The yuan has been pegged at a rate of 8.28 to the US dollar for years, a rate which the US - as well as Japan and the European Union - now suggest is a long way out of step with China's surging exports and breakneck economic growth.

Politicians lining up for next year's US presidential election are beginning to blame the weak yuan for some of the 2.8 million jobs lost in the US since early 2001.

But according to S&P, the Chinese would be ill-advised to accede to the pointed requests emanating from Washington DC - and in any case, the jobs accusation is wide of the mark.

Past experience

Observers need only look at the chaos caused by the Asian economic meltdown of 1997-8 as an example of how a weak banking system, floating currencies and loose capital controls can trigger crisis, said S&P.

"China's banking system is insolvent, with problem loans estimated by S&P at 45% of total loans, and its risk control systems are ill-prepared to deal with a rapid liberalisation," said Paul Coughlin, Managing Director of S&P's Asia Pacific corporate & government ratings.

The banks rely on high savings rates to sustain the bad debts, S&P said, aided by the inrush of money in the form of investment by foreign firms.

"The volatility from a revaluation - or devaluation - coupled with capital flight, could crystallise the banks' insolvency," Mr Coughlin said.

"The banks credit risk is also substantial, given that many of its borrowers, especially public enterprises, are hardly profitable."

The economic data also suggests that imports of goods and services are growing along with the surging export performance, S&P says.

While China may choose to give up the fixed peg, it is much more likely to tie the yuan to a basket of currencies - as do many Asian nations since the currency crisis - than to allow it to float as the US wants.

China has made occasional noises suggesting it appreciates the US concerns, saying - without mentioning a date - that an eventual float is on the cards.