China will ultimately decide more yuan flexibility would benefit it, Treasury Secretary Timothy Geithner said on Tuesday as Beijing defended its currency policy and said any changes would be on its own terms.
Geithner, who told Indian television the global economic recovery looks quite strong now, also said it was China's choice whether or not it revalues the yuan.
The White House said President Barack Obama will raise the currency issue with Chinese President Hu Jintao in Washington next week on the sidelines of a nuclear security summit.
The administration will continue to press the Chinese to ... value their currency in a way that is much more market based, White House press secretary Robert Gibbs told a news briefing.
That is the way we think is best at this point, and I think you've seen reports of the past week or so about the Chinese beginning to take some steps and realize on their own that this is the best path for them, he said.
With U.S. unemployment stuck near 10 percent, Obama faces pressure to persuade Beijing to allow the yuan to appreciate so as to help U.S. firms compete with Chinese goods.
I am confident that China will decide it's in their interest to resume the move to a more flexible exchange rate that they began some years ago and suspended in the midst of the crisis, Geithner told India's NDTV.
In Beijing, a Foreign Ministry spokeswoman and two government economists held out the prospect of the yuan being allowed to resume its rise after a 20-month pause. But they said at separate briefings that China would proceed with caution and on its own terms.
We don't want to see our exchange rate kept unchanged, said Zhang Yansheng, director-general of the Institute for International Economic Research, a think-tank under the National Development and Reform Commission, a powerful planning agency.
Making the yuan more flexible was a challenging task, not least because of a lack of hedging instruments in China and domestic companies' lack of experience in handling a fluctuating exchange rate, the economist said.
Many U.S. economists say the currency is undervalued by as much as 40 percent. They say that gives Chinese firms an unfair price advantage, takes jobs away from other countries and adds to global financial distortions.
Geithner over the weekend decided to delay a report on whether China manipulates its currency, pledging to work instead through the Group of 20 economies and other multilateral meetings to press for more currency flexibility.
There is no doubt that this is of great concern to a number of economies around the world. I think the best thing to do is let Secretary Geithner and others work through this process in these upcoming meetings and evaluate where we are, said White House spokesman Gibbs.
Earlier on Tuesday, a Chinese Foreign Ministry spokeswoman said China never manipulates the yuan and rejected the argument that a firmer yuan would reduce the U.S. trade deficit with China -- indicating that Geithner's decision may not have eased tensions over the issue.
After allowing a three-year climb in the yuan, Beijing in July 2008 re-pegged the yuan near 6.83 to the dollar to help its exporters weather the global financial crisis. Critics, including many U.S. lawmakers, say the yuan's value represents an unfair subsidy that costs jobs in many countries.
NOT THE SOLUTION
Jiang Yu, the Foreign Ministry spokeswoman, said China does not manipulate the yuan and called for trade differences to be settled through dialogue.
The renminbi exchange rate is not the main reason behind the U.S.-China trade deficit, Jiang told a regular briefing. So naturally, renminbi appreciation is not the solution to rebalance Sino-U.S. trade.
Financial markets expect Beijing to permit the yuan to resume its rise sometime this year in order to cap inflation and help promote domestic demand.
The yuan rose in offshore forward markets on Tuesday as traders read the postponement of the manipulation decision as a sign of an easing in bilateral tensions that could buy time for policymakers in Beijing to reach a consensus.
The market is now pricing in a 3 percent rise against the dollar in a year's time.
Jiang, the Foreign Ministry spokeswoman, said China would keep perfecting its managed floating exchange rate but would stick to the three principles it has always followed: any change must be at Beijing's initiative, the manner of the change must be controlled, and it must be gradual.
Geithner, in his comments after launching a new economic and financial partnership with Indian Finance Minister Pranab Mukherjee, said he would press for more balanced growth based more on domestic consumption, not exports.
We're working with countries around the world to make sure there is a level playing field globally so that our companies, as t hey compete globally, are competing on a fair basis. That's the general imperative and it goes beyond China, he told the NDTV TV channel.
The partnership focuses on infrastructure, financial markets reforms, and economic stability.
The Treasury chief also heaped praise on India as a model for managing a developing economy with a flexible exchange rate, and said it navigated the financial crisis well to emerge with strong growth prospects.
Geithner had encouraging words for the U.S. economy, saying it was looking substantially stronger after job growth in March, with a greatly reduced chance of a double-dip recession.
I think the global recovery looks quite strong now. It's much stronger than it was even three months ago. There's much broader confidence about its sustainability, Geithner said.
(Additional reporting by Alister Bull in Washington) (Writing by Tony Munroe, Alan Wheatley and Paul Eckert, Editing by Andrew Hay)