China will maintain the stability of its currency while increasing the yuan's flexibility in controllable, gradual steps, Chinese Premier Wen Jiabao said yesterday during a meeting with European Union (EU) financial chiefs.

Wen held talks with Euro Group President and Luxembourg Prime Minister Jean-Claude Juncker yesterday in Nanjing. Also at the meeting were European Central Bank President Jean-Claude Trichet and EU Economic and Monetary Affairs Commissioner Joaquin Almunia.

"China hopes all major reserve currencies will maintain stability," Wen said. "The stability of Chinese currency is an important contribution to world financial stability."

The meetings came ahead of the 12th China-EU summit, amid worries that the rising euro might derail the recovery of a region that imports heavily from China.

"The meeting with Euro Group leaders constitutes an important part of the dialogue mechanism between China and the EU," said Wen. "Such a mechanism was established the year before last, demonstrating the further growth of Sino-EU relations."

The yuan began gaining against other major currencies after a set of exchange rate reforms were introduced in July 2005. After rising nearly 20 percent against the US dollar, the Chinese currency has hovered around 6.83 to the US dollar for about a year.

In the past month or so, the euro has risen to a 15-month high of $1.5061, and any successful intervention to stem the dollar's fall against the euro will probably need China's cooperation.

Patrick Bennett, an Asia Foreign Exchange Rates Strategist with Societe Generale in Hong Kong, said reforms of China's foreign exchange system are aimed at an eventual balance of supply and demand.

"Any expectations that the 5.7 percent annualized pace of gains seen from July 2005-2008 will be repeated are likely to disappoint as moves (outside of a potential one-off revaluation) will be modest in order to encourage an eventual balance of inflow and outflow," he said. "Speculation outside China is interesting but currency policy is home made."

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