U.S. tells China yuan issue is of "real concern"

"The more this goes on the more China will go against what the U.S. is wishing for," said Jinny Yan, an economist at Standard Chartered Bank in Shanghai.

Three-month dollar/yuan non-deliverable forwards had priced in a rise of more than 1 percent in the yuan last week but investors scaled back expectations after Premier Wen Jiaobao said on Sunday calls for yuan appreciation were even more protectionist.

ROOM FOR MANOEUVRE

Several branches of the Chinese government, including the ministries of commerce and industry, also conducted currency stress tests last month.

A government source familiar with one of the field trips to China's coastal exporting hubs said the mission came back unconvinced that the pros of a stronger yuan would outweigh the cons because of the razor-thin margins Zhang mentioned.

"But having said that, we found that these companies are quite flexible in adapting to new market conditions," he said.

Because they can make a steady profit on their current margins, thanks to high volumes, they have little incentive to move up the value chain, the source added.

"So yuan appreciation would be a nice catalyst to force these firms to change for the better, which is also what the government wants to see," he said. "It's true that jobs are a major concern. But we're also seeing labour shortages in many places. So I think it should be manageable."

The source said arm-twisting by U.S. lawmakers was counter-productive.

"The last thing China will do is be seen bowing to foreign pressure, even if it's the right thing to do. The Americans should keep quiet and not lecture the Chinese. Once it's left alone, China is quite likely to move on the yuan," he said.