China eases currency controls on yuan before trade talks with U.S.

China took steps Friday to let its currency trade more freely against the dollar and to cool its sizzling economy ahead of talks in Washington over Beijing’s soaring trade surplus.

China eased controls on the yuan amid pressure from the U.S. and Europe, but cautioned against expecting sharp increases in its value. The U.S. responded that Beijing was not moving fast enough to allow its currency to strengthen and help reduce its growing trade gap.

The Chinese government also raised interest rates for the second time in just over two months and tightened bank credit to slow its economy.

American officials are pushing Beijing to raise the yuan’s value in hopes that will help cut the multibillion-dollar U.S. trade deficit with China by making Chinese goods more expensive.

In the latest change, the yuan will be allowed to fluctuate against the dollar by 0.5% a day, up from 0.3%, the central bank announced. Still, the bank said it would keep the yuan -- also known as the renminbi, or “people’s money” -- “basically stable” to safeguard economic stability.

“It does not mean that the RMB exchange rate will see large ups and downs, nor large appreciations,” the bank said on its website.

The move comes as senior U.S. and Chinese officials prepare to meet in Washington next week to discuss China’s trade surplus, product piracy and other contentious issues.

Critics say Beijing keeps the yuan undervalued, giving its exporters an unfair price advantage and swelling its trade surplus with the U.S. to $232.5 billion last year. Some American lawmakers want punitive action against China if it fails to move quickly on the yuan.

The U.S. government reacted cautiously to Friday’s announcement.

“The Treasury’s view is that this is a useful step toward an eventual float,” said Alan Holmer, President Bush’s special envoy for China. “The administration takes the issue of the currency very seriously.”

Beijing revalued the yuan against the dollar by 2.1% in July 2005 and has let it rise another 5.3% since then in tightly controlled trading.

“That is not fast enough as far as the administration is concerned,” Holmer said.

Germany, Europe’s biggest economy, welcomed the change.

“That is a positive sign,” German Finance Minister Peer Steinbrueck said.

Chinese officials say the country needs a more flexible exchange rate to ease the strains of its huge, export-driven inflows of money.

They say eventually they will let the yuan trade freely on world markets. But they insist that dropping controls too quickly could damage frail Chinese banks and financial industries, causing economic turmoil.

Communist leaders also are worried that a stronger yuan might hurt export-dependent Chinese producers of toys, textiles and other goods, boosting unemployment and fueling social tensions.