China is expected to change its currency policy next year on a gradual basis, probably leading to a mild 3 percent fluctuation in the value of the yuan by the end of 2005, according to a market analysis released by emerging market-focused lender Standard Chartered (StanChart), Shenzhen Daily reported Wednesday.

The research shows that China's economic fundamentals are pointing to revaluation pressures, which are now at an all-time high since the country's last currency change in 1994.

According to the market analysis, there are both domestic and external grounds for the appreciation of the yuan. However, any changes were likely to be gradual as China would seek sustainable economic growth without triggering inflation, the report said.

As China's economy becomes more open to international trade, with imports and exports expected to account for some 70 percent of its gross domestic product this year, allowing some flexibility into the exchange system is expected to bring China an additional economic shock absorber for changes at home, according to the report.

Taking the country's recent interest rate hike, the lingering high consumer price indexes and the recent market price of non-deliverable forwarded yuan, the report concluded that the exchange rate of the yuan against the U.S. dollar would probably float within the band of plus or minus 3 percent next year.

The Chinese yuan, also called the renminbi, is pegged at about 8.28 yuan to the U.S. dollar and only convertible on the current account. China has come under pressure, especially from the United States, to revalue it higher.

The Chinese Government has pledged to make the yuan more flexible through reforms, but to do so in its own time and without bowing to pressure from outside.

(Xinhua News Agency November 24, 2004)