The United States should not make a political issue out of the yuan, a Chinese central banker said on Friday, as the two countries lurched toward a potential bust-up over Beijing's currency regime.

The latest rhetorical salvoes underlined how long-running friction caused by the yuan's de facto dollar peg could come to a head next month when President Barack Obama's administration decides whether to brand China as a currency manipulator.

People's Bank of China Vice Governor Su Ning said the United States should look to itself to boost exports and not cast blame on other countries, when asked to comment on remarks on Thursday by Obama, who called on China to move to a more market-oriented exchange rate.

We always refuse to politicize the yuan exchange rate issue, and we never think that one country should ask another country for help in solving its own problems, he said.

Obama's rare comment about the currency comes as his administration mulls whether to use the currency manipulator label in a semi-annual Treasury Department report due on April 15, which could set in train punitive actions against China.

With Obama facing domestic pressure to take a tough line against China and Beijing clinging to its dollar peg, the report could act as a tipping point.

If China flinches, it may soon resume the yuan appreciation halted in mid-2008 to cushion the country from the global credit crunch. Speculation that Beijing could revalue its currency in the coming weeks briefly flattened the curve for offshore yuan forwards on Friday.

But if China keeps the yuan locked in place, then scattered trade spats between the two giants could escalate into a full-fledged dispute, with Washington even considering across-the-board tariffs against Chinese products.

The chances of a collision have never been higher, Stephen Green, China economist for Standard Chartered Bank in Shanghai.

Asked whether it might be counter-productive for Washington to ratchet up pressure over the yuan, Green said: That's the $64-billion question to which no one really knows the answer.

Li Jianwei, a director in Development Research Center, a think-tank under China's cabinet, was unequivocal: demands for aggressive yuan appreciation will harm not only China but also the United States and others.

A stronger yuan will hit exports and lead to a double dip in the Chinese economy, which in turn will hamper the global economic recovery, Li said.


Still, there are hints of division within China about the yuan. With inflation fast creeping up, investors are beginning to wonder just when the government will allow the yuan to rise again.

Data this week showed that China has considerable growth momentum and mounting price pressures, leading many analysts to conclude that the central bank will soon increase reserve requirements for the third time this year.

The central bank has been in overdrive, trying to dispel worries over inflation after consumer prices rose more than expected to 2.7 percent in the year to February from 1.5 percent in the year to January.

We had expected that February's CPI would be higher than January, Su said on Friday. After adjustment for seasonal factors, month-on-month inflation did not show any sign of accelerating, he said.

We are still observing to see whether the price trend is upward or downward, but we hope prices can move down a little bit, he said. He added that inflation was likely to peak in June or July when the base effect caused by the comparison with last year started to fade.

Central bank governor Zhou Xiaochuan also sounded a soothing note on inflation on Thursday, describing February's jump as in line with his expectations.

China's central bank has increased required reserves twice this year as part of its efforts to slow rampant credit growth and prevent the economy from overheating, and economists suspect a third rise is imminent.

But officials have shied away from drastic tightening for fear that fragile global demand could still sap the economy, and a senior central banker said it was a tough to strike the right balance between cooling lending while sustaining growth.

Most economists do not expect interest rates to rise until the second quarter at the earliest.

The market is in a wait-and-see mode now. The PBOC may want to wait to see March data before deciding whether to tighten monetary policy and raise interest rates, said a money market trader at a mid-sized bank in Shanghai.

(Additional reporting by Aileen Wang in Beijing and Karen Yeung in Shanghai; Editing by Ken Wills)