China to let yuan rise around 3 pct/year: top adviser

By Zhou Xin

BOAO, China (Reuters) - Beijing will probably continue to let the yuan rise only at a modest rate amid concern that a faster pace could hurt exporters and attract speculators, a top adviser to China's leadership said.

Justin Lin Yifu, a Taiwan-born economics professor at Peking University and one of China's most influential policy advisers, said that the yuan would probably only appreciate by about 3 percent a year against the dollar in the foreseeable future.

"The Chinese government's wording of 'keeping the yuan rate stable' means it will continue the existing pace of appreciation, which is about 3 percent a year," Lin said in an interview.

The People's Bank of China has repeatedly asserted that it aims to keep the yuan basically stable at a "reasonable" level, and that appreciation would be gradual.

Any faster pace than 3 percent a year could push many exporters out of business, and a rate of 4 percent was likely to stimulate speculation on the yuan CNY=CFXS, Lin said, citing the gap between U.S. and Chinese interest rates.

He was speaking on the sidelines of the Boao Forum for Asia being held on the southern Chinese island province of Hainan.

Many of China's trade partners assert that the yuan is significantly undervalued, giving Chinese exporters an unfair advantage in global markets. Some U.S. lawmakers have said that the currency is underpriced by up to 40 percent.

U.S. Treasury Secretary Henry Paulson said on Friday that Beijing and Washington agreed that the yuan reform should continue, but that the two sides differed on the speed.

The yuan has risen by just 5.1 percent against the dollar since the central bank revalued it by 2.1 percent and decoupled it from a dollar peg in July 2005.

Lin said that even the frequent post-revaluation highs of the yuan on the onshore market were mainly the result of the central bank's plans to allow more two-way movement in its value -- not a sign that it would let loose on the reins outright.

Still, that increased volatility was an important part of the central bank's aim of letting the yuan become more flexible, Lin said.

HOT MONEY

Many economists say that for the exchange rate regime to develop, the market needs more developed derivative products. But without enough volatility, it is difficult for those markets to develop.

Lin added that the sudden drop in the country's trade surplus in March to $6.9 billion, from $23.8 billion in February and $15.9 billion in January, could be attributed in part to a slow in the inflows of hot money.

Part of the inflows of speculative capital came in the form of exaggerated export figures and underreporting of imports, he explained.