US to push China on interest rates

Treasury Secretary Timothy Geithner will urge China to allow higher interest rates when he meets Chinese leaders this week, as the US extends its push for a stronger yuan.

Geithner will say China should relax controls on the financial system and give foreign banks and insurers more access, said David Loevinger, the Treasury Department's senior co-ordinator for China.

Officials from both nations are meeting as part of the annual Strategic and Economic Dialogue.

US officials argue that a yuan kept artificially cheap to help exporters also makes it harder for China to lift interest rates and curb an inflation rate that hit a 32-month high in March. China, led at the talks by Vice-Premier Wang Qishan, blames record US budget deficits for contributing to lopsided flows of trade and investment.

"It's pretty clear that the current system is hurting them in their inflation fight," said Dan Dorrow, head of research at Faros Trading, a currency trading firm in Stamford, Connecticut. "The reason ... is the improperly-priced exchange rate."

China has raised interest rates four times since mid-October and the lenders' reserve requirement seven times. The benchmark one-year lending rate increased 0.25 percentage point to 6.31 per cent on April 5. The one-year deposit rate stands at 3.25 per cent.

The median forecast of 30 economists surveyed by Bloomberg News is for an annual inflation rate in April of 5.2 per cent, down from 5.4 per cent in March.

Vice-Finance Minister Zhu Guangyao said on May 6 that China is paying "close attention" to US efforts to cut its budget deficit, and his country will focus on improving the quality of its exchange-rate mechanism.

China held US$1.15 trillion ($1.45 trillion) in Treasuries at the end of February, more than any other country. The US trade deficit with China came to US$18.8 billion in February.

Geithner and Wang will meet alongside Secretary of State Hillary Clinton and State Councillor Dai Bingguo at this week's meetings, which will draw about 30 top Chinese officials.

The Obama Administration and US lawmakers say China's currency policy gives the nation's exporters an unfair competitive advantage, costing US jobs. Geithner is trying to convince Chinese officials that a stronger yuan has benefits for their economy.

Geithner said last week that allowing the yuan to rise and making their financial system less dependent on government-controlled interest rates would give Chinese leaders an "enhanced" ability to damp inflation.

- BLOOMBERG