UPDATE 2-China to let yuan rise 5 pct in 2011 -paper

* Official newspaper sheds light on policy thinking in China

* Yuan appreciation will not help U.S. - commerce official

* China should let yuan move more freely adviser

(Adds former adviser comment)

BEIJING, Jan 5 (Reuters) - China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency.

But a Commerce Ministry official warned that any appreciation would do little to narrow China’s trade surplus with the United States, a constant irritant in the relationship between the world’s two largest economies.

The yuan’s gains would be particularly strong in the first half of this year, the China Securities Journal said in a front-page editorial.

“Yuan appreciation will make imports cheaper to reduce the impact of rising commodity prices in the international market, providing relief from inflationary pressure,” it said.

The Chinese-language newspaper is a leading voice on domestic economic affairs. Its views do not represent official policy, but do shed light on thinking in Beijing.

Investors expect the yuan to be about 3 percent higher in a year’s time, according to pricing in offshore forwards markets.

China let the yuan rise just 3.6 percent in 2010.

But China-based traders expect the yuan to appreciate about 2 percent in the first quarter of 2011 alone, partly propelled by President Hu Jintao’s visit to the United States in mid-January.


But Vice Commerce Minister Jiang Yaoping said appreciation would have limited impact on reducing China’s trade surplus with the United States.

Jiang noted that much of the imbalance was explained by the processing trade in which multinational companies import intermediate goods and assemble them as finished products in China before exporting them to the United States.

“We have adjusted the yuan’s exchange rate since 2005, but we can see that China’s trade surplus with the United States, especially the surplus in the processing trade, basically did not change,” he told a forum on Wednesday. “That is to say, the yuan’s exchange rate has no big impact on the trade surplus.”

U.S. President Barack Obama’s national security adviser pressed for efforts to reduce U.S.-China trade imbalances in talks on Tuesday with China’s foreign minister. [ID:nN04247778]

Obama, who joined the meeting with Chinese Foreign Minister Yang Jiechi, reaffirmed a commitment to improve global cooperation with Beijing as he prepared to host President Hu on a state visit to Washington on Jan. 19, the White House said.

While Beijing and Washington are likely to use the summit to cast their relationship in a positive light, strains over China’s currency and trade practices are expected to loom large.

U.S. national security adviser Tom Donilon “stressed the importance of effective efforts to reduce imbalances in both the global economy as well as in U.S.-China trade”, the White House said in a summary of Tuesday’s wide-ranging talks.

U.S. complaints that China keeps the yuan too cheap, giving it an unfair trade advantage, are likely to feature in the meeting between Obama and Hu. The U.S. trade deficit with China rose 20 percent in the first 10 months of 2010 and could top $270 billion for the year.

While the central government generally tries to paint a picture that it resists U.S. pressure for yuan appreciation, in reality it has often allowed it to strengthen ahead of major political events in recognition of the importance of bilateral ties.


Yu Yongding, a former adviser to the People’s Bank of China, said the central bank must reduce its intervention in the currency market to let the yuan move in line with market forces, which would help cap the growth of the country’s foreign exchange reserves.

“China should now reduce its holdings of dollar assets as far as possible, rather than increasing holdings,” Yu, an academic member of the central bank’s monetary policy committee until 2006, wrote in an article in Caijing magazine.

“This means the central bank, to avoid further rises in foreign exchange reserves, must reduce its intervention in the foreign exchange market. Reducing intervention means the exchange rate will appreciate in line with market supply and demand,” he added.

China’s reserves, the world’s largest, hit a record $2.65 trillion at the end of September, a reflection of heavy-handed intervention to hold down the yuan’s value.

Reporting by Zhou Xin, Aileen Wang, Simon Rabinovitch and Kevin Yao; Editing by Chris Lewis