China wants to move towards a floating currency system that would link the yuan to a basket of currencies rather than just the US dollar, its senior foreign exchange official has said.

No timetable was given, but the comments, published yesterday, were the clearest indication yet of how China might reform its long-standing fixed currency policy, analysts said.

Beijing's bottom line was that the yuan's value must initially be kept stable if it moved to let market forces play a bigger role in setting the exchange rate, they said. "We don't think that a fixed system is good. We think that a floating system is good," Mr Guo Shuqing, head of the State Administration of Foreign Exchange, was quoted as saying in an interview in the Financial Times.

"This is an integrated, systemic approach. We have done a lot of research [on using a basket of currencies\]. In the past we had such a system. The floating system will also have some reference to a basket [of currencies\]."

The currency has been pegged to the US currency since 1996 and trades in a razor-thin band from 8.276 to 8.280 under what Beijing calls a "managed float".

Markets have speculated China could still revalue the yuan - also known as the renminbi - at a stronger rate against the dollar or widen the band in which it is allowed to trade.

A shift to a basket system would tie the currency's value to the combined exchange rate of a handful of currencies from major trading partners. A basket would at least include the dollar, yen and euro, and might hold as many as seven other currencies, such as the South Korean won and Singapore dollar, analysts said.

Critics of the peg, most notably US manufacturers, say the peg makes Chinese goods artificially cheap on world markets at the cost of jobs in industrial countries, particularly the US.

Representatives of the forex administration and the central bank declined to comment.

The comments come just before a meeting of the Group of Seven (G7) economic powers on Saturday. The G7 comprises the United States, Japan, Germany, Britain, France, Italy and Canada.

Although China is not a G7 member, it has come under fire from the US over its currency system. Beijing has so far resisted pressure to revalue, saying it would make the currency more flexible by introducing reforms in its own time.

Mr Stephen Roach, chief economist for Morgan Stanley, said he firmly believed China should not tamper with the currency now.