U.S. Treasury Secretary Henry Paulson, due in Beijing next month for economic talks, said last week that China is ``out of step'' with the rest of the world's calls to let the yuan appreciate. The trade gap also pumps cash into China's financial system, hindering government efforts to curb inflation that's close to a decade high and stock and property bubbles.
``Paulson will continue to face pressure from the U.S. Congress to persuade China to allow a freer exchange rate,'' said Shuji Tonouchi, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. ``A stronger yuan will help China curb inflation.''
Faster yuan appreciation could reduce the flow of money into China's financial system by making exports more expensive. The currency has gained more than 11 percent versus the dollar since a fixed exchange rate ended in July 2005.
``China is increasingly seen as out of step with international norms and expectations, as evidenced by the growing number of national leaders and multilateral institutions calling for currency appreciation,'' Paulson said in New York last week. China needs ``more flexible prices, including a much more flexible, market-driven exchange rate,'' he said.
China's central bank said last week in a monetary- policy report that it will ``strengthen the role of prices in managing the economy'' and improve the coordination of interest- rate and exchange-rate policies. It also said moderate currency appreciation may help to ease inflation pressures.
Speculation that China may decide to hold less of its $1.43 trillion of reserves in dollar assets contributed to a slide in the U.S. currency this week to a record low versus the euro.