The currency strengthened 6.6 percent this year, making it Asia's best performer, as policy makers attempt to curb the nation's trade surplus and cool inflation. Paulson said yesterday on a conference call hosted by Foreign Affairs magazine that U.S. proposals to punish China for depressing the value of the currency might spark an unproductive ``trade war.''
China's trade surplus widened to $25.3 billion in July, the first increase in four months, as demand from emerging markets helped shield exports from a slowdown in the U.S. economy. A stronger yuan would make China's exports more expensive, helping reduce the U.S. trade deficit with China that ballooned to a record $256 billion last year.
Since July, Chinese policy makers have put extra emphasis on sustaining growth rather than cooling inflation in the world's fourth-biggest economy as global demand weakens. Economic growth has cooled for four quarters and industrial output rose last month at the slowest pace since February 2007.
The People's Bank of China has kept the yuan little changed since the end of June, after gains of 4.2 percent and 2.3 percent in the first and second quarters of the year. China's stocks surged the most since April on speculation the government will introduce measures to support the world's worst-performing market this year.
Traders in the forwards market are raising bets on how far the yuan will rise. Three-month non-deliverable forwards rose 0.4 percent today, implying the currency will strengthen to 6.8180 against the dollar in the next three months. The contracts are agreements in which assets are bought and sold at current prices for future delivery.