China is testing the potential impact of a strong yuan on its labor-intensive manufacturing sector, and economists are widely expecting the government to allow the currency to resume its gradual and limited appreciation later this year.

The stress tests, conducted by the Ministry of Commerce and the Ministry of Industry and Information Technology, focus on textile, garment, shoe and toy manufacturers, the 21st Century Business Herald reported yesterday, citing sources it didn't name.

The tests will serve as a reference for the government to gauge the yuan appreciation's impact on exports, the newspaper said.

There has been speculation that the government will let the yuan rise after China's exports started to rebound. They surged 21 percent in January after a growth of 17.6 percent in December, ending a straight 14-month drop.

"Improving exports, rising inflation and trade rows are increasing the chances of a yuan appreciation," said Leong Chinlin, head of wealth management at Citibank retail banking China.

A more valuable yuan can help trim inflationary pressure on imports to push forward domestic consumption, economists said.

"Expectations for further appreciation may accelerate, but we don't think the resumption of a yuan appreciation is imminent," Leong said. "It will not happen until the end of the second quarter."

China has repeatedly rebuffed calls for the yuan to appreciate and said it's unfair to blame the currency for global imbalances.

The yuan has been flat against the United States dollar at around 6.83 since the middle of 2008, which economists called a "repeg to the dollar" after China depegged the yuan from the greenback in July 2005.

Concerns over hot money, or speculative capital, betting on better returns on the yuan is one of the deterrents to appreciation, economists said. They said a gradual rise in the yuan is more likely.

Lu Zhengwei, an Industrial Bank senior economist, said he expects the yuan to show a wider fluctuation band.

Citi sees the yuan to rise to 6.62 against the dollar by the end of this year from 6.83.

(Shanghai Daily February 27, 2010)