BEIJING: China`s central bank set the strongest yuan exchange rate in years on Friday, as international pressure builds for a stronger currency ahead of the weekend Group of 20 summit in Canada.

The People`s Bank of China said it set the central parity rate -- the centre point of the currency`s allowed trading band -- at 6.7896 to the dollar, 0.3 percent stronger than Thursday`s 6.8100.

That marks the strongest level since China freed the currency from an 11-year-old peg in July 2005 and moved to a tightly managed floating exchange rate.

In early trading, the yuan weakened slightly to 6.7900 on China`s main foreign exchange market.

China has tweaked the rate up and down this week ahead of the G20 summit and has a history of letting the yuan strengthen slightly before sensitive events, apparently to defuse criticism that it keeps the currency too low.

Policymakers pledged last weekend to let the yuan trade more freely against the dollar but ruled out dramatic moves in the currency or a one-off appreciation.

In a vaguely worded statement, the central bank said the yuan would remain "basically stable" -- official code for keeping the currency on a tight leash. The action was widely seen as a bid to head off rancor at the G20 meeting following intense pressure on Beijing to embrace currency reform as part of efforts to enhance a global economic recovery.

US President Barack Obama said Thursday it was too early to determine the impact of China`s limited currency reform although he viewed the move as "positive."

Speaking ahead of his meeting Saturday with Chinese leader Hu Jintao on the sidelines of the G20 summit, Obama maintained that the "undervalued" yuan provided China "with an unfair trade advantage."

Some experts say the yuan is undervalued against the dollar by up to 40 percent.

The currency has been hovering around 6.8 in recent days, with traders reporting Chinese state-owned banks were buying the dollar, thereby weakening the yuan.

They said it was an apparent attempt by authorities to show its critics that currency flexibility could cut both ways.

Unmoved by Beijing`s action, US lawmakers have threatened to press ahead with legislation they said would treat "currency manipulation" as an illegal subsidy and enable US authorities to impose tariffs on Chinese goods.

On Thursday, China again warned against "protectionist" retaliation over its currency policy, saying an appreciation in the yuan would not solve the Chinese trade surplus with the United States, a source of tension between the two countries.

Analysts say China`s yuan pledge does not presage the sort of significant revaluation that many are calling for, and they expect only a limited appreciation over the next 12 months, if any.

However, the currency`s limited moves this week might be enough to deflect criticism at the G20, said Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong.

"This is not a big move, but it is significant. President Hu can point to it as evidence that China is serious about making its currency more flexible when he meets other G20 leaders in Toronto," he said.

China had effectively pegged the yuan at about 6.8 to the dollar for the past two years to prop up exporters during the global financial crisis. Critics say the policy gives Chinese producers an unfair advantage.

BDST:946 HRS, June 25 2010
NJ/DC