BEIJING, June 25 (Reuters) - China's Ministry of Commerce, a long-standing opponent of a stronger yuan, fell into line on Friday behind the scrapping of the currency's peg to the dollar but said the exchange rate would climb only gradually.

The ministry has traditionally resisted a rise in the yuan CNY=CFXS, arguing it would spell bankruptcy for many export-oriented manufacturers working on thin margins.

But Vice Commerce Minister Jiang Yaoping said the impact of the exchange rate was secondary to a host of other factors, including final demand, wages, the cost of raw materials, the level of interest rates and tax rates.

Looking at the timing of China's currency reform, we can say that the overall benefits to exports are greater than the damage, he told a forum.

The People's Bank of China said on Saturday that it would once again allow the yuan to move more freely after having kept the currency more or less pegged to the dollar for two years to provide stability for exporters during the global downturn.

The yuan has risen about 0.5 percent against the dollar since then to its highest level since its July 2005 revaluation, though gains have been kept in check by big state-owned banks. [CNY/]

Jiang cited conditions in 2005-2008, when Chinese exports continued to grow strongly despite a cumulative 21 percent rise in the yuan against the dollar.

But he said the pace of future currency appreciation would be gradual and rejected charges that China was unfairly holding down the yuan to give its companies an advantage in global markets.

Some Western economists believe the yuan is undervalued by as much as 40 percent.

Jiang sidestepped a question about whether exporters could cope with a yuan rise of 3 to 5 percent within a year, saying the rate of appreciation would be decided by the market.

First, China's yuan currency reform will be gradual. Second, accusations that China is manipulating its currency are groundless. The facts have proved that it's not true.

NOT TOO QUICK

A second government official also ruled out a big move in the yuan in coming months and said last Saturday's announcement was timed to take pressure off China at this weekend's summit of Group of 20 leading economies in Toronto.

In the longer term, the yuan will appreciate but only very gradually, the official, who declined to be identified, said.

The comments are likely to be grist for the mill of U.S. lawmakers who are sceptical of China's willingness to permit a substantial rise in the value of a currency they argue is kept deliberately undervalued, to the detriment of U.S. jobs.

As the dominant player in China's tightly controlled currency market, the PBOC could let the yuan appreciate more swiftly by scaling back its purchases of dollars.

Thanks to the central bank's intervention down the years, China has built a stockpile of official currency reserves worth $2.45 trillion at the end of March.

With Congress weighing legislation to prod Beijing to relax its grip, U.S. President Barack Obama said China had made progress by announcing greater currency flexibility, but it was too early to say whether it would go far enough.

The initial signs were positive. But it is too early to tell whether the appreciation, that will track the market, is sufficient to allow for the rebalancing that we think is appropriate, Obama said on Thursday.

The PBOC has said the main aim of reverting to the managed float that it suspended in mid-2008 is to inject more two-way volatility into the currency, not to propel it sharply higher.

Some economists have speculated that the central bank, to underline its point, might let the yuan decline at times, for instance if the euro were to fall further against the dollar.

But the second government official ruled out this option as a political non-starter.

It would be too costly because it would lead to more criticism and pressure from the international community, he said.

You know, so many eyes are now trained on China's foreign exchange policy. (Additional reporting by Aileen Wang; Editing by Kim Coghill)

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