The People's Bank of China (PBOC), the central bank, raised the benchmark rate of one-year loans from 5.31 percent to 5.58 percent and the rate of one-year deposits to 2.25 percent from 1.98 percent on October 29. It is China's first interest rates hike in nine years. Heated discussions have been one result of the central bank's latest move.

Beijing News: The slight interest rates hike sends a signal that the Chinese Government has decided to use market-based tools, like monetary policies, to strengthen its control over the macro-economy. Meanwhile, such adjustment also gives a warning to those sectors that the government's administrative measures to rein in have not been effective.

Following the small margin of interest rates growth, a series of interest rates increment might follow, as well as other deflationary policies.

The last time the PBOC raised its lending rate was in July 1995. And since November 1993, the deposit interest rate has not been lifted until now. In the past eight years, consistent cuts have meant Chinese customers have had to suffer contracting bank deposits as interest rates became negative because of inflation.

There are still predictions for a further raise in the deposit interest rate.

The central bank has also moved a step towards interest rates liberalization. Financial institutions now have freedom to decide their own interest rates within the benchmark rates set by the central bank.

The interest rates increase will put pressure on the stock market and real estate sector. But the slight margin of 0.27 percent will not have a drastic influence in the short-term. Recovering from fluctuating interest rates hike, housing prices will keep soaring. The government should kickstart a series of increases, together with tightening land supply, to continuously curb the excessive development of this sector.

In the stock market, the interests rate adjustment should not be responsible for its long-term bearishness.

It is hard to predict that a raise of this margin this time will effectively curb the excessive development of some overheated sectors and emerging inflation, but it demonstrates the independence of the central bank in monetary policy-making and controls on the macro-economy.

China Business News: After China's central bank raised the benchmark rates, the international market fluctuated slightly - many futures' prices and stocks of companies engaged in raw materials business declined.

Last Thursday, when the PBOC released the news, crude oil prices in New York were cut US$1.54 per barrel. Meanwhile, futures prices of steel and coal also dropped. Such fluctuations eased on Friday and have now stabilized.

The international financial circle thinks Beijing's move is a signal to the world that China is ready to speed up its financial system reform. Some even hold that China's rates hike aims to influence the international market.

But officials have denied the rumours, saying the rise was only due to domestic issues.

China wants to use market-based tools to control the macro-economy and optimize its resource allocation. It will smooth the cash flow to prevent some firms from occupying excessive cash. Putting the national economy on a sound, fast and stable track is this move's aim.

The benchmark rates hike kickstarts China's road to interest rates liberalization. Any adjustment afterwards will depend more on the market. The policy-making mechanism will look more to market rules.

The PBOC took a prudent attitude and a mild measure in this round of rates rise, displaying its precious independence while not being influenced by the international press and domestic presumption.

Although the hike is just a beginning, it gives the international market confidence in China's market reforms. The ensuing influence on the international market shows China's growing weight in international financial affairs.

People's Daily: Since the PBOC announced the deposit rate rise, banks have been flooded with people trying to increase their deposits to attract more interest.

Although only a small increase, it still influences people's economic behaviour, dampening their desires for consumption and encouraging saving .

It might not be the original intention of the adjustment, which is intended to solve recent problems in financial operation and maintain the achievement of the government's macro-economic control. The government expected that the market-based tools could play a bigger role in resource allocation.

The PBOC wants to curb excessive investment in fixed assets and ease inflation pressure.

Reports say there are more than 20,000 projects in the pipeline nationwide. Blind investment and low level, duplicate construction still have not stopped. Some local governments are not aware of the damage excessive investment would bring about, but instead are interested in large-scale projects.

In China, the "invisible hand," the market, is not strong enough to squeeze bubbles from the real estate sector and rein in the red-hot economy. As well as the market rule, there are administrative powers intervening in economic development, disturbing the resource allocation.

Although most projects are based on a scientific decision-making system, some are launched simply to pursue a high GDP figure and political scores.

Worse, with the backing of local governments, banks always lend a great deal of money with little risk awareness.

As such, rate hikes alone are not going to be enough to rein in the economy. They might dampen companies' investment desire, but will not influence some local governments' decisions. The power of local governments to meddle in the economy needs to be curbed.

(China Daily November 5, 2004)