China aiming for market exchange rate, Wen says

Chinese Premier Wen Jiabao (溫家寶) said the country is working toward letting market forces decide the value of the yuan, the first clear statement that the government aims to end the currency's nine-year fixed link to the dollar.

The government wants to create an exchange-rate mechanism based on "market demand for and supply of" the currency, Wen said in a speech carried by the official Xinhua news agency. He didn't give a time frame, adding China plans to keep the yuan "basically stable at a reasonable and balanced level."

Wen's comments come amid intensifying speculation over the future of the yuan, fixed at about 8.3 to the dollar since 1995.

The US and other countries including Japan have pressured China to let the yuan rise, arguing the fixed link undervalues the currency and gives the country an unfair trading advantage.

"If the government were to set the yuan's exchange rate based on current demand for the currency, it would have to revalue it," said Chris Leung, an economist with DBS Bank Hong Kong Ltd. "More people are converting their foreign assets into yuan because they expect it to appreciate in value."

A US Treasury-led team visited Beijing last week for two days of talks on financial-system changes that may pave the way for a more flexible currency, as Treasury Secretary John Snow said in a US television interview that China is "committed" to moving toward a free-floating yuan.

China's foreign reserves surged by a record 40.7 percent last year to US$403 billion and increased by a further US$13 billion to US$416 billion in January.

"If the inflow of foreign exchange continues, the Chinese government would have no choice but to widen the yuan's trading band," Leung said. "The government has to manage market expectations and say explicitly what its currency policy will be to stop the speculation."

The timing of any change remains unknown. China's government hasn't released any timetable, nor detailed how it might carry out an adjustment to the exchange-rate regime.