- The Washington Times - Friday, May 18, 2007

BEIJING (AP) — China took steps yesterday to let its currency trade more freely against the dollar and to cool its sizzling economy ahead of talks in Washington over Beijing’s soaring trade surplus.

China eased controls on the yuan amid pressure from the U.S. and Europe, but cautioned against expecting sharp increases in its value. The U.S. responded that Beijing is not moving fast enough to allow its currency to strengthen and help reduce its growing trade gap with China.

The Chinese government also raised interest rates for the second time in just over two months and tightened bank credit to slow its economy.

American officials are pushing Beijing to raise the yuan’s value in hopes that will help cut the multibillion-dollar U.S. trade deficit with China by making Chinese goods more expensive.

In the latest change, the yuan will be allowed to fluctuate against the dollar by 0.5 percent a day, up from 0.3 percent, the central bank announced. Still, the bank said it would keep the yuan — also known as the renminbi, or “people’s money” — “basically stable” to safeguard economic stability.

“It does not mean that the RMB exchange rate will see large ups and downs, nor large appreciations,” the bank said.

The move comes as senior U.S. and Chinese officials prepare to meet in Washington next week to discuss China’s trade surplus, product piracy and other contentious issues.

Critics say Beijing keeps the yuan undervalued, giving its exporters an unfair price advantage and swelling its trade surplus with the United States to $232.5 billion last year. Some American lawmakers want punitive action against China if it fails to take faster action on the yuan.

The U.S. government reacted cautiously to the announcement.

“The Treasury’s view is that this is a useful step toward an eventual float,” said Alan Holmer, President Bush’s special envoy for China. “The administration takes the issue of the currency very seriously.”

Beijing revalued the yuan against the dollar by 2.1 percent in July 2005 and has let it rise another 5.3 percent since then in tightly controlled trading.

“That is not fast enough as far as the administration is concerned,” Mr. Holmer said.

Germany, Europe’s biggest economy, welcomed the change.

“That is a positive sign,” German Finance Minister Peer Steinbrueck said at a meeting of finance ministers outside Potsdam.

Chinese officials say the country needs a more flexible exchange rate to ease the strains of its huge, export-driven inflows of money.

They say eventually they will let the yuan trade freely on world markets, but they insist that dropping controls too quickly could damage frail Chinese banks and financial industries, causing economic turmoil.

Communist leaders also are worried that a stronger yuan might hurt export-dependent Chinese producers of toys, textiles and other goods, boosting unemployment and fueling social tensions.

Yesterday’s announcement did not mention the trade disputes and described the change as the next stage in long-range reforms of Beijing’s exchange-rate mechanism.

“Substantive progress has been made. Meanwhile, the Chinese economy is undergoing steady and relatively fast growth; the financial reform is further deepened,” the bank said. “All these factors have created a favorable condition for further improving the exchange rate regime.”

The interest rate increase announced yesterday was the fourth in the last 12 months. The last rate increase was March 17.

Economists had expected the move after the government reported investment in real estate, factories and other urban assets was growing by double digits, indicating earlier interest rate rises were failing to moderate the boom.

So far, the controls have had a limited impact in a system that is flush with money from soaring exports and economic growth that is expected to top 10 percent for a fifth straight year. Chinese leaders are trying to reduce a growing construction and lending bubble, worried that it could ignite politically dangerous inflation or a debt crisis.

The central bank has been forced to drain billions of dollars a month from the economy by selling bonds to reduce pressure for prices to rise. That has led to Beijing piling up more than $1.2 trillion in foreign reserves.

The 0.18 percent increase takes effect today and raises lending rates to 6.57 percent on a commercial one-year loan, the central bank said on its Web site.

Banks also were ordered to set aside more reserves, reducing the amount of money available for lending. The increase takes effect June 5, the central bank said in a separate statement.

The government said Thursday that investment in urban fixed assets jumped by 25.5 percent in the first four months of the year. That exceeded the 2006 full-year growth rate of 24.5 percent.

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