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China Holds Door Open A Crack To U.S. On Yuan

"China will continue to steadily advance reform of the [yuan] exchange rate formation mechanism," Chinese President Hu Jintao said.

"China will continue to steadily advance reform of the [yuan] exchange rate formation mechanism," Chinese President Hu Jintao said.

BEIJING (Reuters) -- China struck a conciliatory note in talks with the United States by vowing to spur domestic demand and keeping a guarded opening to exchange rate reform, which the Obama administration says is needed to rebalance the global economy.

The United States treaded softly on the subject and welcomed Beijing's long-standing pledge to reform the yuan as the two sides opened their second Strategic and Economic Dialogue on May 24.

But both countries also made clear that a stronger Chinese currency was not enough by itself to narrow the whopping U.S. bilateral trade deficit that has fueled tensions between them at a time when the global economic recovery remains fragile.

While Chinese President Hu Jintao broke no new ground on the yuan dispute, he set an amicable tone for the two days of talks during which the world's biggest and third-biggest economies will seek to steady their relations.

"China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable, and gradual," he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington -- worried about its yawning trade deficit with China -- has also advocated.

U.S. President Barack Obama, in statement released later in Washington, said the two nations could collaborate.

"Together, we can promote economic growth that is balanced and sustained and trade that is free and fair," Obama said, in a coded reference to his desire for more yuan flexibility.

U.S. Treasury Secretary Timothy Geithner said the Chinese government was moving in the right direction on the yuan, which has been effectively pegged to the dollar since the global financial crisis worsened in mid-2008.

"We welcome the fact that China's leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda," he said.

Trying to press the case that appreciation would be in China's own interest, Geithner said that a more market-driven exchange rate would help suppress inflation while also driving private firms to move up the value chain.