EU-China in tug-of-war summit over yuan, trade

BRUSSELS, October  6, 2010 (AFP) - China heads for a potentially divisive summit with Europe on Wednesday as Brussels raises demands for improved conditions with its second-largest trade partner and presses for revaluation of the yuan.

The EU-China meeting follows an EU-South Korea summit the same day marked by the signing of a historic free trade pact, the first in a possible slew that Europe hopes to seal with Asia.

"Trade liberalisation," said EU president Herman Van Rompuy at the signing ceremony, "is key to the recovery of the world economy."

But complaints over access to China's market and skewed trade patterns are likely to add to the list of grievances piling up against Beijing -- with a row over the value of the yuan sitting top of the list.

China, already under fire from all sides for an "undervalued" yuan the West says promotes its exports, came under new pressure over the issue at a two-day summit of 46 European and Asian leaders in Brussels on Monday and Tuesday.

"Orderly, significant and broad-based appreciation of the renminbi (yuan) would promote more balanced growth," said leading eurozone finance minister Jean-Claude Juncker after talks with Chinese premier Wen Jiabao on Tuesday.

"Exchange rates should be as realistic as possible," said German Chancellor Angela Merkel.

Europe's trade commissioner Karel De Gucht meanwhile said the bloc was mulling ways of blocking Chinese companies from bids for public works projects unless European companies get the same access to China.

"We will be launching a study on this in October," he said as business leaders across the EU moan about the deteriorating limate for foreign firms in China and reduced quotas.

The yuan dispute is likely to loom large at the annual International Monetary Fund meeting beginning Friday in Washington.

The United States and the European Union have become become increasingly frustrated by the massive trade surpluses that China and other emerging countries build up on the back of cheap exports.

China pegged the yuan at about 6.8 to the dollar for the past two years but said in June that it would allow the unit to rise, partly to calm growing criticism of Beijing.

Since then, however, the yuan's gains have been minimal while Wen has warned that allowing the currency to strengthen too much could wreck Chinese exports and spark massive social unrest if the economy slumped as a result.

On Monday, Wen rebuffed calls to revalue the currency, calling for stability in the exchange rates of major currencies.

Some analysts believe the yuan should be valued as much as 40 percent higher and Brazil's Finance Minister Guido Mantega has warned that the world is already locked in "an international currency war."

Wen meanwhile also wants Europe to give far more say to developing countries in how the world is ordered, not only in the IMF but also in the other agencies such as the World Bank.

"We have sent clear signals on the modernisation of the international financial institutions," Van Rompuy said at the close of the bi-annual Asia-Europe summit.

"This process needs to take into account the realities of today's world economy -- the shifts that have taken place and the strong growth in dynamic emerging markets and in developing economies."