China has raised interest rates in an attempt to cool the stock market and widened the trading band for its currency, days before top financial officials meet their American counterparts to discuss such trade.

However, the unprecedented flurry of measures announced by the central bank, the People’s Bank of China, will take some time to work through the system. The Government is trying to rein in an economy that is growing at more than 10 per cent annually and starting to show signs of overheating.

The bank widened the trading band of the yuan against the dollar to 0.5 per cent above and below its central parity rate set each morning, from 0.3 per cent previously. The measure will take effect on Monday. The bank also raised its one-year lending rate by 0.18 percentage points and the one-year deposit rate by 0.27 points.

The US has been stepping up pressure on China to allow the yuan to strengthen more quickly. The currency has appreciated by nearly 5.8 per cent since it was revalued by 2.1 per cent and untethered from a dollar peg in July 2005.

Washington reacted cautiously to yesterday’s announcement. Alan Holmer, President Bush’s special envoy for China, said: “The Treasury’s view is that this is a useful step toward an eventual float. The administration takes the issue of the currency very seriously.” The timing of the shift appeared to be no coincidence. In four days, Wu Yi, the Vice-Premier, and a dozen other Chinese officials are due in Washington for the second session of semi-annual US-China strategic economic dialogue. Both sides have pinned hopes for defusing bilateral trade tensions on these talks.

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