The world's fastest-growing economy is so hot that the government is considering a currency revaluation prompted by uncontrollable money supply growth, inflation, a runaway stock market and ballooning foreign exchange reserves.
Paulson, whose mandate as U.S. Treasury Secretary amounts to pleas for a stronger yuan, will be only too happy to give credit for the Chinese policy shift to the laws of economics. The People's Bank of China allowed its currency to trade in a wider range, raised interest rates and curbed bank lending on May 18, four days ahead of a meeting between Vice Premier Wu Yi and Paulson in Washington.
``This is a modest and methodical act and very much in keeping with China's own interest,'' said Charlene Barshefsky, the chief U.S. trade negotiator from 1997 to 2001 and now a senior international partner at the law firm WilmerHale in Washington. ``It needs greater control over its economy and it needs to do that now.''
The central bank said the yuan will be allowed to move as much as 0.5 percent on either side of the daily rate it sets against the dollar, up from the current 0.3 percent. The government also raised its one-year benchmark lending rate for the fourth time since April, to 6.57 percent, and boosted bank reserve requirements for the eighth time, by half a percentage point to 11.5 percent.