Plus, China will want to buy triple-A-rated American and European bonds as a way of keeping a lid on the yuan.
Last year it banned their use to buy real-world goods and services, in part because of concerns about the impact on the yuan.
Beijing, in turn, shows little sign of budging on the yuan, even though the latest figures show surprisingly strong export growth and higher-than-expected inflation.
Thursday's rate hike will put further upward pressure on the yuan.
On Friday, a Bank of China official stated that, over the next five years, the Chinese would phase out the conversion restrictions presently in place on the yuan.
Noting the euro's steady rise against the yuan, several American analysts conclude that the Chinese have taken a deliberate decision to allow Europe to foot the bill for any small concessions they may offer to America on the yuan.
Elsewhere, China is moving to curb bets on the rising yuan, while Thailand is considering efforts to curb the strongest baht since the 1997 Asian financial crisis.
WSJ: Asian Governments Take Measures to Battle Strong Currencies
And in the lead up to the 2008 crisis, China had exactly the same reasons for holding back on the internationalisation of the yuan.
We should be wary of assuming that the offshore trade in renminbi out of Hong Kong is the first step on the road to the yuan as a major global currency, with the City taking a big piece of the action.
The decision to slash tax rebates on exports also alleviates some of the U.S. pressure on China to let the yuan appreciate relative to the dollar.
Eswar Prasad, a professor of trade policy at Cornell University, agrees with Paulson that the U.S. should work to help China establish a sound financial system instead of narrowly focusing on the exchange rate between the yuan and the dollar.
In other words, the impact on the trade deficit of Yuan appreciation in the period 2005-2008 would not be fully manifest until the period 2007-2010.
FORBES: Economists Ignore the Facts in Supporting Chinese Currency Legislation
Last June, for example, they removed restrictions on the use of yuan to settle foreign trade deals.
While businesses and individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a stamp of approval by China on the expansion in yuan trading.
On July 5, the agency imposed the maximum fine on the Houston firm, 200, 000 yuan, for the spill.
The inquiry was sparked when yuan remitted into Hong Kong for trade settlement in October more than doubled from the previous month, boosting yuan on deposit in the city's banks by 45%.
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Last year, the loss on its dollar reserves, as a result of a modest rise in the yuan, was partially offset by a gain on its euro-denominated reserves as the euro strengthened.
The central bank also loosened its grip on the currency a little, widening the yuan's daily band from 0.5% either way to 1%.
The PBOC added a record 290 billion yuan into the banking system on October 30 and almost 1.3 trillion yuan since late June.
Perhaps to underscore that warning, on Monday morning it set the range within which the yuan could trade on Monday exactly where it was set last Friday morning.
At the same time, issuers command lower coupons on synthetic yuan bonds than dollar bonds, pocketing the difference, though they forego any gains on renminbi appreciation.
WSJ: The View From Hong Kong: Behind the Yuan Borrowings are Dollars
Youku, which is listed on the New York Stock Exchange, posted a loss of 47.5 million yuan in the third quarter on revenue of 262.5 million.
The IMF's Steven Barnett and Ray Brooks calculate that in urban areas every extra yuan the government spends on health prompts an extra two yuan of consumer spending.
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The currency, informally known as the yuan, has been convertible on the current account since December 1996.
The yuan on Friday closed 0.01 percent stronger than Thursday at 6.15 to the dollar, according to the China Foreign Exchange System.
There is pressure on China to strengthen the yuan, and while the yuan will indeed strengthen, the key issue will be the rate at which it does so.
It also means their currencies should rise against the dollar, though the pace will depend, more than anything, on China's decisions about the yuan.
The 12-month (notional) forward rate for the yuan is currently betting on a 5.5% revaluation of the currency over the next year.
As part of the effort to expand the market's investor base beyond Asia, the proposed bond may join a handful of yuan deals already listed on the London Stock Exchange, which is striving to become an offshore hub for the Chinese currency, another person said.
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