Yuan will not necessarily rise, China media warn

BEIJING (Reuters) - China's pledge to reform the yuan does not necessarily mean that the currency will strengthen against the dollar, state media reported on Monday, citing Chinese economists.

The People's Daily, the official newspaper of the ruling Communist Party, said the yuan would float both up and down against the dollar and that one-way appreciation was not the thrust of the reform.

"Going further with exchange rate reform does not necessarily equate to renminbi appreciation," the newspaper said. The yuan is also known as the renminbi.

But the report also went to considerable lengths to explain to the domestic public why currency reform could benefit the country after months in which top leaders had said a stable yuan was essential to the economy's health and that China would not be bullied into ending a nearly two-year-old peg to the dollar.

The central bank said on Saturday that China would gradually increase the exchange rate's flexibility, an announcement that looked timed to head off criticism from abroad a week before a G20 summit in Canada.

Global markets and policymakers will closely monitor the Chinese yuan this week for signs that the central bank is actually allowing the currency to rise after its statement was widely understood as a promise to do so.

Ba Shusong, a researcher with the Development Research Centre, a think-tank under the cabinet, was quoted as saying that the foundation for yuan appreciation had significantly weakened because China's current account surplus accounted for a smaller and smaller portion of gross domestic product.

Ha Jiming, chief economist at China International Capital Corp, the country's largest investment bank, was quoted as saying that the yuan may fall against the dollar if the euro plunges against the U.S. currency because the Chinese exchange rate would refer to a basket of currencies.

China's official Xinhua news agency, in a strongly worded commentary carried on its website (www.xinhuanet.com), warned the West not to misinterpret or "distort" the meaning of the reforms.

"Firstly, 'increasing the flexibility of the renminbi's exchange rate' does not equal renminbi appreciation, and it certainly does not mean fast appreciation," it said.

"Stability in the renminbi's exchange rate is good not only for China's economy, but for the world's," Xinhua added.

The key to resolving global economic imbalances did not rest at the yuan's door, it said.

"The fundamental way out for this problem is improving global economic governance, reforming the international monetary system and solving the development gap between the north and south."

In a pointed reference to the United States, Xinhua said some developed countries had to stop spending so much, or "eating next year's food" as the commentary termed it, using a Chinese idiom.

However, the People's Daily said that yuan reform would be a good thing, giving China "three benefits."

First, it would help push forward structural adjustment of the Chinese economy, putting it on a path toward sustainable development. Second, it would assist in controlling inflation and asset bubbles.

And third, the newspaper highlighted the broader political gains from the move. "It will help protect the period of strategic opportunity and the international environment for our country's economic development," it said.

(Reporting by Zhou Xin, Simon Rabinovitch and Ben Blanchard; Editing by Jacqueline Wong)