By Alan Wheatley, China Economics Editor
BEIJING, Nov 24 (Reuters) - Trying where Barack Obama failed a week ago, a trio of top European Union policymakers troops to China this weekend to press the case for a stronger yuan.
Their chances of success are as dim as those of the U.S. president.
China regards a firmer currency as part of the strategy for eventually withdrawing policy stimulus, but financial diplomats say it has no appetite right now for renewed appreciation of the yuan, which has been re-pegged to the dollar since mid-2008.
Ahead of Obama's visit, the People's Bank of China flagged the possibility of a shift in policy by dropping from its quarterly monetary report a stock reference to keeping the exchange rate at a reasonable and balanced level.
But with exports still 14 percent lower than a year earlier and no inflation to speak of, a resumption of the yuan's rise is a non-starter for the time being, one diplomat said.
"The forces opposed to a stronger exchange rate are as strong as they were a year ago," he said.
Against this background, the EU delegation will seek to portray a rise in the yuan as just one ingredient in a policy mix that would be in China's own interest to adopt as it strives to redirect economic resources from exports to domestic demand and the jobs-rich services sector.
European Central Bank Governor Jean-Claude Trichet; Luxembourg Prime Minister Jean-Claude Juncker, who chairs the Eurogroup of euro-zone finance ministers; and Joaquin Almunia, the EU's commissioner for economic and monetary affairs, will hold talks on Sunday in Nanjing on the eve of an EU-China summit.
The three are due to meet Premier Wen Jiabao and Zhou Xiaochuan, the governor of the People's Bank of China, among others.
COORDINATING EXITS
The EU officials are also eager to discuss how to coordinate the winding down of stimulus policies, mindful that such a move by China could have repercussions across global markets.
The end of the second quarter of 2010 might provide a window for China to exit from its ultra-loose policies, according to a researcher with a state planning agency. [ID:nPEK271539]
As they did on an earlier mission in 2007, Trichet, Juncker and Almunia will stress the need for a rise in the effective exchange rate (EER) of the yuan, which measures its value against all China's trading partners.
Because of its tie to the weakening dollar, there has been a 9 percent depreciation since March in the yuan's EER, which is the decisive gauge of a country's currency competitiveness.
The EU will argue that, to the contrary, economic circumstances demand a stronger currency: China has increased its global market share during the crisis; its economy is again growing close to potential; and the central bank is still piling up foreign exchange reserves at a breakneck pace.
The overarching worry for the euro zone is that it will have to carry most of the burden of reducing global imbalances, via a stronger euro, if Beijing continues to hold down the yuan against a weak dollar and if other Asian economies keep their currencies on ice to remain competitive against China.
"I am somewhat afraid that the euro zone countries could bear 95 percent of the adjustment in a competitive devaluation scenario," said Christian de Boissieu, who chairs the French government's Council of Economic Analysis.
Speaking at a recent conference in Beijing, de Boissieu suggested offering China a greater say in global economic governance as an inducement to unshackle the yuan and thus shoulder more of the responsibility for global adjustment.
"This, for me, is going to be THE topic for the G20 next year," de Boissieu added.
COMPLAINTS BOTH WAYS
China retorts that it cannot be expected to let the yuan rise as long as its exports are falling. Moreover, officials say, the yuan's anchor to the dollar has been a source of stability for the international economy.
But Klaus Regling, a former senior monetary official with the European Commission, said this thinking was economically muddled given the dollar's weakening trend.
"China says a stable exchange rate is in its interest, but the yuan is NOT stable given that it's pegged to the dollar,' Regling, who runs an eponymous economics consultancy in Brussels, told the Beijing conference.
The yuan has dropped 15 percent against the euro since March.
But the complaints run both ways.
Ding Yifan of the Development Research Centre, a think tank under the State Council, or cabinet, said the shortcomings of the euro stand in the way of China's diversifying out of U.S. Treasuries, especially short-term debt, and into euros.
In the absence of a unified euro-zone bond market, China cannot hold as many euros in its reserves as it would like to, he wrote in the latest issue of the Chinese Journal of European Studies.
"A state's forex reserves are not a pile of cash; they need bonds with strong liquidity to play a role in preserving and enhancing value," Ding wrote in the Chinese-language magazine.
"If the euro zone moves towards greater integration and issued consolidated bonds, foreign investors would feel more reassured and the Chinese government would certainly buy up more euros as reserves." (Additional reporting by Chris Buckley; Editing by Tomasz Janowski) ((alan.wheatley@thomsonreuters.com; +86 10 6627 1235; alan.wheatley.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))