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China Widens Yuan Band Ahead of U.S. Talks

China's central bank said on Friday that it would widen the yuan's daily trading band against the dollar to 0.5%, just days ahead of a key meeting with the United States to discuss trade issues such as the value of China's currency.

The People's Bank of China also said on its Web site (www.pbc.gov.cn) that it would raise both deposit and lending rates, as well as the proportion of deposits that banks must hold in reserve.

The widening of the yuan's band, from the previous 0.3%, will take effect on Monday, the central bank said.

The yuan will now be permitted to rise or fall by 0.5% each day from a mid-point set each morning.

"This is favorable for further promoting the development of the foreign exchange market, and will increase the flexibility of the yuan's exchange rate," the central bank said in a statement.

The United States have been pressuring China to let the yuan, which many in Washington say is artificially undervalued, to strengthen more quickly. The currency has appreciated by nearly 5.8% since it was revalued by 2.1% and untethered from a dollar peg in July 2005.

The announcement by China's central bank comes ahead of the "strategic economic dialogue" between the two sides scheduled for May 22-23. U.S. officials had said they were looking for tangible progress on key issues.

Widening Yuan Daily Trading Band

However, the central bank reaffirmed its official line that it would keep the yuan basically stable, adding that the widening of the band did not necessarily mean there would be large fluctuations in the exchange rate or that the currency would appreciate significantly.

The daily band against other currencies, 3%, would remain unchanged, the central bank said.

The central bank said in a separate statement that the one-year lending rate would increase by 0.18 percentage point and the one-year deposit rate by 0.27 percentage point, effective May 19.

That will bring the one-year deposit rate to 3.06% from 2.79%. The one-year benchmark lending rate will rise to 6.57% from 6.39%.

Banks' reserve requirement ratio would be increased by 0.5 percentage point, effective June 5, the central bank said. That takes the ratio for big banks to 11.5%.

The People's Bank of China has now raised interest rates four times since April 27, 2006, and reserve requirements eight times since June 2006. Analysts have been expecting further tightening, as economic indicators have shown the economy growing quickly.