BEIJING, May 20 (Reuters) - Just a few weeks ago, there was virtually unanimous agreement among investors and economists that China was on the cusp of dropping the yuan's peg to the dollar, while the debate centred on how it might happen.

The reverse is now true.

When the yuan will be unshackled has become a matter of great uncertainty, with some believing that Europe's debt woes and turbulent global markets will delay any move by Beijing.

But as to how the exchange rate regime will be reformed, there is now virtually unanimous agreement on one key aspect: whatever Beijing does, the yuan's rise will be extremely small. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The Yuan Debate Top News page MARKET SIGNALS on the yuan [ID:nSGE63F0FM] FACTBOX on yuan forecasts [ID:nYUANVIEW] FACTBOX on China's yuan divisions [ID:nTOE63D03G] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The decision to reintroduce exchange rate flexibility is of such political importance, both domestically and internationally, that it will be taken by President Hu Jintao and the ruling Communist Party's top leaders.

Here are some of the options they will be considering:


* Possible by end-June, but delay to Q3 increasingly likely

After being allowed to gain 21 percent against the dollar between July 2005 and July 2008, the yuan CNY=CFXS was then repegged near 6.83 per dollar to help Chinese exporters ride out the global credit crunch.

A solid consensus appears to have formed among policymakers -- with some dissenters in the pro-export Ministry of Commerce -- that this policy should eventually be changed: it no longer makes sense for a dynamic China to slavishly track the dollar, a currency that many in Beijing regard as volatile and unsound.

But the debt crisis in Greece has muddied the waters about the timing of the de-pegging, which once seemed imminent.

A major reason for fixing the yuan in place in mid-2008 was to give Chinese financial markets, and not just exporters, a sense of stability when volatility reigned abroad.

This view is once again in the ascendancy in Beijing.

China will help the world recover from its current financial crisis by continuing to hold the yuan stable, Commerce Minister Chen Deming said this week. [ID:nTOE64I07R]

Paradoxically, as global markets reel, the political optics become more favourable for yuan appreciation.

China cannot be seen to be bowing to foreign demands. And with the attention of the world focused on Europe's debt troubles, foreign calls for a stronger yuan have all but died away. [ID:nTOE64D03A]

Critics will not stay quiet forever.

U.S. officials have said they will nudge Beijing to move on the yuan at the high-level U.S.-Chinese Strategic and Economic Dialogue next week. [ID:nN19236087] If the yuan is still frozen in place by the time of a Group of 20 summit in Canada in late June, foreign pressure will start mounting again.


* Rise likely to be very gradual; any revaluation, tiny

The global dollar surge this month means that the yuan has also soared against a trade-weighted basket of currencies and is likely to lead China to scale back how much appreciation it will allow once it abandons the dollar peg.

A Chinese commerce ministry report on Wednesday said the yuan had risen nearly 14.5 percent against the euro so far this year and predicted that exports would suffer. [ID:nTOE64H09H]

A government adviser in Beijing said last month that he expected the People's Bank of China to quietly take the brakes off the yuan by nudging the currency's daily midpoint higher.

Standard Chartered, among others, is looking for much more flexibility in the PBOC's daily fixings. The bank ruled out a big one-off move, which it said would look strange given comments in March by Premier Wen Jiabao that the yuan was not undervalued.

Capital Economics thinks China will let the yuan rise at some point over the next month, but warns that the long-awaited move could be disappointing, bringing the issue back to square one before long.

The pace of gains should be meagre, and trade tensions won't fade for long, economist Mark Williams wrote in a note this week.

Offshore yuan forwards are pricing in 1.85 percent appreciation against the dollar over the 12 months, down from late April, when they implied a rise of 3.5 percent. [CNY/]


* Gradual band widening likely, accompanied by a shift to managing the yuan against a basket of currencies.

Many economists expect the PBOC to widen the yuan's daily trading band, currently plus or minus 0.5 percent from its morning midpoint against the dollar, introducing two-way risk into the market. Traders would no longer be able to assume that the yuan was on the up escalator day in, day out.

A growing number of economists expects China to introduce even more flexibility by managing the yuan in relation to the value of a basket of currencies, much as Singapore does, rather than simply tracking the dollar.

Because the currencies in the basket would bounce around, the day-to-day direction of the yuan would be uncertain -- thus deterring the speculative hot money that China abhors -- even if Beijing was targeting a gradual trend appreciation.

Several economists said that a subtle change in wording last week in a central bank monetary policy report indicated that the objective of targeting a basket was alive and well.

Although the wording about managing the yuan with reference to a basket of currencies was not new -- it has been used since 2005 -- it had disappeared from the previous quarterly reports by the central bank, but reappeared in the latest version. [ID:nTOE64909T] (Reporting by Simon Rabinovitch; Editing by Ken Wills)