The country's decision to shift to a basket of currencies as a reference for the yuan's value will also give policymakers more room to maneuver in their effort to control cross-border capital flows, he said.

The gradualist way of currency appreciation, while causing more inflows of speculative capital, will help control such adverse capital movement, analysts said.

If the annual appreciation of the currency can be kept below 3 percent, it will make it hard for speculators to profit, since they will have to pay dual-way transaction costs that will be close to what they can gain from a rising yuan, said Zhou Shijian, senior economist at the China-US relations research center of Tsinghua University. "If the yuan rises, it must be narrow-floating."

A hasty, swift appreciation of the yuan will make it difficult to control an influx of "hot money" and endanger the Chinese economy, Zhou said, citing widespread trade sector bankruptcies and job losses in the country from October 2007 to July 2008, when the yuan appreciated by 11 percent against the dollar, compared with about 8 percent in the previous two and a half years.

"By claiming that there would be no one-off revaluation this time, the authorities have obviously learnt from that experience," Zhou said.

The yuan has risen by 21 percent against the greenback since 2005. Economists said that if the currency rises gradually, it will benefit the Chinese economy, although it could also bring about uncertainties as the lingering European debt crisis will dampen Chinese exports to Europe, China's largest trade partner.

A rising yuan will also make Chinese imports cheaper, they said. China is now a major importer of such commodities as oil and iron ore.

Similarly, the country's economic restructuring could accelerate toward a services- and consumption-driven economy.

In the short term, efforts to control inflation will be beneficial as well, said Nouriel Roubini, an economist and chairman of economics consultancy Roubini Global Economics.

"Given the context that (China's) inflation is rising, a gradual process of appreciation of the yuan against the dollar is useful not only for the US, but more so for China, because domestic consumption would be cheaper, and it would allow credit policies to cool off."

(Xinhua News Agency June 21, 2010)