Chian should prevent the value of the yuan from rising "too fast" against other currencies, but an annual increase of 3 percent would be acceptable and not have a large negative affect on foreign trade, the Ministry of Commerce said in a statement.

A sharp increase in the value of the yuan would likely reduce the competitiveness of Chinese products in international markets and cause financial difficulties for labor-intensive industries, the ministry said in a statement posted on its Website late Tuesday.

A quick increase in the yuan's value could also hinder foreign investments in China by pushing up costs, while volatility could shake investor confidence, the statement said.

China's central bank lifted the value of the yuan by 2.1 percent to 8.11 against the US dollar in July, 2005 when it re-pegged the RMB to a basket of currencies. The yuan has advanced a further 1.74 percent since then to close yesterday at 7.9699 against the greenback.

The ministry said a moderate increase in the yuan's value could help "bolster imports, encourage domestic companies to expand overseas and ease trade tensions."

"Based on the double-digit growth in exports and imports, a small increase won't be a problem for the country's overall trade situation," the statement said. "The yuan's appreciation is acceptable as long as the trade environment is under control."

A 3 percent increase will possibly slow export growth by 3 percentage points and boost import growth by the same amount, the ministry said.

In July, Chinese exports rose 22.6 percent to hit US$80.3 billion and imports were up 19.7 percent to US$65.7 billion, pushing the country's trade surplus to an all-time monthly high of US$14.6 billion.

China's economy grew by 11.3 percent in the second quarter of this year, after growing by 10.3 percent in the first quarter.

The ministry's statement said the country should "carefully" carry out changes to the exchange-rate regime and prevent speculators from putting pressure on the yuan to rise.

"Authorities have to boost efforts to curb rapid inflows of hot money," which jumped nearly 12 times to US$12.5 billion in May from February, the ministry said referring to capital that is moved quickly from one investment to another to make short-term gains.

The government should also scrap preferential tax policies for foreign-funded manufacturers and replace them with incentives for high-tech and high value-added companies, it said.

Editor: Yan