China’s $2.6 trillion economy has been throwing off alarming heat flashes for months now. Ordinary Chinese have yanked some $9 billion in bank savings this year to join the merriment at the Shanghai Stock Exchange, where the composite index has shot up about 50% so far, following a 130% gain in 2006. The smaller Shenzhen bourse is up roughly 100%.

It’s party time on the mainland as money supply and loan growth rollick along at double-digit rates. Meanwhile, the country’s export sector is smoking, and China is likely to make economic history for a developing economy when it reports a current account surplus this year approaching $400 billion, a mind-blowing number. China’s gross domestic product also blew by market estimates and grew at an 11.1% annual rate during the first quarter.

“Do something—anything—”to cool things off has been near universal advice from economists and policymakers abroad. China responded after the markets closed on May 18 with a three-pronged approach to wrestle this beast to the ground. Most important, it widened from 0.3% to 0.5% the trading band within which the yuan is allowed to fluctuate on a daily basis against the dollar. Skeptical China Watchers

The People’s Bank of China also, as expected, raised interest rates. A key one-year loan benchmark goes up to 6.57% (from 6.39%), and the one-year deposit will be nudged up to 3.06% from 2.79%.

This makes the fourth round of credit tightening the central bank has executed since the late spring of 2006. It has also repeatedly raised the reserve requirements of cash that mainland lenders must park with the central bank.

In a statement posted on its Web site, the central bank described the move as a natural progression in the country’s long-term goal of liberalizing its foreign currency market. МPeople’s Bank has enacted a series of policies to develop the foreign currency market,Н the statement said. МAt the same time, the Chinese economy has been developing rapidly and stably, financial reform has also made improvements.Н

Well, that’s one take. The timing of these moves will hardly go unnoticed to skeptical China watchers. After all, Chinese Vice-Premier Wu Yi is leading a trade diplomatic mission to Washington beginning May 22. He’ll be meeting with U.S. Treasury Secretary Henry Paulson to discuss trade imbalances, currency policy, intellectual property rights protection, and other issues that have turned relations acrimonious on economic matters. Fear of a Bubble

МThe increase in the trading band is obviously directed at the U.S.,Н says Andy Rothman in Shanghai, the China macro strategist at CLSA Asia Pacific Markets. However, Мthe move is so small that it won’t generate any goodwill in Washington.Н The goal, he says, is not so much to slow down the economy but prevent it from overheating.

Yet there is more to the move than pre-summit theatrics. Beijing officialdom is genuinely anxious about the social blowback from a stock market meltdown (there are 70 million traders in China) or worse, a boom-then-bust economic scenario. Premier Wen Jiabao and PBOC Governor Zhou Xiaochuan have both expressed public concern about a potential equity market bubble in recent days.

In fact, Standard Chartered Senior Economist Stephen Green thinks the primary intent of the moves is to defuse the stock markets. And in a research note circulated soon after the PBOC announcement, he told clients: МWe expect the market to fall next week—and if it proves resistant, Beijing will continue with a thousand small cuts until it does.Н Big Incentives Remain

So will these moves do much to cool off China’s hyper-growth? They certainly show that Beijing is serious and willing to take action. However, China’s interest rates are still awfully low if you factor in inflation running about 3%. That means real interest rates are a bit over 3% in an economy still setting land-speed records.

On top of that, there is so much excess cash in China from export earnings, speculative inflows into real estate, and foreign direct investment that banks will still have a big incentive to lend and companies to borrow. Individual stock investors will still be tempted to bet on stocks, given the obvious math that a 3% inflation rate and 3.06% return on bank deposits is not the way to get rich in a hurry.

The widening of the trading band—though a step in the right direction—isn’t going to have much impact on China’s exploding trade numbers. On May 11, Green forecast that China’s trade surplus would rocket up to $370 billion this year, vs. $217 billion in 2006.

