China says to stick to yuan path, open to dialogue

BEIJING, Oct 9 (Reuters) China will stick to its policy of letting the yuan become more flexible over time, the foreign ministry said on Tuesday, in the face of increasing pressure from European countries for faster yuan appreciation.

But ministry spokesman Liu Jianchao said Beijing was open to dialogue with its critics, who say the yuan is undervalued, which gives Chinese exporters an unfair advantage on world markets.

Euro zone finance ministers said in a statement overnight that they would target the yuan as the chief culprit behind imbalances in global exchange rates and trade, marking a departure from their previous, more conciliatory approach.

In response to a question about their statement, Liu noted that the yuan had risen by more than 9 percent against the dollar since Beijing revalued the currency by 2.1 percent in July 2005 and depegged it from the dollar to float within managed bands.

''On this issue, China has repeatedly enunciated its stance,'' Liu told a regular news briefing.

''China will continue making the relevant arrangements according to this flexible exchange rate policy. We are willing to engage in dialogue and consultation with concerned parties on this issue.'' Policymakers have consistently said they would gradually let market forces play a greater role in setting the yuan's value. But they say they need to proceed with caution because a sharp rise could destroy jobs in agriculture and export-oriented sectors like textiles.

Michael Pettis, a finance professor at Peking University, said he shared the view of those policymakers who believe China needs a swift appreciation in the yuan to regain control of monetary policy.

But Pettis said the pressure would have to be significant to sway other policymakers who regard the exchange rate as primarily a domestic issue.

''There's a group, who I believe are in the majority, who are saying: 'our number one concern is to maintain employment growth, and if it ain't broke, don't fix it'. And those guys so far are winning the battle,'' Pettis said.

Zhao Qingming, an economist with the China Construction Bank in Beijing, said China would not bow to overseas pressure.

Another revaluation was all but impossible, Zhao said ''In framing foreign exchange policy, the ideas of neighbouring countries and other trading partners may play a certain role, but the main consideration is China's own economic conditions,'' he said.

Jiang Chao, an analyst with Guotai Junan Securities in Shanghai, said the euro zone was right to ask why the yuan had been allowed to rise against the dollar but not against the euro.

But he said Beijing was still reluctant to let the currency rise much faster.

''There is no sign that the government is willing to let market forces alone decide the yuan's rate,'' he said.

REUTERS SR ND1445