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China defends "reasonable" yuan

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Says Yuan not to blame for trade surplus with US; G7 meet over weekend to focus on Chinese Currency.

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China dismissed US threats to get tough on trade and exchange rates to ensure American goods are not disadvantage, saying on Thursday that its currency was at a reasonable level. US president Barack Obama said his administration was pushing China to enforce trade rules and further open its markets, adding to a range of issues weighing on relations between the world's biggest and third-biggest economies. A Chinese foreign ministry spokesman responded by saying the Yuan was already at a reasonable level, and that China did not deliberately pursue a trade surplus with the United States.

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"At the moment, looking at international balance of payments and Forex market supply and demand, the level of the yuan is close to reasonable and balanced," Ma Zhaoxu told regular news briefing repeating China's standard line on its currency. "Accusations and pressure do not help to solve the problem," he added. The foreign ministry has no say in China's currency policy, which is driven mainly by domestic considerations, such as the need maintain rapid economic growth and provide jobs. US manufactures have complained for years that China deliberately holds down the yuan, giving local exporters an unfair price advantage.

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China says exchange rate policy is an internal matter. Analysts cautioned against reading too much into Obama's comments, saying his words were as much aimed at appealing to a domestic audience as trying to put pressure on Beijing. "Even if China wants to adjust its exchange rate, it is nearly impossible for Beijing to meet the demands of the US this is China's own business," Li Jain, a researcher with a thing-tank under China's Ministry of Commerce, said. Markets, too, were not counting on a brisk rise. "Previous tough comments on the yuan from US administration have typically led nowhere," said a US bank dealer in Shanghai.

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"The market is not sure the latest comments by Obama will really lead to a tougher US stance on the yuan." Offshore on year dollar/yuan non-deliverable forwards (NDFs), a rough gauge of market sentiment. on Thursday implied a 2.8% rise in the yuan over the next months, slightly less than on Wednesday. The yuan's spot exchange rate, which tightly controlled by the central bank, was nearly flat. Obama told a meeting with Senate Democrats on Wednesday that Washington was trying to get much tougher about enforcement of existing rules, putting constant pressure on China and other countries to open up their markets in reciprocal ways.

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Obama said he would not take a protectionist stance toward China, arguing that to close ourselves off from that market would be a mistake. The Peterson Institute for International Economics in Washington has estimated that the yuan is undervalued by about 30% against all world currency and about 40% against the dollar. Underscoring US concerns, Republican senator Charles Grassley urged Obama to formally designate China as a currency manipulator to prod Beijing into action. Obama has twice manipulator, but faces a third decision that issue in April.

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