Meanwhile the current account surplus, the widest measure of trade and capital flows, would hit $400 billion. That would compare with $249 billion last year. Starting Somewhere

The reality is that the rest of the world will have to tolerate some large trade numbers during the rest of this decade and at the same time persuade Chinese leaders to stay on a course of phased-in reform of currency policy, full interest rate liberalization, and the lifting of capital controls. Beijing also has to shore up its social welfare programs so ordinary Chinese can feel more secure about their retirement and health care and perhaps spend more.

In the great scheme of things, today’s moves were baby steps in that direction. Think of them as a minor scene in a marathon multi-act play. This economic drama is by no means finished.

Ex-JonBenet Suspect Arrested in Ga. Former JonBenet Ramsey Suspect John Mark Karr Arrested in Domestic Argument in Georgia The Associated Press

SANDY SPRINGS, Ga.

John Mark Karr, who made what turned out to be bogus claims of killing JonBenet Ramsey, was jailed Saturday in a domestic argument at his father’s house in suburban Atlanta.

Officers received a 911 call late Friday from the house about an argument between Karr, his girlfriend and his father, Sandy Springs Police Lt. Steve Rose said.

Karr, who was arrested last summer in Thailand after making bizarre, detailed confessions in the 6-year-old beauty contestant’s death, was arrested in the domestic case shortly before midnight and charged with battery and obstruction.

Officers took Karr to a hospital after he complained of chest pains, and took him to jail late Saturday morning, Rose said. No other details were immediately released.

Karr’s confession last summer was a sudden turn in the decade-old Ramsey killing in Boulder, Colo. But after Karr, a sometime teacher obsessed with the little girl’s slaying, was brought back to the U.S., he was freed for lack of corroboration for his claims or even any solid indication he’d been near Boulder at the time of the killing.

David Cameron was today accused of being blinded by Blairism, as the grammar school row refused to die down.

Just a day after the shadow chancellor, George Osborne, proclaimed that Tories were the natural “heirs to Blair”, Graham Brady, the Tory frontbencher who quit over the issue, attacked Mr Cameron for supporting the outgoing prime minister’s education policies and “refusing” to accept evidence that shows grammar schools raise standards.

Mr Brady resigned as shadow Europe minister earlier this week after being “severely reprimanded” for condemning the suggestion by the shadow education spokesman, David Willetts, that academic selection did little to help social mobility.

Writing in today’s Daily Telegraph, the Conservative MP for Altrincham and Sale West, said: “Labour and the Lib Dems have long been blinded by ideology on the issue, but they have now been joined by the Tories.

“Declaring their support for the education policies of the departing PM, the Conservatives have refused to weigh up the evidence on schools - even ignoring the party’s own policy review group.”

In the article, Mr Brady also criticised the Tory vow to give parents increasing choice over schools under a Tory government, while flatly ruling out the prospect of more grammar schools for communities who want them.

“While proclaiming a commitment to diversity, ‘localism’ and choice, the party is telling parents that, if they want for their children is an academically selective education, then tough. Unless of course, they can afford to go private.”

Mr Osborne was put on the spot at a Policy Exchange event yesterday when he outlined Conservative plans for public services.

Much to the annoyance of many within Conservative ranks, Mr Osborne said Mr Cameron shared significant common ground with Tony Blair over public service reform objectives, though the two parted company on the methods needed to deliver them.

This included giving parents a stronger “voice and choice” over schools for their children, with money following pupils more directly, in the same way that NHS money now follows patients to their hospital of choice.

There would also be more opportunities for organisations to set up new schools in response to local parents’ wishes.

However, Mr Osborne was forced to admit this choice would be circumscribed, since parents would not have the option of seeing new grammar schools erected, and academic ability would no longer be a criteria for selection.

The Conservative party is seeking to persuade voters that Mr Cameron is the natural successor to Blairite policies, while the Labour leader-in-waiting, Gordon Brown, would lurch the party back to the left.