China Lets Yuan Rise Faster Before Paulson Meeting

May 18 (Bloomberg) -- China's government increased the amount its currency can appreciate, raised interest rates and curbed bank loans to tame a runaway economy and ease trade tensions with the U.S. and Europe.
The measures, announced today on the central bank's Web site, may be aimed at appeasing U.S. lawmakers who say the yuan is kept artificially weak to make China's exports cheap. Chinese Vice Premier Wu Yi and U.S. Treasury Secretary Henry Paulson meet May 22-24 in Washington.
``This is clearly designed to get headlines ahead of the dialogue next week,'' said Julian Jessop, chief international economist at Capital Economics in London. ``By raising rates and reserve requirements, the central bank sends a signal to domestic investors to dampen speculation in the equity market.''
China's benchmark CSI 300 Index of stocks has soared 85 percent this year.
The yuan will be allowed to move as much as 0.5 percent either side of a daily fixing rate against the dollar, up from 0.3 percent, the central bank said. Gains will help temper the export-led expansion that has flooded the banking system with cash, raising concern about a stock market bubble in the world's fastest-growing major economy.
The currency closed at the highest since China ended a link to the U.S. currency in July 2005, rising 0.1 percent for the week to 7.6686 per dollar at 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The central bank has allowed the yuan to increase 7.9 percent since the end of the fixed exchange rate.
Willing to Act
``This is China trying to show the U.S. that China is willing and trying to act on the currency issue,'' said Jeffrey Tan, a treasury dealer at Maybank Shanghai.
The yuan never moved the maximum permitted under the previous daily limit. The biggest move this year against the dollar was a 0.22 percent gain on May 11.
The widening is ``only a small and symbolic move,'' said Audrey Childe-Freeman, an economist at CIBC World Markets in London. ``Perhaps another step in the right direction at a snail pace.''
The one-year benchmark lending rate will be raised to 6.57 percent from 6.39 percent, starting tomorrow, the People's Bank of China said. The one-year deposit rate will be increased to 3.06 percent from 2.79 percent. Both rates are the highest in more than eight years.
It's the first time since 1993 that China has raised deposit rates more than lending rates. The benchmark deposit rate will be above the inflation rate for the first time in four months.
Soaring Stocks
That may help to stem the flow of money from households' bank accounts to the stock market. Household yuan deposits fell by 167.4 billion yuan ($21.8 billion) in April from a month earlier, the first decline since February 2003.
Li Ka-shing, Asia's richest man, yesterday warned of a bubble in China's stock market, echoing comments by People's Bank of China Governor Zhou Xiaochuan.
``The government can't just sit there and do nothing as deposits leave the banking system,'' said Dong Tao, chief Asia economist at Credit Suisse Group in Hong Kong. ``If the hike can slow money flows into the stock market, that could provide less ammunition for speculators.''
A record 9.2 percent plunge in the CSI 300 on Feb. 27 triggered a five-day rout that wiped more than $3.3 trillion from the market value of equities worldwide.
`Market Exuberance'
Lenders must put aside 11.5 percent of deposits starting from June 5, up from 11 percent, the People's Bank of China said. That is the fifth increase in banks' reserve ratios this year, compared with three in all of last year.
``This is the single, biggest move yet on the part of the Chinese government to calm the stock market and address fundamental problems in its economy,'' said Tomo Kinoshita, chief economist for Asia ex-Japan at Nomura International Hong Kong Ltd. ``The signal is unmistakable: the government wants to stop the stock market exuberance and stem excess liquidity.''
The nation's trade surplus, which ballooned 74 percent last year to a record $177.5 billion, drove the country's foreign- exchange reserves to an all-time-high of $1.2 trillion, making it difficult for the government to slow growth.
China's economy expanded 11.1 percent in the three months ended March 31, exceeding 10 percent for a fifth quarter.
China needs to develop a more flexible exchange rate, the National Development and Reform Commission, the nation's top planning agency, said on April 25.