China's surprise rise in interest rates stirred speculation that, after years of issuing administrative orders, the People's Bank of China (PBOC) might be moving towards relying on conventional market forces to guide the economy.
The increase, the first in nearly a decade, took the benchmark rate up by just over a quarter of a percent to 5.58% from 5.31% – small, but enough to send ripples through international currency and commodity markets.
For many observers the rate hike now puts attention on the value of the yuan, which now faces further upward pressure.
Among those eyeing a currency adjustment was government economist Ba Shusong, deputy head of the financial research institute at the State Council's Development Research Center, who told the China Business Times that after the interest rate hike, "The need for adjusting the exchange rate formation mechanism is becoming more striking."
Speculation that the yuan was next in line was further increased by comments from the deputy governor of the PBOC, Li Ruogu, who said preparations had basically been completed for the introduction of a flexible exchange rate. He stressed that reform efforts were aimed at an exchange rate mechanism that kept the yuan stable at "a rational level" .
The rate hike itself was also seen by some as the likely prelude to a series of incremental rises as China continues its efforts to cool its economy to more sustainable levels.
JPMorgan Chief China Economist Frank Gong said it was exactly that series of incremental increases which would enable Beijing to begin the process of gradually revaluing its currency, most likely through a 2%-3% widening of its trading band, coupled with the introduction of an onshore forward hedging market.
While conditions were "almost mature enough now" to move towards more currency flexibility, Gong warned that adjustments had to be gradual because any sudden shifts would inflate bad loans and deflate China's investment in US Treasuries.
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