May 25 (Bloomberg) -- The yuan isn't the cause of the U.S. trade deficit and a ``large'' appreciation would hurt China's economy, Vice Premier Wu Yi said, signaling the nation won't cave in to demands for faster gains.

``China will continue to reform its exchange rate on its own initiative, gradually,'' Wu said at a dinner in Washington after two days of talks with U.S. Treasury Secretary Henry Paulson that yielded no agreements on the currency and failed to quell calls in Congress for sanctions against China.

About 85 percent of China's trade surplus with the U.S. is generated by foreign companies such as Wal-Mart Stores Inc. exporting products from China that are no longer made in the U.S., Wu said, citing textiles, shoes and furniture. Imposing protectionist measures to cut last year's record $232.5 billion U.S. deficit with China would harm both nations, she said.

``The U.S. government also doesn't want a trade war with China,'' Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. ``If that really happens, the losses for the Americans might not be lower than those for the Chinese.''

The yuan closed little changed at 7.6527 against the dollar in Shanghai from 7.6519 late yesterday, completing its second- biggest weekly gain since February. China has allowed the currency to rise 8.2 percent since abandoning a fixed link to the dollar in July 2005.

China's trade surplus almost doubled in the first quarter, spurring economic growth of 11.1 percent, the fastest among major economies. The nation's foreign-exchange reserves grew at about $1 million a minute in the first three months to reach $1.2 trillion, the world's largest.

Stock Market

Wu, 68, and Paulson concluded two days of talks on May 23 aimed at easing tensions between the two nations. Paulson and Wu agreed to increase the number of flights between China and the U.S., to lift a freeze on foreign firms entering China's securities industry and to allow overseas banks to offer yuan- denominated credit and debit cards.

China will also increase the quota allotted to approved international investors for the purchase of stocks usually reserved for domestic buyers.

Paulson wasn't able to persuade Wu to allow foreign banks to own more than 25 percent of a domestic lender.

``She's not conceding on any of our points,'' said Alan Tonelson, research fellow of the U.S. Business and Industry Council, which represents about 1,500 smaller manufacturers in Washington. ``This is insulting.''

Democratic Representative Sander Levin of Michigan, who chairs the trade panel of the House Ways and Means Committee, said May 23 the yuan is undervalued by as much as 40 percent.

Yuan Trading

``Large scale yuan appreciation will have a negative impact on China's economy,'' Wu said, adding that trade protection would hurt relations between the U.S. and China. Paulson and Federal Reserve Chairman Ben S. Bernanke also attended the dinner.

China last week increased the amount its currency can appreciate by widening the band within which it can fluctuate each day against the dollar to 0.5 percent from 0.3 percent.

``As the market evolves, the yuan's trading range will continue to expand,'' Wu said. China's currency has yet to move by as much as 0.3 percent in a single day.

Textile Jobs

China is concerned faster appreciation of the yuan would hurt company profit and jobs. The textile industry, which accounted for 72 percent of China's trade surplus last year, loses 8.2 billion yuan ($1.1 billion) for every percentage point of currency appreciation, the China National Textile and Apparel Council estimates.

Wu met with U.S. President George W. Bush yesterday. Bush later told reporters the U.S.-China relationship was ``complex'' and that the two nations must work together to ease economic tensions.

The U.S. is ``watching very carefully'' China's steps on its currency, Bush said, and is prodding China's government to open its capital markets to international financial institutions.

Wu cited a March study by a Boston scholar that found that China's trade surplus with the U.S. reflects the overall surplus East Asia has with world's largest economy. She didn't name the scholar.

``This scholar's opinion is very well founded,'' Wu said.

To contact the reporter on this story: Yanping Li in Washington at yli16@bloomberg.net

Last Updated: May 25, 2007 07:02 EDT