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. Last Updated: 07/27/2016

Chinese Currency In Flux

HONG KONG -- China's central bank announced Friday that it would begin allowing the country's currency to fluctuate more during each day's foreign exchange trading, but again rebuffed demands from the United States and Europe for a sustained rise in the currency.

The bank also raised interest rates and demanded that commercial banks set aside more of their assets as reserves that cannot be lent. Both of the moves are aimed at reducing the risk of overheating in an economy that is growing at more than 11 percent and at taming speculation in domestic stock markets that have more than tripled since the beginning of last year.

The announcement came as top U.S. and Chinese economic policy makers prepared to meet next week in Washington in an effort to head off growing pressures from Congress to confront China over the widening U.S. trade deficit.

But economists said that the latest policy moves, which take effect on Saturday, were unlikely to have any practical effect on China's soaring exports, while the initial reaction from the United States was cautious.

The People's Bank of China said in a statement on its web site that it would allow the yuan to rise or fall up to 0.5 percent in each day's trading. The current daily limit is 0.3 percent.

But the central bank gave a clear signal in its statement that the policy should not be interpreted as Chinese willingness to allow a run-up in the value of the yuan. The bank said it would continue to "keep the exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies."

The bank issued a separate statement quoting an unidentified spokesman as saying that the decision did not mean that the exchange rate "will see large ups and downs, nor large appreciations."

The People's Bank has not allowed the yuan to move the maximum allowed percentage on any day since it broke the yuan's peg to the dollar July 21, 2005. The Chinese government allowed the yuan to rise 2.1 percent then, and has let it inch up by only another 5 percent over the nearly two years since.

In contrast, members of the U.S. Congress from manufacturing states that have lost jobs during China's export boom have been calling for China to revalue by 25 percent or more. If China did allow the yuan to rise more quickly, Chinese exports would become more expensive in foreign markets and foreign goods would be more competitive in China.

Liang Hong, an economist in the Goldman Sachs' Hong Kong office, said the wider trading band represented "a symbolic but laudable development in China's foreign exchange reform."

The initial reaction from the U.S. Congress was chilly. "To widen the band is well and good, but if they don't use the band, nothing will happen," said Senator Charles Schumer, a Democrat who has called for steep tariffs on goods from China unless Beijing lets the yuan rise.

The administration of U.S. President George W. Bush was also cautious but a little more welcoming. "This is a useful step towards greater flexibility and an eventual float of the currency," said Brookly McLaughlin, a U.S. Treasury spokeswoman.