China will let its currency rise faster

By Joe McDonald
Associated Press
via Yahoo News
Friday, May 18, 2008

http://news.yahoo.com/s/ap/20070518/ap_on_bi_ge/china_economy;_ylt=Ah6I....

BEIJING -- China took steps Friday to let its currency appreciate faster against the dollar and to cool its sizzling economy ahead of what are expected to contentious talks in Washington over Beijing's soaring trade surplus.

American officials hope a stronger yuan will help to narrow the multibillion-dollar U.S. trade deficit with China by making Chinese goods more expensive. But the Chinese central bank cautioned that the latest change will not lead to "large appreciations" for the yuan.

As of Saturday, the band in which the yuan -- also known as the renminbi, or "people's money" -- is allowed to fluctuate against the dollar each day will be widened from 0.3 percent to 0.5 percent above or below the previous day's closing value, the bank announced.

"It does not mean that the RMB exchange rate will see large ups and downs, nor large appreciations," the bank said on its Internet site. It said Beijing will "keep the exchange rate basically stable" and "safeguard stability of the overall economy."

Also Friday, China raised interest rates for the second time in just over two months and tightened access to credit in a renewed effort to cool its sizzling economy.

The moves came ahead of a two-day meeting starting Wednesday of senior U.S. and Chinese officials that is meant to address complaints about China's trade gap, product piracy and other issues.

Critics say Beijing keeps the yuan undervalued, giving its exporters an unfair price advantage and adding to its swelling trade surplus.

The United States reported a trade deficit of $232.5 billion last year with China, its biggest ever with any country. This year's trade gap is expected to surpass that.

Washington reacted cautiously to Friday's 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," Holmer said.

American manufacturers contend that the appreciation of the yuan so far has done little to trim the trade gap. Some American lawmakers have called for punitive action against China if it fails to take faster action.

But economists say a stronger yuan by itself is unlikely to narrow the trade gap.

The Chinese central bank's announcement did not mention the trade disputes and described the latest change as the next stage in long-range reforms of Beijing's exchange-rate mechanism.

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

A stronger yuan and slower export growth also could help Beijing ease economic strains from the flood of money pouring into the economy from abroad.

Friday's interest rate hike was the fourth in the last 12 months.

Economists had expected it 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.

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

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 government also ordered commercial banks to increase the amount of money they set aside as reserves to reduce the pool of credit for lending. The reserve increase takes effect June 5, the central bank said in a separate statement.

Chinese leaders worry that a construction and lending boom could ignite politically dangerous inflation or a debt crisis.

The government reported 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.

The government also has imposed investment curbs and banned some types of projects outright in the textile, auto and other industries where supply exceeds demand.

But the controls have had a limited impact in a system that is flush with money from booming exports and economic growth that is expected to top 10 percent this year for a fifth straight year.

The last rate hike was March 17.

Premier Wen Jiabao, China's top economic official, said Wednesday the government will make interest rates more flexible and control the growth of the money supply to ensure economic stability.

"There are some problems. We face excessive liquidity, an imbalance in the balance of payments, and rapid accumulation of foreign exchange. But we are taking measures to deal with these issues," Wen said in Shanghai at a meeting of the African Development Bank.

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