China tries to cool yuan dispute with US

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Gradual appreciation?

Just last week, market expectations were growing that a solid recovery in Chinese exports and a build-up in inflationary pressure might prod the government to permit yuan appreciation.

Investors have scaled back their bets on any imminent move this week on the view that Beijing will find it politically unpalatable to appear to cave into US pressure.

The yuan was bid just a touch above a three-week low in offshore forwards on Friday, implying expectations of 2.5% appreciation over the next 12 months.

The burst of rancour with the United States has grabbed headlines over the past week, but China is the world's largest exporter and the yuan's exchange rate is an issue that affects virtually all countries.

Visiting Washington, Indian Commerce and Industry Minister Anand Sharma said China's exchange rate policy created problems for Indian exporters.

"We feel that the policy should be such that exporters should not be disadvantaged," he told Reuters after a speech.

But Kaushik Basu, chief economic adviser in India's Finance Ministry, said New Delhi was unlikely to join other states in putting pressure on China to revalue the yuan.

A Japanese deputy finance minister told reporters China should understand global calls for a more flexible yuan but it would be "wrong" for Washington to resort to sanctions.

In a discussion paper for a meeting of officials from the Group of 20 industrialised and emerging nations, Canada said that stalling on economic and financial reforms agreed at a G20 summit in Pittsburgh last year would bring unsustainable debt levels, higher interest rates and another crisis.

The Canadian discussion paper did not mention China by name, but said in a scenario where rich countries cut deficits, but emerging markets neither let their currencies float, nor encouraged their own consumers to spend more, "by 2011, deflation would occur in advanced countries, real interest rates would increase sharply, and growth would stall."