The comment by Ba Shusong, a deputy director-general of the Financial Research Institute with the Development Research Center of the State Council, may reinforce broad expectation among economists that China may let the yuan rise gradually this year, as part of efforts to fend off inflationary pressures despite exporters' concern that a stronger local currency may hurt their competitiveness.

The fact that the yuan issue has been politicized has made it even more difficult for Beijing to reform the yuan mechanism, Ba said. But the Chinese government should avoid either "fear about float" or "cold-war mentality," he said.

China has kept the yuan barely changed against the U.S. dollar since the outbreak of the global financial crisis, a move that has been criticized by its major trade partners, including the U.S. and the European Union, for giving its local exporters unfair competition and causing trade imbalances.

In response to the criticism, Beijing has insisted that China wasn't pursuing a big trade surplus and wouldn't bow to external pressures to adjust the exchange rate policy. Rather, the government officials said any adjustment to the yuan policy would be made based on China's own needs. "Sooner or later" China would exit the extraordinary monetary policy adopted during the financial crisis, People's Bank of China Gov. Zhou Xiaochuan said earlier this year.

Ba urged Beijing to put the issue of widening the yuan's float band on its agenda.

Unlike what some of the U.S. policy makers have argued, Ba said letting the yuan appreciate wouldn't help solve the imbalances in the Sino-U.S. relationships, or tackle the U.S. jobless problem.

However, he said, "the yuan policy is an important component of China's macroeconomic and political policies." Allowing it to flow in a greater band would help promote a balanced and steady macroeconomic growth, which is conducive to everybody, he said.

A transcript of his remarks were posted Saturday on the website of a financial information portal, http://www.jrj.com.cn .

Ba's comment about yuan band widening is consistent with what he has been advocating recently. While the comments aren't new, Ba as a senior academic at the Cabinet's research arm are among economists from government-backed think tanks who are often invited by Beijing's leaders to discuss macroeconomic issues, though any decision on yuan would involve fierce debates among government departments with different interests.

Meanwhile, Ba said the space for China to increase interest rates is very limited, in part because the domestic economic growth may have peaked in the first quarter and will likely gradually slow down in the second and third quarters.

"After the consumer prices reach peak levels, (maintaining) economic growth may become China's priority task," he said. China's consumer price index is widely expected to be higher in the middle of this year while relatively lower around the start and the end of the year, he said.

Also, he expected the U.S. and other parts of the world will likely maintain relatively low interest rates in the near term, which will limit the room for to adjust its own interest rates, he said.

Many people have urged Beijing to raise interest rates to curb property market bubbles, he said. However, he said recent administrative measures taken by Beijing to dampen property speculations, if implemented effectively, can also reach the same impact as rate hikes can have on the property market.

-Victoria Ruan contributed to this article, Dow Jones Newswires; 8610 8400 7799; victoria.ruan@dowjones.com

Sourced from www.online.wsj.com