The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
EU's new tune unlikely to charm
One year ago, European Union officials seemed barely interested in China or its currency, the yuan.
True, monetary affairs commissioner Joaquin Almunia had gone on record to say that Beijing should allow more exchange rate flexibility. But he had added that Europe understood this was 'not easy to implement'.
Meanwhile, European Central Bank president Jean-Claude Trichet had mentioned that a gradual appreciation of the yuan could be in China's interest. But he acknowledged that the topic was 'delicate' and 'touchy', so he remained 'relatively cautious' about the chance of any significant strengthening.
And when asked whether he was worried about the effect on exchange rates of a possible diversification of Chinese foreign reserves into the euro, one senior ECB official seemed bemused by the question. 'We are not concerned,' he said. 'We would neither promote nor hinder it.'
Now, 12 months on, EU officials are taking a radically different tone. This week a parade of European big shots, including Mr Almunia and Mr Trichet, as well as French President Nicolas Sarkozy, has passed through Beijing. All have called loudly on the Chinese government to let the yuan strengthen, with European trade commissioner Peter Mandelson hinting heavily that if Beijing does not comply, Brussels could retaliate with trade sanctions.
A lot has changed in the past year. Most notably, Beijing's crawling peg, which has seen the yuan strengthen by 6 per cent against the US dollar, means the yuan has actually fallen by 5.5 per cent against the euro.
Since mid-2001 the yuan has fallen by a third against the euro. Over the same period, the EU's monthly trade balance with China has blown out from zero to a deficit of almost Euro10 billion (HK$115.48 billion) in October (see chart). Altogether, the deficit reached Euro131 billion last year. It looks set to exceed Euro150 billion this year.
Not surprisingly, Europeans are getting upset. Although there are plenty of other factors behind their growing deficit, including China's increasing import substitution, EU officials want to see a marked rise in the value of the yuan against the euro. Luxembourg Prime Minister Jean-Claude Juncker, who is also in Beijing this week representing the EU's finance ministers, reckons it needs to appreciate by 20 to 25 per cent to reach fair value.
He is unlikely to have had a sympathetic hearing. Although Beijing does not want a trade spat with Europe, domestic considerations are far more important. As President Hu Jintao has made clear this week, preventing overheating and combating inflation are the main priorities.
There are plenty of influential advisers in Beijing, including within the central bank, who argue that this policy aim could indeed be achieved by allowing the yuan to strengthen more rapidly. So far, however, they have been opposed successfully by other officials, especially within the commerce ministry, who fear that faster appreciation could endanger millions of jobs in low-margin, labour-intensive manufacturing industries.
This policy debate will be played out largely behind closed doors over the next few months. One thing is sure, however. If Beijing does decide to allow the yuan to rise more quickly, it will not be because the Europeans have changed their tune.