April 24 (Bloomberg) -- China will accelerate foreign exchange reform, a regulatory official said, a day after the central bank governor said the country may speed preparations to loosen the tie between its currency and the U.S. dollar.

China should undertake ``step-by-step'' reforms, Wei Benhua, deputy director of the State Administration of Foreign Exchange, said at a panel discussion during the Boao Forum in southern Hainan Island today.

``We will positively, but prudently, accelerate the process of reform of the renminbi exchange rate,'' Wei said. Yesterday, central bank Governor Zhou Xiaochuan said pressure from outside China could force the country to speed reforms.

Today, Wei said domestic concerns should also be considered.

``We should take the domestic effect into consideration first, instead of paying attention to factors such as the trade surplus or deficit with certain countries,'' he said. It's ``probably time,'' but first ``we need to see what the impact will be on neighboring countries.''

Finance ministers from the Group of Seven industrial nations last weekend stepped up calls for China to ease the yuan's decade- old peg to the dollar, which the U.S., Japan and Europe say gives the nation an unfair trade advantage. A more flexible yuan may help China contain inflation and money supply growth amid record foreign-exchange inflows.

Currency Peg

China's central bank buys and sells dollars to keep its currency at about 8.3 to the dollar, regardless of market developments. Critics say the yuan became undervalued as the dollar declined in recent years, giving Chinese manufacturers a price advantage that's helped drive the U.S. trade deficit to a record and hampered economic growth in Europe.

``We're encouraged that they've stated that they want to move toward flexibility,'' said U.S. Treasury spokesman Rob Nichols. ``We're not aware of a formal timetable, but certainly in our view, moving toward flexibility as soon as possible would be most welcome.''

China's foreign reserves, the world's second-biggest after Japan's, jumped 50 percent to a record high of $659.1 billion at the end of March from a year earlier, as exports surged and investors bet the government will let the yuan appreciate.

Zhou said China welcomes international pressure because it will force the nation to speed up needed financial reforms. Still, ``we don't see that the pressure is that strong right now,'' he said.

John Snow

U.S. Treasury Secretary John Snow, who led the G-7's April 15-16 gathering in Washington, last week called for China to embrace a more flexible exchange rate immediately. Canadian counterpart Ralph Goodale said China should understand there is a ``freight train coming'' as the U.S. Senate and European Union weigh tariffs or import restrictions on Chinese goods.

The G-7's sharper rhetoric marked a shift in the group's efforts to coax the world's fastest-growing major economy into ending the peg. Some investors said the strategy might backfire, making China less likely to revalue because its leaders won't want to be seen as bowing to outside influence.

``We have a very clear target in this regard, but we have our own sequence,'' Zhou said at the forum, a two-day gathering of regional leaders. ``We are doing some preparation, for example the reform of the financial sector, to enlarge the role of the foreign-exchange market.''

A complete liberalization of the country's foreign exchange system would take ``several decades'', Wei said today, adding that China is about halfway to achieving this.

`Consider Competitiveness'

Zhou said overseas manufacturers that complain about the yuan's value should first consider their competitiveness in the international market. ``For those companies with real competitive advantage, they will not have to be concerned about the exchange rate,'' he said.

China's gradual approach to foreign exchange reform is understandable, given the risks that any instability in the country's economy would pose, said Khempheng Pholsena, vice president for Finance and Administration at the Asia Development Bank, a Manila-based international lending agency.

``We have to appreciate that any disruption in China will have very negative implications for the region as well as the world economy,'' she said during the forum. ``I have strong confidence in their wisdom in making this decision.''

To contact the reporter on this story: Rob Delaney in Beijing at robdelaney@bloomberg.net To contact the reporter for this story:

Last Updated: April 24, 2005 06:06 EDT