Updated: 2005-06-12
The European Union's trade chief suggested Saturday China consider linking the value of the yuan to a basket of foreign currencies, including euro, in order to ward off increasing pressures from Washington.

Peter Mandelson said in Shanghai that European Union believed the timing of any currency reform should be left to the Chinese government.

The New York Times reported on Friday, quoting its exclusive sources, that China's top leadership is actively discussing the pros and cons of any eventual change of the current yuan peg to the U.S. dollar would bring to Chinese and world economy.

The report said Beijing is preferring a reform of the yuan pegged to a basket of foreign currencies, which may include euro, the U.S. dollar, the Japanese yen and possibly British pound.

Mandelson said that China should consider linking the value of its RMB yuan to a basket of foreign currencies, saying that could ward off accusations from Washington and elsewhere that China deliberately keeps its currency cheap and helps its export. The EU trade chief signed a deal with China¡¯s Trade Minister Bo Xilai in Shanghai late Friday night settling a potentially damaging dispute over rising Chinese textile exports.

"I happen to believe that a more flexible exchange rate, one that's pegged not just to the dollar but to other currencies, including the euro, will be better for China," Mandelson said in an interview with the Associated Press.

"I think it would ward off some of the protectionist responses and attitudes to China," he said.

Mandelson didn't indicate any urgency on the part of the EU to get Beijing to reform its currency regime.

In contrast, Washington has recently intensified the pressure on China to stop linking the yuan at a fixed rate to the dollar, a practice that some American manufacturers say has undervalued the yuan and given China trade advantage.

However, some economists and analysts are worried that any change to the yuan peg might cause the inflationary pressure to rise in the United States, which could have adverse effect on the world¡¯s biggest economy.

Mandelson's comments came a day after he and Minister Bo Xilai agreed to limits on the growth of Chinese textile exports to Europe, that have increased massively since quotas were lifted on January 1.

The agreement, announced after 10 hours of talks in Shanghai Friday night, allows for gradually rising caps on allowed increases in Chinese textile exports to Europe over the next three years, with all limits to be done away with in 2008. Annual growth of exports of 10 types of major textile products to the European Union would be capped from 8-12.5 percent before 2008.

"China and the European Union have agreed that, in the period from 11 June 2005 to the end of 2007, .... (we) will determine China's amount of exports to Europe by a growth rate of between eight to 12.5 percent per year," China's commerce ministry said in a statement on its website.

China is embroiled in a similar dispute with Washington, which has already announced a 7.5 percent cap on the increase in seven types of Chinese textile exports this year.

Mandelson praised the agreement as helping eliminate the uncertainty that had roiled the industry and ensuring a healthy long-term trade relationship with China.

"I think it would appeal to people of different opinions in Europe because if will give predictability or certainty for traders," Mandelson said.

"It is a breathing space, creating space for European industries to accept to restructure to develop into different parts of the market in order to fend off Chinese competition.

China hailed an agreement reached with the European Union, saying the grouping's positive approach contrasted sharply with that of the United States.

The state-run Xinhua news agency published a commentary Saturday praising the EU for upholding "the principles of free trade" and criticize the United States' protectionist stance.

"EU's move is in sharp contrast with the US slapping of import limits, an approach that is widely criticized by the international community as discriminatory and protectionist, undercutting the very principles it is promoting," it said.