China may resist pressure to let yuan strengthen

By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) -- As China enters strategic talks with the U.S. this week, the nation will likely resist any pressure to let the yuan strengthen and instead follow its own timetable for currency appreciation, analysts said.

Kevin Lai, economist at Daiwa Institute of Research in Hong Kong, said currencies are "always part of the agenda" when the two nations meet, and the U.S. may continue to push China to let the yuan rise in order to help even out trade flows.

"I don't think [China] would do anything drastic in the near term. They would continue to push their own agenda, which is internationalizing the [yuan], and moving toward [currency-rate] flexibility in a very, very gradual manner," said Lai.

Top officials from the U.S. and China were slated meet later Monday in Washington for their annual closed-door talks on a range of strategic and economic issues. See full story on China-U.S. dialogue.

The talks come only a few days after U.S. Commerce Secretary Gary Locke said earlier this month that if "China allowed for greater flexibility in its exchange rate and further opened up its domestic markets for imports and foreign direct investment, it would accelerate the world's return to growth."

Last week, the International Monetary Fund's governing board also urged China to let the currency rise in value, even if it contributed to short-term unemployment.

China allows its currency to trade within a fixed band against its "central parity rate," which it sets daily. On Monday that rate was reported set at 6.8316 yuan to the U.S. dollar, marking a slight slip for the Chinese currency if compared to Friday's close of 6.8310 yuan.

China did allow the yuan to appreciate relatively sharply against the U.S. dollar in 2007 and in 2008, but has since kept the exchange rate mostly flat, apparently to protect the nation's exporters and those who work for them.

Among other currencies, the dollar changed hands for 94.74 yen Monday, down from 94.85 yen Friday in New York. The Australian dollar rose to $0.8189, from $0.8171 Friday.

In the stock markets, China's Shanghai Composite rose 1% to 3,407.81, and Hong Kong's Hang Seng Index advanced 1.6% to 20,311.40. Japan's Nikkei 225 advanced 1.8%, Australia's S&P/ASX 200 gained 1.3% and South Korea's Kospi rose 1.3%.

Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.

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