Euro zone not counting on quick response to yuan call

The euro zone's top economic officials pressed China on Sunday to let the yuan resume its gradual rise but said they were not counting on immediate results.

"I can't say that I'm more optimistic than I was before I came here," Luxembourg prime minister Jean-Claude Juncker, who chairs the 16-nation Eurogroup of euro zone finance ministers, told a news conference in the eastern Chinese city of Nanjing.

Speaking after a day of talks with senior officials including Premier Wen Jiabao, he said it was tough to justify the yuan's recent depreciation against a basket of currencies in light of China's fast economic growth and bulging external surpluses.                                          

"People think an orderly and gradual appreciation of the renminbi would in the best interest of China and in the best interest of the global economy," Juncker said.

Striking a conciliatory tone, he said he understood why China had halted the appreciation of its currency, also known as the renminbi, during the global credit crunch.    

The yuan  rose 21% in all against the dollar in the three years after Beijing ended a peg to the US currency in July 2005 and said it would let the yuan float in a managed band with reference to a basket of currencies.                                           

Last July, however, China effectively repegged the exchange rate around 6.83 per dollar to help its beleaguered exporters.                                          

"We are not advocating an immediate, short-term-oriented, dramatic change in Chinese monetary policy, but, as I said, an orderly and gradual appreciation of the renminbi," Juncker said.                                                                                   

"We will see"
The Chinese central bank caused a stir this month by dropping from its quarterly monetary report a stock reference to keeping the yuan''s exchange rate at a reasonable and balanced level.                                           

Some economists thought Beijing was flagging a shift in policy, and European Central Bank Governor Jean-Claude Trichet said Chinese officials had promised to keep implementing the currency reforms launched in 2005.                                           

"But I would not interpret that it means immediate changes. It is again the decision of Chinese authorities and I will not over-interpret," Trichet said. "It is their decision, and we will see."                                           

Despite the caution, Joaquin Almunia, the EU''s commissioner for economic and monetary affairs, said Chinese officials had disclosed that a stronger yuan would be part of their strategy for eventually unwinding pro-growth policies adopted a year ago. 

"One of the elements of this exit strategy, according to our Chinese friends, is to resume the regime for the exchange rate of the renminbi that was agreed in July 2005," Almunia said. Sunday's meetings, a repeat of a 2007 mission, took place on the eve of a regular summit between China and the 27-member EU.                                           

The yuan's exchange rate is one of the biggest bones of contention between China and Europe, and the euro zone officials described Sunday's meetings as friendly but frank -- a euphemism typically used when there is disagreement. 

No Dubai fallout                                           
Juncker said Chinese officials had explained that it was tough to convince their domestic audience to back an immediate resumption of the yuan's rise.

But the euro zone delegation pointed out the risk of a protectionist backlash against China, which sends 20 percent of its exports to EU, if it prevents its currency from rising to levels that reflect its growing economic clout.                                           

"The exchange rate issue should be considered in this picture of the conditions that we need to establish to avoid protectionist trends," Almunia said. The two sides did agree, however, on the desirability of a strong dollar.                                           

"We don't think that the US, China or Europe or anyone else could have an interest in having a weak dollar," Juncker said. On the economy, he said there were clear signs of recovery in Europe but it was too early for policymakers to relax given the uncertain outlook.                                           

"The moment has not yet arrived to withdraw the fiscal stimulus packages which are under way in all parts of the world. As regards the euro area, there will be no major withdrawal of fiscal measures in 2010," Juncker said. He ruled out the risk of a debt restructuring or default in the euro zone in the wake of Dubai's request last week for a standstill on its debts.                                           

"I don't see any default problem in the euro area," he said. Trichet added: "I would entirely confirm what the prime minister said." Dubai's shock request rocked global markets and revived concerns about the fiscal health of some euro zone members, notably Greece.