WRAPUP 6-China holds door open a crack to U.S. on yuan

* Hu repeats China is sticking to gradual currency reform

* Geithner says U.S. welcomes China’s vow to reform yuan

* Both sides hint at progress on other trade irritants

* China central banker says euro debt woes won’t hurt world
(Adds China commerce minister, central banker comments)

By Chris Buckley and Glenn Somerville

BEIJING, May 24 (BestGrowthStock) – China struck a conciliatory note in talks with the United States
on Monday by vowing to spur domestic demand and keeping a guarded opening to exchange rate
reform, which the Obama administration says is needed to rebalance the global economy.

The United States treaded softly on the subject and welcomed Beijing’s long-standing pledge
to reform the yuan as the two sides opened their second Strategic and Economic Dialogue.

But both countries also made clear that a stronger Chinese currency was not enough by itself
to narrow the whopping U.S. bilateral trade deficit that has fuelled tensions between them at a
time when the global economic recovery remains fragile.

While Chinese President Hu Jintao broke no new ground on the yuan dispute, he set an amicable
tone for the two days of talks during which the world’s biggest and third-biggest economies will
seek to steady their relations.

“China will continue to steadily advance reform of the renminbi exchange rate formation
mechanism following the principles of being independent, controllable and gradual,” he said. The
renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth,
something that Washington — worried about its yawning trade deficit with China — has also
advocated.
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For full coverage of China-U.S. relations [ID:nN22220946]

Yuan special coverage: http://china.thomsonreuters.com/yuan/

The Yuan Debate Top News page: http://link.reuters.com/jej52k

U.S.-China trade graphic: http://r.reuters.com/duq35k

Reuters Insider video: http://link.reuters.com/fen85k
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U.S. Treasury Secretary Timothy Geithner said the Chinese government was moving in the right
direction on the yuan, which has been effectively pegged to the dollar since the global financial
crisis worsened in mid-2008.

“We welcome the fact that China’s leaders have recognized that reform of the exchange rate is
an important part of their broader reform agenda,” he said.

Trying to press the case that appreciation would be in China’s own interest, Geithner said
that a more market-driven exchange rate would help suppress inflation while also driving private
firms to move up the value chain.

TRADE POLICIES

China and the United States signalled that there could be progress on two other trade-related
policies that have been additional irritants in their relations.

China said that it was working to resolve the concerns of foreign companies about an
“indigenous innovation” programme that the United States has said was unduly restrictive and a
concern on par with the yuan.

And Chinese Commerce Minister Chen Deming said he was optimistic that the United States would
loosen controls over high-tech exports, a move that would go a small way to balancing their trade
ties.

The talks also touched on Europe’s debt woes, with both sides saying that they were
cautiously optimistic that any fallout would be limited.

“The general view was that the pace of the global economic recovery will be basically
maintained,” People’s Bank of Governor Zhou Xiaochuan told a news conference.

The one slight point of open discord were U.S. calls for a tougher line against North Korea
over an alleged sinking of a South Korean warship, contrasting with China’s appeals for
restraint. [ID:nTOE64N00Y]

Tensions flared between Beijing and Washington in the first months of 2010, when China
denounced U.S. criticism of its Internet censorship, Washington’s arms sales to Taiwan, and
President Barack Obama’s meeting with the Dalai Lama, Tibet’s exiled leader.

Beijing considers Taiwan a part of its territory, and Hu said on Monday that it was important
for countries to respect one another’s sovereignty.

Beijing officials have said they want only “quiet discussion” of U.S. complaints that the
Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope that a quieter
approach will give Beijing more political space to let its currency appreciate.

The annual U.S. trade deficit with China fell to $226.8 billion in 2009 from a record $268.0
billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a
point of friction with Beijing.

Stock Market News
(Additional reporting by Arshad Mohammed and Doug Palmer; Editing by Ken Wills)

WRAPUP 6-China holds door open a crack to U.S. on yuan