updated 5/18/2007 2:06:46 PM ET 2007-05-18T18:06:46

China began letting its currency gradually rise against the dollar almost two years ago, a grudging response to complaints by trading partners that a weak yuan was behind the country’s soaring trade surpluses.

Since then, the U.S. trade gap with China has soared to its highest ever, and looks set to rise further this year, even as the yuan has strengthened more than 7 percent against the dollar over that period.

So, on the cusp of trade talks with the U.S., China on Friday took steps to let the yuan’s rise against the dollar pick up a bit of steam.

The U.S. response? Not fast or radical enough.

A move that was perhaps meant to mollify Europe and the U.S., may instead provide a flashpoint for what’s expected to be contentious discussions in Washington next week about trade irritants that include product piracy, exchange rates and protectionism.

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 and U.S. exports cheaper and more competitive in China.

In the latest change, the yuan will be allowed to fluctuate against the dollar by 0.5 percent a day, up from 0.3 percent, 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 Web site.

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 take faster action 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 percent in July 2005 and has let it rise another 5.3 percent 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 at a meeting of finance ministers outside Potsdam.

China’s announcement Friday did not mention the trade disputes and described the change as the next stage in long-range reforms of Beijing’s exchange-rate mechanism.

“Substantive progress has been made. Meanwhile, the Chinese economy is undergoing a steady and relatively fast growth; the financial reform is further deepened,” the bank said. “All these factors have created a favorable condition for further improving the exchange rate regime.”

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 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.

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

Friday’s interest rate hike was the fourth in the last 12 months. The last rate increase was March 17.

Economists had expected the move after the government reported investment in real estate, factories and other urban assets was growing by double digits, indicating earlier interest rate rises were failing to moderate the boom.

So far, the controls have had a limited impact in a system that is flush with money from soaring exports and economic growth that is expected to top 10 percent for a fifth straight year. Chinese leaders are trying to reduce a growing construction and lending bubble, worried that it could ignite politically dangerous inflation or a debt crisis.

The central bank has been forced to drain billions of dollars a month from the economy by selling bonds to reduce pressure for prices to rise. That has led to Beijing piling up more than $1.2 trillion in foreign reserves.

The 0.18 percent increase takes effect Saturday and raises lending rates to 6.57 percent on a commercial one-year loan, the central bank said on its Web site.

Banks also were ordered to set aside more reserves, reducing the amount of money available for lending. The increase takes effect June 5, the central bank said in a separate statement.

The government said Thursday that investment in urban fixed assets jumped by 25.5 percent in the first four months of the year. That exceeded the 2006 full-year growth rate of 24.5 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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