monthly trade deficit since April 2004.
Although economists think a deficit would be an anomaly, it could still give officials pause before letting the yuan rise.
The Commerce Ministry in particular has repeatedly demanded that the yuan be kept stable until exports have recovered strongly. The central bank, by contrast, would like a firmer currency to ease inflationary pressure from a red-hot economy.
China should let market forces play a bigger role in setting the level of the yuan, a professor at the Chinese central bank's graduate school said in a magazine issued by the bank which reached subscribers on Wednesday.
This kind of reform will further stress the role of market supply and demand in affecting the direction of the exchange rate, Professor Wu Nianlu wrote in China Finance magazine.
(Additional reporting by Chris Buckley and Kevin Yao and Doug Palmer in WASHINGTON; Editing by Alan Wheatley and Jerry Norton)