Beijing will make yuan more flexible: central bank

China's government will make the yuan more flexible, central bank Governor Zhou Xiaochuan (周小川) said yesterday, a commitment that may help the Bush administration fend off calls in the US for trade sanctions against the nation.

Premier Wen Jiabao's (溫家寶) pledge to improve the currency system this year ``means that the government will add more flexibility to the exchange rate,'' Zhou told reporters during the National People's Congress in Beijing.

The government may widen the yuan's daily trading band, Zhou said, without giving a timetable.

The yuan has gained less than 1 percent since China revalued the currency and ended a decade-old peg to the dollar on July 21 last year.

US senators Lindsey Graham, a Republican, and Charles Schumer, a Democrat from New York, are sponsoring legislation that would impose tariffs on Chinese goods unless the yuan is allowed to rise more rapidly.

China's government started managing the yuan's value against a basket of currencies last July, allowing it to move by as much as 0.3 percent against the dollar either side of a daily rate announced by the central bank.

In practice, the yuan's biggest daily swing has been less than a third of the maximum.

"It's a natural step for the country to gradually widen the trading band," said Ha Jiming (哈繼銘), chief economist of China International Capital Corp (中國國際金融公司) in Beijing, who forecasts the band will be widened to 1 percent this year. "Conditions in China are mature enough for this to happen."

China's trade surplus tripled to a record US$102 billion last year, helping to drive a 9.9 percent economic expansion, the fastest among the world's major economies. Lawmakers in the US, Europe and Japan say the yuan is undervalued, giving Chinese exporters an unfair price advantage.

The yuan closed at 8.0382 to the dollar on Friday. Its value was reset at 8.11 to the dollar on July 21 last year, a 2.1 percent appreciation from the pegged level where it had been held since 1995.

"We will improve the system of managed floating foreign exchange rates and keep the yuan exchange rate basically stable at an appropriate and balanced level," Wen said in his annual report to China's parliament yesterday.

Any decision to widen the trading band will depend on demand from the international market and China's domestic needs, Zhou said. The current trading band against the dollar is "appropriate," he said.

US Secretary of the Treasury John Snow, who opposes the tariff legislation, is pushing China to loosen controls on the yuan.

Protectionist measures against China would risk undermining US efforts to promote the free flow of goods and services around the world, Snow said in a speech last Friday.

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