Two key interest rates rose sharply in what was seen by some as a bid by the People's Bank of China to clamp down on bank lending and provide a soft landing for China's overheating economy. Analysts were divided on whether this would add to pressure to raise the value of the yuan, reported South China Morning Post. The interbank lending rate rose to 2.96 per cent from 2.1 per cent, while interest rates on government bonds climbed to 3.4 per cent from 2.8 per cent.
"The authorities can either slow down the economy or cool off external [yuan] pressures – but not both," said UBS economist Jonathan Anderson. The dilemma is that tightening credit invariably means raising interest rates and higher interest rates attract larger amounts of foreign currency, increasing upward pressure on the yuan. By mid- October, the offshore non-deliverable forwards market was valuing the Chinese currency at Yn7.9 to the US dollar, breaking the Yn8 barrier for the first time.
Other economists believe tighter bank lending will not have a big impact on the yuan, pointing out that the interbank rate is confined to banks and that the yuan is not a commodity currency that traders can use for speculative purposes. HSBC China economist Qu Hongbin noted that the government had other options to reduce pressure on the yuan, such as issuing 'sterilisation bonds' to investors to mop up liquidity.