CHINA / National

EU backs China's gradual yuan moves
Updated: 2006-04-04 07:36

The European Commission backed China's policy of switching to a more flexible exchange-rate system at its own pace, rebuffing U.S. calls for faster steps to boost the yuan, according to a confidential document.

The commission, the European Union's Brussels-based economic watchdog, warned that sudden moves to strengthen the Chinese yuan as demanded by some U.S. officials could further weaken the dollar against the euro.

"China should introduce greater exchange-rate flexibility in a gradual manner," according to a document obtained by Bloomberg News. A gradual move would lessen the risk of the dollar, euro and Japanese yen "overshooting" on the markets.

The U.S. is pushing for a more flexible exchange-rate system to boost American exports and erode the U.S. trade gap with China. U.S. officials complain that China keeps the yuan, a denomination of the renminbi, artificially depressed so Chinese products are cheap in the marketplace.

The yuan has appreciated 1 percent against the dollar since China on July 21 replaced a decade-long peg to the dollar with a basket of currencies and let its exchange rate rise 2.1 percent immediately.

No. 1 Customer

The U.S. is the biggest market for the 12 European countries using the euro. European exports of 184.8 billion euros ($223 billion) to the U.S. last year dwarfed exports to China of 43.5 billion euros. Europe's trade deficit with China, at 74.1 billion euros in 2005, was less than half the U.S. level.

"An abrupt de-pegging of the renminbi, and possibly other Asian currencies, from the dollar could give rise to a sudden reversal of Asian capital flows into the U.S., which might risk an excessive additional downward movement of the dollar against the euro," said the commission document, which was prepared for an April 6 meeting of European finance ministers in Vienna.

Finance chiefs from Asian countries including China and Japan will meet the EU ministers on April 7 and 8.

"The Europeans are concerned that should China allow more appreciation in the yuan that we could see an acceleration of dollar weakness, and that could spill over into major markets, and we could see European currencies strengthening," said Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein in London.

The euro bought $1.2063 at 3:15 p.m. Brussels time, compared with an average of $1.2453 last year.
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