Will US yuan calls make for a stubborn China?

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Preparing the ground

There are signs that China is preparing the ground for a resumption of yuan appreciation.

Since the re-pegging nearly 22 months ago, the rhetoric out of Beijing has grown predictable: a stable yuan has helped the economy and the global recovery.

In the last few weeks, this has started to change.

State newspapers have run a series of reports about officials visiting export hubs to 'stress test' how firms would cope with appreciation.

And in his most important news conference of the year, Zhou Xiaochuan, China's central bank governor, described the "special yuan policy" as a temporary stimulus policy that would end "sooner or later".

It will probably be for President Hu Jintao and Premier Wen Jiabao to decide whether to let the yuan rise again.

The official policy description - keeping the yuan "basically stable at a reasonable and balanced level" - has been consistent since 2005, leaving them with considerable discretion to resume mild appreciation, said Victor Shih, a political scientist at Northwestern University in Illinois.

"Things change very fast. If inflation does increase, arguments can change. If exports do recover very quickly, arguments can change," Shih said.

"They can say, 'no, we are not doing it because some laowai (foreigner) is telling us to do it. We are doing it for these other reasons'."

Hence the relatively mild market jitters thus far.

While the war of words with the United States has made headlines, forecasts of a pick-up in both exports and inflation still dominate the outlook for the yuan.

The yuan fell to a five-week low in offshore forwards on Monday, but the implied expectation of a 2.3% rise over the next 12 months was still well within the range tracked since late last year.