The United States and China sparred over exchange rates at a meeting of Asia Pacific leaders on Sunday, pointing to tricky talks ahead for President Barack Obama when he flies to China to address economic tensions.

The discord surfaced at a summit of the Asia Pacific Economic Cooperation (APEC) forum in Singapore when a reference to market-oriented exchange rates was cut from a communique issued at the end of two days of talks. An APEC delegation official said Washington and Beijing could not agree on the wording.

That underscored strains likely to feature when Obama travels to Shanghai later on Sunday following moves by Washington to slap duties on various Chinese-made products and a growing drumbeat of pressure on Beijing to let its yuan currency strengthen.

It also suggested investors should be cautious about betting on a yuan appreciation after a central bank statement last week appeared to give the green light for strengthening.

China has pledged to keep monetary policy moderately loose, and their concern is still the economic recovery, said currency strategist Enrico Tanu Widjaja at OCBC Bank in Singapore. They will probably let the yuan strengthen when they start tightening policy.

Chinese officials have grown testy about the pressure over the yuan. Chinese banking regulator Liu Mingkang told a forum in Beijing on Sunday that ultra-low interest rates in the United States were fuelling speculation in overseas asset markets and threatened the global economic recovery. [ID:nPEK143256]

Obama pledged on Saturday to deepen dialogue with China rather than seek to contain the rising power, which is set to overtake Japan next year as the world's second-largest economy.

But issues ranging from the yuan and trade tensions to human rights could complicate what many regard as the most important relationship of the 21st century.

With regards to trade, this is a difficult time for the U.S.-China relationship, said Derek Scissors, trade economist at the conservative Heritage Foundation in Washington.

The signs are actually getting worse instead of better.

SPECULATION ON YUAN MOVE

Chinese President Hu Jintao ignored the yuan issue in several speeches at APEC and focused instead on what he called unreasonable trade restrictions on developing countries.

An earlier draft pledged APEC's 21 members to maintain market-oriented exchange rates that reflect underlying economic fundamentals. That statement had been agreed at a meeting of APEC finance ministers on Thursday, including China, although it made no reference to the yuan.

A U.S. official sought to play down talk of discord over the removal of the reference to currencies, and said the actual discussions took place among aides, not leaders.

He also signaled Obama was prepared to discuss the yuan when he gets to China. In an interview with Reuters last week, Obama said he planned to raise the issue on his trip.

Washington says an undervalued yuan is contributing to imbalances between the United States and the world's third-biggest economy. China is pushing for U.S. recognition as a market economy and concessions on trade cases that would make it harder for Washington to take action against Chinese products.

The yuan has effectively been pegged against the dollar since mid-2008 to cushion its economy from the downturn.

China is coming under growing international pressure to let it rise because its manufacturers have gained market share at the expense of rivals in countries whose currencies have risen against the falling dollar.

China's central bank said last week it would consider major currencies in guiding the yuan, suggesting a departure from an unofficial peg.

However, Chinese Vice Commerce Minister Chen Jian on Sunday played down talk of a shift in policy as well as expectations of a rise in the yuan's exchange rate.

Beijing may have forced APEC to tone down its language on currencies to avoid encouraging bets on yuan appreciation that would suck speculative capital into China and fuel asset bubbles and inflation.

By Friday dollar/yuan volatilities were implying the strongest expectations the Chinese currency would appreciate since June, and the market for offshore non-deliverable forwards pointed to a 3.6 percent rise in 12 months.

GLOBAL IMBALANCE

Obama told APEC leaders the world economy was on a path to recovery but warned that a failure to rebalance the global economic system would lead to further crises.

He said the world could not return to the same cycles of boom and bust that sparked the global recession.

We cannot follow the same policies that led to such imbalanced growth. If we do, we will continue to drift from crisis to crisis, a failed path that has already had devastating consequences for our citizens, our businesses, and our governments, Obama said.

Obama's strategy calls for America to save more, spend less, reform its financial system and cut its deficits and borrowing. Washington also wants key exporters such as China to boost domestic demand.

The APEC statement endorsed stimulus measures to keep the world from sliding back into recession and urged a successful conclusion to the Doha Round of trade talks in 2010.

APEC is the last major gathering of global decision-makers before a U.N. climate summit in Copenhagen in three weeks meant to ramp up efforts to fight climate change.

Those negotiations have largely stalled, but a U.S. official said Obama had backed a two-step plan by the Danish prime minister to aim for an operational agreement and to leave legally binding details until later.

The APEC statement dropped all references to emissions reductions that had been in earlier drafts.

(Additional reporting by Neil Chatterjee, Caren Bohan and Lucy Hornby and the Beijing bureaux and Paul Eckert in Washington; Writing by Dean Yates, Editing by John Chalmers and Bill Tarrant)

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