MercoPress. South Atlantic News Agency

China raises rates to cool economy but, US unmoved

US Treasury Department described China's Central Bank decision to raise its one year lending interest rates from 5.58 to 5.85% as “positive”, but demanded more flexibility for the Yuan in money exchange markets.

"It would be better to make the Chinese currency totally flexible and let the market act", said Tony Fratto spokesperson for the US Treasury.

China's Central Bank decision, the first of its kind in 18 months is geared to tighten lending and curb investment which has helped the economy expand 10.2% in the first quarter. Fearing unbridled growth could fuel inflation Beijing's expansion target for 2006 is 8% following last year's 9.9%.

The measure was interpreted by market analysts as "unexpected and positive" since it signals a "proactive Central Bank", although previous experiences with lending rates, October 2004, haven't been successful in curtailing excess liquidity.

Until now Beijing has avoided raising interest rates, despite worries about the economy overheating.

However, Beijing is trying to gradually shift the balance of economic growth away from investment to consumption and President Hu Jintao recently expressed concerns about the neck breaking pace of economic growth, saying the government wanted to focus more on improving the lives of China's poorest.

Authorities recently called on banks to screen potential borrowers more thoroughly in an effort to reduce lending.

United States and the Europe Union arguing they are being flooded with "cheap" Chinese imports have been pressing Beijing to give the Yuan more floating space in money markets.

Beijing has promised to concede but at its own time and pace which is considered insufficient by US Congress.

In the coming weeks the US Treasury will be presenting a report on world exchange rates and could formally accuse China of "manipulating" its currency to promote and preserve exports. The findings of the report eventually could open the door for trade sanctions against China from United States.