China is unlikely to allow any appreciation of the yuan before the middle of next year but will continue to respond to American concerns about its large trade deficit through regulatory and policy means that will have the same effect, JP Morgan's head of economic research and market strategy for Asia says. Without an open capital account, a flexible exchange rate was not possible and that ruled out a major revaluation, William Belchere said yesterday, while outlining the bank's economic outlook for the coming year. However, a gradual widening of the band against the US dollar could happen in the second half of next year, prompting a slight strengthening of the yuan to 8.21 to the US dollar by year-end from 8.28 at present, he added. China was also expected to cut value-added tax rebates at the beginning of next year by 3 per cent to 4 per cent, Mr Belchere said, adding that this 'effectively constitutes a 3 to 4 per cent revaluation of the currency'. In the market, the discount on non-deliverable yuan forwards widened in response to comments from the US administration after Tuesday's meeting between President George W. Bush and Premier Wen Jiabao. By the end of Asian trading, the one-year forward discount had widened to 3,850 to 3,650 pips, implying that the yuan would trade at 7.89 against the US dollar in 12 months' time. During the meeting, Mr Bush again raised the issue of China's fixed currency and said exchange rates should be set by the markets, according to Bloomberg. A group from the US Treasury will start talks with China in January with the aim of persuading it to let the yuan float. 'Since comments from various high officials are always along the lines of keeping the door open for an appreciation, but they never give a time line, the market will continue to speculate,' said Tommy Ong, vice-president of sales, treasury and markets at DBS Bank.