Just days before a meeting with US Treasury Secretary Henry Paulson, China is taking baby steps toward letting its currency trade more freely. The government also raised interest rates and the reserve on bank loans today, signaling concern over the country's red-hot economy. China's trade surplus—which some American politicos say the undervalued yuan fuels—rose 74% last year.
But the government's strategy may be more than political maneuvering. The Chinese economy is in danger of overheating as money flows out of savings into the stock market. Some see the move as pure economic necessity. "The government can't just sit there and do nothing as deposits leave the banking system,'' says the chief Asia economist at Credit Suisse.