* China to drop "special" yuan policy sooner or later
* Timing of exit from stimulus requires prudence
* Central banker warns banks on lending to localgovernments
* Says dollar still reigns supreme in global economy
(Recasts with central bank chief"s comments)
By Zhou Xin and Benjamin Kang Lim
BEIJING, March 6 (Reuters) - China flagged on Saturday itwill let the yuan resume its rise at some point as it unwindsthe super-loose policies it has been pursuing to prop up theworld"s third-largest economy.
China is under intense pressure from the United States andEurope to abandon the exchange rate peg it instituted of around6.83 yuan per dollar since mid-2008 to preserve thecompetitiveness of its exporters during the internationalfinancial crisis.
Speaking during the annual session of China"s parliament,central bank governor Zhou Xiaochuan said Beijing wouldeventually have to drop this "special" yuan policy, one of arange of emergency measures taken to cushion the blow togrowth.
"Practice has shown that these policies have been positive,contributing to the recovery of both our country"s economy andthe global economy," Zhou told a news conference.
But he added: "The problem of how to exit from thesepolicies arises sooner or later."
China would have to be careful in withdrawing theextraordinary stimulus it has provided since late 2008.
"If we are to exit from these irregular policies and returnto ordinary economic policies, we must be extremely prudentabout our choice of timing. This also includes the renminbiexchange rate policy," he added.
Beijing fears a tide of capital will flow into China ifspeculators sense the yuan, also known as the renminbi, isstrengthening.
Zhou expressed concern about whether China"s extensiveholdings of U.S. assets would retain their value, but said thedollar was still the currency that played the key role inglobal trade and investment flows.
LINGERING CRISIS
Zhou was speaking after the bank issued a statementreaffirming a pledge made a day earlier by Premier Wen Jiabaoto keep the yuan "basically stable" in 2010.
Economists say that phrasing is broad enough to accommodatea renewed appreciation of the exchange rate -- a decision thatwould have to be taken by Wen and the State Council, China"scabinet.
The People"s Bank of China has already ordered banks twicethis year to increase the proportion of deposits they must holdin reserve, rather than lend out, in order to gently slow theeconomy and nip inflation in the bud.
But, unlike Australia or Malaysia, the central bank has yetto increase interest rates, leaving investors anxious for cluesas to how rapidly it might withdraw its stimulus.
Zhou signalled the bank would tread carefully and"flexibly" in implementing its relatively loose pro-growthmonetary policy.
"Even though the global economy is at present trendingtowards recovery, the influence of the crisis is still veryserious," he said.
Chinese exports plunged 16 percent in 2009 and CommerceMinister Chen Deming said it might take them two to three yearsto regain pre-crisis levels.
Speaking at the same news conference, Chen defendedBeijing"s policies to help its exporters as being in line withglobal trade rules and said China"s trade surplus reflectedbroad economic factors, not a cheap exchange rate.
BE CAREFUL
Turning to the hot topic of lending to local governments,the central bank chief warned banks they were taking risks byfinancing some projects that were unviable and by extendingcredit against the collateral of land because the price of thatland might fall.
Some economists and officials have voiced growing concernabout a surge of credit to local governments, which typicallypledge land as backing for loans taken out by investmentcompanies under their control.
Yan Qingmin, head of the Shanghai bureau of the ChinaBanking Regulatory Commission, said on Thursday these financingvehicles had borrowed a total of 6 trillion yuan ($879 billion)from banks by the end of 2009. [ID:nTOE62302L]
Land prices soared last year and critics fear a relapsecould expose the weakness of local government finances and sowa new crop of bad loans on the books of the nation"s banks.
The PBOC said it would promote regional currency andfinancial cooperation and step up coordination andcommunication with other central banks, particularly on majorpolicy issues.
It singled out continuing participation in meetings of theGroup of 20 advanced and developing economies, which issupplanting the Group of Seven industrial nations as thepremier global economic policy forum. (Writing by Alan Wheatley and Simon Rabinovitch; Editing byBill Tarrant)
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