The yuan and other Asian currencies rose sharply on Thursday as speculation intensified that China might soon unveil a long-awaited shift in its exchange-rate regime by revaluing its currency.
The New York Times reported that Beijing was very close to announcing a small but immediate revaluation of the yuan and would then let the currency fluctuate more widely.
The dispatch from Hong Kong, which quoted people with knowledge of the policy consensus emerging in Beijing, coincided with the arrival in the Chinese capital of U.S. Treasury Secretary Timothy Geithner for hastily arranged talks with Vice Premier Wang Qishan.
A late advance in the yuan in Shanghai to 6.8235 per dollar, its highest rate since October 2009, fanned the talk that change was afoot.
The rise on the day was tiny but nonetheless significant because the People's Bank of China tightly controls the currency's movements through its interventions in the market.
In offshore markets, three-month yuan/dollar non-deliverable forwards fell to the lowest level since July 2008, implying a 1 percent rise in the Chinese currency over that period. Other Asian currencies rose in sympathy.
The U.S. dollar got smashed down against the South Korean won, Indonesian rupiah and Taiwan dollar, not to mention the yuan, said a Singapore-based trader.
U.S. officials declined to comment on Geithner's talks, but he has repeatedly made the case that it is in China's, as well as the world's interest, to permit a renewed rise in the currency.
Beijing has pegged the yuan near 6.83 to the dollar since mid-2008 to help its exporters weather the global crisis, drawing increasing complaints from Washington that the yuan is seriously undervalued, handing Chinese firms an unfair trading advantage.
Xia Bin, a recently appointed member of the central bank's monetary policy committee, said China should return to its pre-crisis way of managing the yuan as soon as possible.
Between July 2005 and 2008, China operated a managed float that saw the yuan gradually gain 21 percent against the dollar.
Xia that a big rise in the yuan would harm the global economy and U.S. consumers, who would have to pay more for goods imported from China. But he acknowledged that engineering a spike in the currency would have the merit of forestalling speculation about a never-ending climb.
At a certain point, when necessary, it is better to have a quick, prompt appreciation in a bid to fend off speculative capital, he told reporters after a speech in Shanghai.
Chinese policymakers have stressed the gains that currency stability has delivered during the crisis, not least by allowing Beijing to focus its efforts on reviving the world's third largest economy. China grew 8.7 percent in 2009 and its demand accounted for half of global growth last year, Xia said.
Beijing also argues that America's $227 billion trade deficit with China reflects low U.S. savings -- something that cannot be addressed just by tweaking exchange rates.
The core interest of the U.S. government at the present is not the issue of yuan appreciation. They all understand that a moderate rise in the yuan's exchange rate will not resolve the fundamental problems of the U.S. economy, nor high U.S. unemployment, Xia said.
But China has been dropping hints that it is preparing to abandon its de facto dollar link.
ASIA MARKETS RISING
Central bank chief Zhou Xiaochuan has called the yuan's dollar peg part of a special policy to respond the crisis, while various government departments have been asking exporters how much of a rise in the exchange rate they could cope with.
The New York Times said Zhou appeared to have prevailed over the Ministry of Commerce, which lobbies for Chinese exporters and opposes a stronger exchange rate.
The paper sketched out a scenario that has become a consensus among economists who follow the issue: after any initial revaluation -- along the lines of a 2.1 percent adjustment in July 2005 -- China would widen the yuan's daily trading band.
The central bank now allows the currency in theory to rise or fall 0.5 percent a day against the dollar. In practice, the bounds of that range have rarely been tested.
The aim of adopting and using a wider band would be to emphasize that the yuan henceforth could fall as well as rise, deterring speculators from assuming the yuan was a one-way bet.
Still, traders are confident that the trend of the yuan would be upward in tandem with China's economic ascent, permitting other central banks in the region to let their own currencies climb without fear of losing competitiveness to China.
As a result, most Asian currencies and stock markets have been rising sharply as investors have resorted to more liquid markets to position for a strengthening of the yuan.
The Malaysian ringgit, considered a good proxy for the yuan, has risen 4 percent against the dollar in the past two weeks. The Indian rupee has gained 3 percent.
Speculation that Beijing will let the yuan rise before long has been fueled by a recent easing of Sino-U.S. tensions over the currency.
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 been a slap in the face to President Hu Jintao, who visits the United States for a nuclear security summit next week.
Washington and Beijing are trying to patch things up after U.S. arms sales to Taiwan and China's dispute with Google over Internet freedom made for a rocky start to 2010.
Geithner, who flew to Beijing after stopping in Hong Kong en route from a visit to India, did not confirm his talks with Wang until Tuesday.
(Additional reporting by Vidya Ranganathan in Singapore; Writing by Alan Wheatley; editing by John Stonestreet)