A government economist has called on authorities to increase the flexibility of the exchange rate and seek a more 'appropriate appreciation' of the yuan next year, according to an analysis published in the official China Securities Journal.

'China has underestimated the costs of a slight appreciation and overestimated risks of a more appropriate pace,' He Fan, an economist with the Chinese Academy of Social Sciences, said.

He noted that China's trade surplus has expanded rather than contracted after the revaluation in July 2005 while the yuan has actually been depreciating against the euro and yen due to the rapid decline in the dollar.

'A modest appreciation is not helpful in dampening market speculation and will encourage inflow of hot money,' he said.

But He added that China should make its own currency policy decisions based on national interest.

He said it is wrong to let the yuan appreciate due to US pressure, but it is also unwise to hold back an appreciation simply to defy the US.