China Expands Currency Trading Band Ahead of Washington Talks

Just days before Chinese Vice Premier Wu Yi heads to Washington for economic talks, the Beijing government has raised interest rates and increased the amount its currency can fluctuate in value. The wider trading band for the yuan, or renminbi, means it can rise faster against the dollar, and that could help reduce China's trade surplus with the United States. Daniel Schearf reports from Beijing.

China's central bank, the People's Bank of China, announced Friday it would allow the yuan to fluctuate by point five percent a day against the dollar, up from point-three percent.

The new trading band will take effect on Monday, one day before China's top trade negotiator, Vice Premier Wu Yi, is due in Washington for the second round of the China-U.S. Strategic Economic Dialogue.

China's currency is expected to be a hot topic at the meeting. American politicians have blamed China's controls on the value of the yuan for "artificially" making the country's exports cheaper, leading to a growing trade gap and U.S. job losses.

Connie Bolland is chief economist of Economic Research Analysis in Hong Kong. She says the economic impact of the widened band will be small, but the gesture is significant.

"It's really something to kind of calm the Senate and the Congress' concerns of China taking all the jobs from the U.S. by keeping the currency artificially low. By widening the band it means China is a bit more relaxed about letting the currency go up or down faster."

U.S. politicians have been pressing the White House to do something about a record trade deficit with China that last year was over 230 billion dollars.

China has rejected U.S. pressure, but says it will gradually increase the flexibility of its currency.

The central bank also announced Friday it would raise the benchmark one-year lending interest rate by point one-eight percent, and the deposit rate by point two-seven percent. China has slowly been raising interest rates and minimum deposit requirements for banks to try to cool an economy that is threatening to overheat in some sectors.

David Mann, senior foreign exchange strategist at Standard Chartered Bank in Hong Kong, says the economic impact of Friday's announcements will be small.

"The strength of the economy is really remarkable. But we will be expecting it to be fairly marginal, the actual impact. It would need substantially further reserve ratio hikes, rate hikes to really slow things down."

Beijing ended a fixed exchange rate with the dollar in July 2005. Since then the currency has risen by seven point four percent.