China said that rapid yuan appreciation in the near term is out of the question as it would harm China's economic growth, in one of the strongest responses yet to U.S. pressure for a faster rise in the currency.
The comments by a spokeswoman for the Ministry of Foreign Affairs on Wednesday reflect China's growing anxiety as its domestic economy slows and demand for its exports is threatened by economic stagnation in Europe and the U.S.
The comments also come after Chinese Premier Wen Jiabao on Tuesday called for China to "fine-tune" its economic policies to support growth, adding to speculation that China may at some point shift away from its focus on curbing inflation.
Yuan appreciation could be one way to offset inflation, but a return to a growth focus could lead to Beijing considering slowing the trend as a way to help China's exporters.
China now faces a dilemma, as some economists have begun arguing that the country's situation justifies slower yuan appreciation, while external pressure on China to keep the yuan rising is likely to remain intense.
Since 2005, the yuan has risen around 30% against the U.S. dollar, and it is now "close to a reasonable equilibrium level," Foreign Ministry spokeswoman Jiang Yu said at a regular press briefing.
"In the short term, pushing for rapid yuan appreciation is not possible. If Chinese economic growth slows, it will reduce global aggregate demand," Ms. Jiang said.
In public comments about the issue, Chinese officials have stressed that yuan reform will be gradual, but haven't explicitly said that rapid appreciation is off the table.
Standard Chartered economist Stephen Green projected Tuesday that the yuan's appreciation against the dollar will slow to 3% to 4% in 2012 from 5.5% in 2011, due to China's slowing economic growth.
On Wednesday, Bank of America-Merrill Lynch economist Lu Ting said that due to recent dollar strength, the yuan has actually appreciated by 4.1% against a broader basket of currencies since the end of July.
"We will expect the room for [appreciation against the dollar] to be quite small in the near term, though depreciation is equally unlikely given the pressures from the U.S.," Mr. Lu said in a note to clients.
Economists aren't expecting a catastrophic slowdown for the Chinese economy. Standard Chartered's Mr. Green forecasts that the Chinese economy will grow 8.5% next year, down from 9.4% growth in the first three quarters of 2011.
Political pressure on China from abroad to allow faster yuan appreciation is unlikely to abate in the near future. A U.S. Senate bill that would penalize China for its currency policies may be stalled in the House of Representatives, but the U.S. presidential elections in November 2012 are likely to keep the issue in the headlines for at least the next year, with Republican presidential hopeful Mitt Romney already pledging to declare China a currency manipulator.
China has other levers that it is already pulling to fine-tune its economic policy beyond the yuan's value. Measures are being rolled out to support smaller companies, which have been starved of access to credit. And Beijing may move to lift restrictions on bank lending, analysts say.
Stronger stimulus measures like interest rate cuts don't look likely, with inflation still alarmingly elevated. On Tuesday, Mr. Wen reiterated that maintaining price stability remains the government's top priority.
Chinese officials frequently point out that the country's trade surplus has been shrinking as a percentage of its economy, aiming to reinforce the case that China is already rebalancing toward domestic demand. In the first nine months of the year, China's trade surplus accounted for around 2% of gross domestic product, compared with 3.1% in 2010, Ministry of Commerce officials.
The dollar late in the Asia trading day Wednesday was at 6.3533 from 6.3604 late Tuesday, with the yuan higher against the dollar for the fourth straight trading day.
Traders said the currency is rising partly due to expectations that the U.S. will keep applying pressure for appreciation during a visit by U.S. Deputy Secretary of State William Burns to Beijing on Thursday.
The yuan has risen 3.7% against the U.S. currency so far this year and 7.4% since June 2010, when China essentially unpegged its currency from the dollar.
