Central bank officials have reaffirmed China's position of gradually moving towards a freely traded currency, responding to two US senators who are threatening trade sanctions unless the yuan's value rises.

Wu Xiaoling, a deputy governor of the People's Bank of China, said on Saturday that China was doing its best and that it would trust market forces to gradually let the currency move more freely.

"There will be no wide fluctuation of foreign exchange rates, because it may harm the steady development of the country's economy," Wu said.

"The yuan's flexibility is increasing gradually and we will allow market supply and demand to play a fundamental role in forming the exchange rate."

US senators Charles Schumer and Lindsey Graham will head to Beijing this week to hear first-hand about what China is doing about its currency, before making a final decision on a bill threatening the country with a 27.5 per cent import tariff.

The senators will meet Chinese officials in Beijing and Shanghai before deciding whether to proceed with a vote on their bill by March 31.

Previously, central bank governor Zhou Xiaochuan had claimed that China would not bow to pressure from the US to bring forward its timetable for yuan flexibility, according to a Bloomberg report on March 11.
 
The yuan last week had its biggest weekly gain against the dollar since the government scrapped a decade-old peg in July after Premier Wen Jiabao promised more flexibility. It has gained almost 1 per cent since the revaluation.

China is also under pressure to let the yuan trade more freely before the US Treasury's semi-annual report on global currency manipulation and President Hu Jintao's visit to the US next month.

Wu pointed out that there would be no link between President Hu's visit and the change of China's policy on the yuan's value.

"We will trust market means," she said. "I want the public to pay more attention to the development of Chinese enterprises rather than the slight rise and fall of the daily exchange rate."

Wu made the comments at a financial forum held in Beijing on Saturday.

The deputy governor said in a speech that China is in a continuous effort to reduce the imbalances in external payments and make adjustments to its foreign exchange policy of relaxed inflows combined with strict outflows.

She said this was the source of excessive increases in foreign exchange reserves.
 
Wu said that China would continue to promote overseas investment as an effective way to balance its currencies.

Chinese companies spent more than US$6 billion abroad in 2005 as the government encouraged firms to "go forth" in search of natural resources and markets.

"China will also introduce more advanced financial products including forward interest rate agreements and currency derivatives to hedge the risks that it may encounter in a freer interest and exchange rate market," Wu said.

Another major job in the central bank's 2006 schedule, according to Wu, is to continue strengthening its efforts to reduce the yuan's excessive liquidity in the banking system, caused by an abundant foreign currency reserve.

On July 21 last year, China reset the yuan's value at 8.11 to the dollar, a 2.1 per cent appreciation from the pegged level where it had been held since 1995, and linked its value to a basket of currencies including the euro and yen. Under the system, the yuan is allowed to rise or fall 0.3 per cent against the dollar either side of a daily rate announced by the central bank.

US lawmakers and manufacturers have accused China of keeping the yuan's value artificially low to spur exports. China's trade surplus tripled to a record US$102 billion last year, helping to drive economic growth of 9.9 per cent.