China Widens Trading Limit for Yuan

The Associated Press
Friday, May 18, 2007; 9:30 AM

BEIJING (AP) ¿ 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 Web 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 US$232.5 billion last year with China, its biggest ever with any country. This year's trade gap is expected to surpass that.

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.

But Washington has pressed for a faster rise, and some American lawmakers have called for punitive action against China if it fails to take faster action on letting the yuan rise.

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

The Chinese central bank's announcement made no mention of the trade disputes and described the latest change as the next stage in long-range reforms of Beijing's exchange-rate mechanism.

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