Central bank

"Foreign exchange inflows will force more liquidity into the financial system, making it more difficult for the central bank to manage inflation and control asset bubbles," Wang said.

The yuan is allowed to trade 0.5 percent on either side of a daily reference rate against the dollar set by the central bank, a limit that could be raised to 1 percent or 3 percent to increase uncertainty, the economist said.

China's currency has stayed at about 6.83 per dollar for the past 15 months as the government shields exporters from a slump in world trade. In September, exports fell by the least in nine months, suggesting that demand is starting to revive.

Wang said she doesn't expect policy makers to take her advice. She sees the yuan staying pegged to the US currency for six to nine months as the government continues to protect exporters, then rising to as much as 6.4 per dollar by the end of 2010.

US treasury

A more flexible Chinese currency is needed for "a stronger, more balanced global economy," the US Treasury said in a report to Congress, released Oct 15. That report called the yuan "undervalued".

Asian Development Bank economist Yolanda Fernandez Lommen cautioned last month that excessive gains by the currency could lead to instability in the world's most populous nation.

The Ministry of Commerce said recently that the government would stick to a "gradual" approach to currency reform.

Central Bank Vice-Governor Ma Delun warned on Oct 20 that policy challenges will increase as expectations for a stronger yuan boost inflows of capital.

The State Council said on Oct 21 that the policy focus in coming months will need to "balance" the need to aid growth with "the need to better manage inflationary expectations".

Consumer prices gained for a second month in September from August, rising 0.4 percent. Year-on-year, prices slid for an eighth month.