The United States kept up pressure on China on Thursday to let the yuan climb as Beijing disclosed it was sounding out exporters on whether they could cope with a stronger exchange rate.

Washington wants Beijing to abandon a currency peg against the dollar that U.S. lawmakers say gives Chinese exports an unfair advantage in world trade and so steals American jobs.

China faced important negotiations over the yuan in coming weeks, U.S. Ambassador Jon Huntsman said, adding Washington was not alone in wanting Beijing to unshackle its currency from the 20-month-old currency peg.

We hope to see more flexibility on the exchange rate, he told students at Tsinghua University, an elite Beijing school.

I would be misleading you if I left you with the impression that this wasn't a very, very important issue in the United States, and will continue to be. We'll see how the next few weeks play out, Huntsman said.

The comments, as well as a demand from 130 U.S. lawmakers on Wednesday for sanctions unless China abandons the peg, did little to alter investors' expectations that the yuan will start rising gradually by the end of June.

A semi-annual U.S. Treasury report due in mid-April could label China a currency manipulator, adding to pressure on Beijing and threatening a deepening rift between the world's biggest and third-biggest economies.

I suspect there will be many important negotiations in the weeks ahead. This is of real concern to people in my country, Huntsman said. Many see the trading relationship with China as a little out of balance, partially because of the currency issue.

He declined to elaborate on the nature of the talks but said the United States was not alone in wanting a stronger yuan. China has kept the currency on ice near 6.83 per dollar since mid-2008 to help its exporters ride out the global credit crunch.

My Chinese friends like to pitch this as just an American issue. I like to say that there are many countries that feel the same way, Huntsman said.

A Japanese deputy finance minister told reporters China should understand global calls for a more flexible yuan but it would be wrong for Washington to resort to sanctions.

UNFAIR, HARMFUL

Chinese officials have given no ground, saying they will not waver in sticking to a stable exchange rate while asserting that their nation is being made a scapegoat for the United States' own economic woes ahead of Congressional mid-term elections.

Qin Gang, a Foreign Ministry spokesman, said U.S. demands for a stronger yuan were unfair and harmful to Sino-American ties. China is the world's biggest exporter.

Resolving such trade frictions requires that both sides be calm and rational, Qin told a regular briefing on Thursday.

A stronger yuan would spell the end for many Chinese exporters in labor-intensive sectors such as garments and furniture, a semi-official trade group said.

If the yuan rises, these companies will face the immediate risk of going bust as their profit margin is already very narrow, said Zhang Wei, vice-chairman of the China Council for the Promotion of International Trade.

While external pressure on China to push up the yuan is intense, domestic pressure to hold it down is even greater, said Zhang, whose members include China's biggest exporters.

He said his group was checking with more than 1,000 exporters on whether they could cope with a stronger exchange rate.

Analysts said too much pressure from the United States could prompt China to dig its heels in.

The more this goes on the more China will go against what the U.S. is wishing for, said Jinny Yan, an economist at Standard Chartered Bank in Shanghai.

Three-month dollar/yuan non-deliverable forwards had priced in a rise of more than 1 percent in the yuan last week but investors scaled back expectations after Premier Wen Jiaobao said on Sunday calls for yuan appreciation were even more protectionist.

ROOM FOR MANOEUVRE

Several branches of the Chinese government, including the ministries of commerce and industry, also conducted currency stress tests last month.

A government source familiar with one of the field trips to China's coastal exporting hubs said the mission came back unconvinced that the pros of a stronger yuan would outweigh the cons because of the razor-thin margins Zhang mentioned.

But having said that, we found that these companies are quite flexible in adapting to new market conditions, he said.

Because they can make a steady profit on their current margins, thanks to high volumes, they have little incentive to move up the value chain, the source added.

So yuan appreciation would be a nice catalyst to force these firms to change for the better, which is also what the government wants to see, he said. It's true that jobs are a major concern. But we're also seeing labor shortages in many places. So I think it should be manageable.

The source said arm-twisting by U.S. lawmakers was counter-productive.

The last thing China will do is be seen bowing to foreign pressure, even if it's the right thing to do. The Americans should keep quiet and not lecture the Chinese. Once it's left alone, China is quite likely to move on the yuan, he said.

(Additional reporting by Eadie Chen in BEIJING; Writing by Alan Wheatley; Editing by Kazunori Takada and Paul Tait)

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