China says hands off yuan

China told the rest of the world on Friday not to meddle with the way it manages the yuan, setting the stage for a clash with its biggest trading partners at next week's G20 summit.

U.S. President Barack Obama released a letter to his Group of 20 colleagues that zeroed in on prickly policy differences over China's currency stance and debt-wary Europe's rush to rein in bulging budget deficits.

World leaders gathering in Toronto next week are struggling to maintain the crisis-forged unity that has been credited with preventing another Great Depression. Now that the global economy is on the mend, divisions are beginning to show.

Cui Tiankai, a vice foreign minister who is China's official in charge of preparing for the G20 summit, said the yuan was China's currency, so I don't think it is an issue that should be discussed internationally.

China has kept the yuan, also known as the renminbi, steady around 6.83 per dollar for almost two years to help its exporters ride out the global financial crisis. Many Western economists believe it is undervalued by as much as 40 percent.

Obama, under pressure from some lawmakers who accuse his administration of soft-pedaling on China, said free-floating currencies were essential to global economic activity, a thinly veiled reference to the yuan.

His administration has stopped short of accusing China of manipulating its currency to give it a trade advantage, something that some members of Congress have urged.

The Treasury Department delayed its regular currency report to Congress, which was due in April, angering some lawmakers who think the administration is dragging its feet.

DON'T PULL THE PLUG NOW

Obama also directed stern words at Europe. In a letter to G20 colleagues dated June 16, he said the highest priority at next week's meeting must be to safeguard the recovery and not succumb too soon to demands that government debt shrink.

We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now, he said.

The United States has urged Germany in particular not to pull the plug on government spending too soon for fear that doing so will derail the still-fragile economic recovery.

Berlin thinks shoring up public finances is an immediate priority, underscored by Greece's debt troubles and growing worries that other small, heavily indebted European countries could face a similar fate.

Obama said it was critical that the timing and pace of the fiscal pullback suit the needs of the global economy and not just domestic demands.

The United States and China appeared to find some common ground on this issue. Zhu Guangyao, China's vice finance minister, said countries with serious budget deficits should accelerate fiscal consolidation but in a manner that is growth-friendly.

U.S. Treasury Secretary Timothy Geithner has used the same phrase in recent weeks to describe the U.S. position on debt.

Obama said countries should be prepared to respond quickly and forcefully to avert another slowdown if the recovery fades. That might not be well received at home, where Obama has faced resistance from Congress over adding to an already swollen government debt burden.

(Additional reporting by Emily Kaiser, Editing by Kristin Roberts and Doina Chiacu)