China will make a one-off revaluation of the yuan within the first quarter of the year and move to a trade-weighted basket of currencies to set its exchange rate by the second half, investment house Goldman Sachs said.

The measures will lead to a five percent cumulative appreciation over the next 12 months, it said.

With low interest rate expectations and yawning current account and budget deficits, the US dollar has been hitting fresh lows against the euro and other major currencies on an almost daily basis.

This is pressuring China to address its exchange rate policy, the investment bank said in a client note.

Although a 10 percent revaluation would be needed to bring the currency to fair value, it expects China to revalue the yuan by 2.5 percent against the US dollar in a "prudent first move" towards a more flexible exchange rate regime.

Goldman Sachs said that China is then likely to move from a direct US dollar peg to a crawling basket of trade-weighted currencies.

It cited a recent mainland media report which said that the government was considering linking the yuan to a basket of 11 trade-weighted currencies.

It noted, however, that because many of these were either managed against or pegged to the dollar, its composition would be 63 percent in dollars and the remainder split between the euro and yen.

Goldman Sachs said that the move to a managed basket of currencies would lead to a one percent appreciation against the basket in six months and 1.5 percent in 12 months, totaling a five percent rise in value overall.

It said that this implies an exchange rate of 8.07, 7.68 and 7.54 yuan to the dollar in three, six and 12 months respectively. The yuan will be valued at 13.00, 12.38 and 12.60 yen over these periods, it said.

The People's Bank of China, the central bank, has not made public any plan to revalue yuan.

President Hu Jintao said last October at the Asia-Pacific Economic Co-operation CEO Summit that maintaining the basic stability of the yuan's exchange rate not only is in the best interests of the Chinese economy, but also conforms to the requirements for economic development in the Asia-Pacific region and the world at large.

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