Geithner says test is how much China yuan moves

China's central bank said it will gradually make the yuan's exchange rate more flexible, indicating that it was ready to break a 23-month-old dollar peg that has come under intense criticism from the United States and other countries.

We welcome China's decision to increase the flexibility of its exchange rate, Geithner said in a statement.

Vigorous implementation would make a positive contribution to strong and balanced global growth. We look forward to continuing our work with China in the G20 and bilaterally to strengthen the recovery.

The People's Bank of China all but ruled out the one-off revaluation or major appreciation hoped for by critics, saying there was no basis for big fluctuations or changes in the exchange rate.

The move comes before a Group of 20 leaders summit in Toronto next week, where President Barack Obama and others were expected to increase pressure for a yuan move. By shackling the yuan to the dollar, U.S. lawmakers and manufacturers say Beijing has gained a trade advantage that costs U.S. jobs.

Geithner had taken a softer approach toward China on the yuan exchange rate, delaying a Treasury Department report on whether China manipulates the value of its currency. Such a finding would trigger negotiations with China involving the International Monetary Fund and could lead to punitive trade sanctions.

But with Congress growing impatient and threatening trade legislation aimed at the yuan, Obama this past week ratcheted up his rhetoric on China's foreign exchange rate policies, telling his G20 colleagues in a letter that free-floating currencies were essential to global economic activity.

(Editing by Doina Chiacu)