http://www.nytimes.com/2006/09/29/business/worldbusiness/29yuan.html?pagewanted=1&_r=1&ref=asia

HONG KONG -- It's been just days since Treasury Secretary Henry M. Paulson Jr. returned from China, but already the Chinese government has sharply stepped up the appreciation of its currency, allowing it to push through an important level against the dollar on Thursday for the first time.

The recent climb - less than a full percentage point since the beginning of September - is still modest and perhaps will not last. But it is producing cautious hope in the Bush administration that the Chinese government may be lifting its opposition to a revaluation that could ease China's huge trade surplus with the United States.

And partly in response to the currency lift in China, two influential senators in Washington announced Thursday that they were pulling back legislation that would punish China with tariffs if it did not allow the value of its currency to rise, a step that would make exports to the United States more expensive and imports from America more competitive.

Though modest, the rise this month in the value of China's currency, the yuan, has been at a rate more than four times the currency's appreciation for most of the past year.

On Thursday, China's government let the yuan push through 7.9 to the dollar, the latest in a series of daily highs that for the last two weeks has proceeded at an annualized rate of 17 percent.

The White House and Mr. Paulson had vigorously opposed the measure by Charles E. Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, arguing that putting pressure on the Chinese would backfire. The administration also argued that imposing tariffs as the bill contemplated would violate international rules. Mr. Paulson called for the bill to be pulled back after he returned from China last Friday.

Mr. Schumer said Thursday that he and Mr. Graham would work with other senators to write a bill for submission next year that would press the Chinese but not do anything that might contravene rules of the World Trade Organization.

"There's a view in both the administration and in Congress that our legislation and the Paulson visit to China has given an impetus for the Chinese to move," he said in an interview. "Our bill was an admittedly blunt instrument. We have decided that it has run its course and that it is time to move to another approach that complies with the WTO." Analysts disagreed on Thursday whether the Chinese action was significant, a harbinger of a trend or a feint that could be reversed easily.

The strengthening of the currency in September, at an annualized rate of 10 percent, compares with an annual appreciation of less than 2.5 percent for most of the year after China's small revaluation in July 2005.

"The reality is they're moving at a faster pace," said Jonathan Anderson, the chief Asia economist at UBS. Others said the pace was likely to be temporary.

"The Chinese are doing this as a gesture of good will," said Tao Dong, the chief Asia economist at Credit Suisse, while adding that he expected the pace of appreciation to settle down soon to about 5 percent a year.

Beijing's leaders have long bridled at foreign criticism, prompting some China watchers to suggest that quiet diplomacy, rather than confrontation, may be more productive in bringing about an appreciation of the yuan.

Mr. Paulson accumulated decades of experience in dealing with China while at Goldman Sachs, where he served as president before resigning last summer to become Treasury chief. He has pursued a much more low-key approach this summer than his predecessors or American lawmakers, preferring to raise the currency issue in private with Chinese leaders.

Bush administration officials and many analysts cautioned against enthusiasm that the currency appreciation will continue. In the past, the currency has sometimes risen slightly only to fall back again later.

"We're not crowing over this," said an administration official, asking not to be identified because the administration policy is not to comment on these matters.

"If you look back over the last year, there is reason for caution," the official added. "Does this represent a change? Or does it mean that the Chinese are letting us feel good about the Paulson trip and then planning to go back to what they were doing."

Nicholas Lardy, a senior China analyst at the International Institute of Economics, said it was too soon to say whether China had embarked on a trend toward revaluation.

"Extrapolation on the basis of a trend like this is a dangerous business," Mr. Lardy said. "It could be a good will gesture for Paulson. But if there's little more net change over the next six months, people will say that the Chinese are just taking us in again."

Just two weeks ago, before the World Bank and International Monetary Fund annual meetings in Singapore, Chinese officials had repeated their longstanding promises to let the market start playing a greater role in the currency's value, without giving any indication of a timetable.

This month, Mr. Paulson met with top Chinese leaders and established a "strategic economic dialogue" between senior officials in the United States and China to discuss a range of economic issues, including currency. Mr. Paulson said the dialogue would be aimed at enlisting broad support among Chinese leaders to push for economic changes in a variety of areas, including currency policy.

Mr. Paulson said he was encouraged by his meetings with various officials, including President Hu Jintao, but he cautioned against expecting quick results. Nevertheless, the slight increase in China's currency has prompted speculation that the Chinese wanted to reward him.

The yuan's rise also comes at a time when the Chinese economy seems to have settled down to sustained but controlled economic growth. That may make Chinese officials more prepared to experiment a little more with the value of the yuan.

After signs emerged last spring of possible overheating in investment, China's central bank raised interest rates and tightened bank reserve requirements, among other measures. The moves, like a halt to projects that had started without the central government¡¯s permission, have helped temper growth.

The official New China News Agency reported on Thursday that Xu Yifan, the deputy director of the National Bureau of Statistics, had predicted the Chinese economy would grow about 10 percent this year for the third year in a row.

Year-over-year growth had jumped to 11.3 percent in the second quarter.

"The various measures that were taken have worked, they've taken some of the steam out," said Michael R. P. Smith, the president and chief executive of the Hongkong and Shanghai Banking Corporation, which encompasses almost all of the Asian operations of HSBC.

Overall economic growth continues in China at a pace that any other country would love to match, Mr. Smith said in an interview on Wednesday afternoon, adding that the Chinese economy "is galloping, but it's in control."

The exception is the trade surplus, which is soaring and has set records for four months in a row through August. "The one big problem sticking out in China like a thumb, like a five-ton thumb, is the trade surplus," Mr. Anderson said.

The People's Bank of China, the country's central bank, said when it revalued the currency by 2.1 percent in July last year that it would start setting the value of the yuan based on a basket of foreign currencies, and would no longer peg it just to the dollar.

But in practice, the central bank has allowed the yuan to appreciate at a fairly steady but very gradual pace against the dollar; statistical analyses of changes in the yuan's value have shown almost no correlation to currencies other than the dollar. The yuan rose 0.07 percent in Shanghai trading on Thursday to trade at 7.8965 dollars at 5:30 p.m.

To prevent the currency from appreciating more rapidly, the central bank has bought dollars and sold yuan on a large scale. It has accumulated the world's largest foreign exchange reserves, which are on track to reach $1 trillion in the coming weeks.