China May Surprise on Yuan Reform

China could spring a surprise on financial markets in deciding when and how it reforms the exchange rate, Premier Wen Jiabao said today, reaffirming Beijing’s intention to let market forces ultimately set the yuan’s value.

“Our goal has been to let market supply and demand determine the exchange rate,” Wen said at a news briefing at the close of the annual session of parliament.

“We are carrying out such work now, and as for the timing and what measures will be adopted, this could be unexpected.”

China’s policy that keeps the yuan pegged in a narrow range near 8.28 to the dollar has drawn criticism from trade partners such as the United States, which complains that the currency is undervalued, giving Chinese exports an unfair price advantage.

In his annual report at the start of parliament earlier this month, Wen pledged to push ahead with currency reforms but gave no indication what form the changes would take.

Beijing has said it will reform the yuan, also called the renminbi, only gradually and after solving problems such as overhauling a rickety banking system.

“Frankly speaking, many of the people who have been strongly urging the revaluation of the renminbi haven’t given much thought to the problems that would arise from there,” Wen said.

Data issued today showed retail sales in January-February were 13.6% higher than a year earlier, slightly less than expected but maintaining a trend of rapid growth in consumer demand seen since early 2004.