U.S. warns of resistance in China to market reforms

BEIJING (Reuters) - China must make a stand against the opponents of reform and allow market forces to play a greater role in setting prices, including the yuan's exchange rate, a senior U.S. official said on Thursday.

Alan Holmer, the U.S. Treasury's special envoy to China, welcomed the recent accelerated pace of yuan appreciation and said it needed to continue because exchange rate flexibility is key to allowing monetary policy to focus on curbing inflation.

"These reforms are -- and will continue to be -- resisted by increasingly influential Chinese interest groups, both business and political.

"However ... the greater risk to China's long-term economic security is not that China opens too fast, but, rather, that protectionists prevail, and Chinese reforms proceed too slowly," Holmer said in remarks prepared for delivery to the Chinese Academy of Social Sciences, the top government think-tank.

Holmer's speech reviewed progress made at last month's session of the Strategic Economic Dialogue (SED), a cabinet-level forum in which the United States and China address bilateral issues covering everything from exchange rates to climate change.

Holmer, the U.S. envoy to the SED, rejected the view that the main lesson China should learn from the still unfolding credit crunch in the United States is that it should slow the pace of economic reforms.

Doing so would entail significant costs for China, he said, as financial sector liberalization is crucial to promote growth and to efficiently allocate investment.

"To enable market forces to efficiently rebalance the economy and spread prosperity to all the Chinese, China needs more flexible prices, including a more flexible, market-driven exchange rate," Holmer said.

"Exchange rate flexibility is also key to allowing monetary policy -- the most potent instrument for guiding an economy -- to focus on controlling inflation and ensuring financial stability," he said.

The People's Bank of China, which tightly controls the yuan, on Thursday set the currency's daily reference rate at 6.8529 per dollar, the highest level since it abandoned a peg to the dollar three years ago in favor of a managed float.

The yuan has now risen more than 20 percent against the dollar in that time.

Holmer specifically welcomed the recent 18 percent increase in fuel prices, to more accurately reflect market prices, and urged China to keep reforming the energy sector. (Reporting by Alan Wheatley; Editing by Keiron Henderson)