Effective from December 21, the one-year benchmark deposit rate was increased by 27 basis points to 4.14 percent while the one-year lending rate was up by 18 basis points to 7.47 percent. This was the sixth interest rate rise announced by the People's Bank of China in 2007.

    The rate for demand deposits was lowered by 9 basis points to 0.72 percent, unprecedented in previous rate hikes. The interest rate for mortgage loans made from the public housing fund was not changed.

    Compared with previous plans to raise the interest rate, the latest one was made against a much more complicated background in and out of the country.

    With the continuous appreciation of the yuan against the U.S. dollar, the further hike of the interest rate on top of the previous five, will attract more capital flow into the country, which could worsen the already excessive liquidity here.

    However, by lowering the rate for demand deposits, the authorities aimed at reducing the money in circulation and easing the pressure of excessive liquidity.

    The earlier rate hikes have played a significant role in checking estate speculation by increasing their costs, but they have also placed a heavy burden on home-buyers. These rate hikes and the 10 rounds of increases in the deposit reserve requirement for commercial banks have directly reduced the profits of commercial banks.

    Considering all the factors mentioned above, the authorities have obviously raised interest rates prudently to strike a balance in the multiple monetary policy objectives.

    The central bank raised the rate for loans by 18 basis points and the rate for deposits by 27 basis points, changing the current margin between the rates for loans and deposits.

    Widely called an "asymmetric" rate rise, the differential makes it less profitable for banks to make loans. Thus, it could check the lending impulse of commercial banks, help tighten the money supply, and cool the economy.

    The lowered rate for demand deposits can compensate the potential loss of banks for the overall narrowed margin between loans and deposits.

    Different from the earlier rate hikes, the sixth one did not change the rate of mortgage loans made from the public housing fund. The fund is a government-initiated project to offer low-interest loans to salary earners by pooling their own savings and the money handed in by their employees.

    Keeping the loan interest unchanged this time, it shows the understanding and consideration of the financial decision-makers toward them.

    Since the sixth round of interest rate hikes was just two weeks ago, it is too early to say whether it could achieve the policy goals smoothly. To be fair, its influence on the economy cannot be foretold easily.

    Judging from current conditions, the interest rate rise will be a strong aid for the authorities concerned about inflation pressure.

    According to a survey by the People's Bank of China, 47.6 percent of those surveyed thought prices rose "too dramatically to accept" in the fourth quarter of 2007 and 64.8 percent expect prices to keep rising in 2008, both of which are at record highs.

    The wide inflation expectations will affect decisions on consumption, saving, production and investment by individuals and businesses, becoming an engine to drive prices up. It will also increase demand for commodities of investment value and capital assets.

    The interest rate rise will tame this expectation by changing the prices of financial assets on the market. It will also stabilize prices and maintain the living standards of the common people.

    Under normal conditions, a higher interest rate would drain the capital supply from the stock market by raising the financing costs of listed companies. But an asymmetric rate rise may not do so.

    The lowered rate for demand deposits would attract considerable money, estimated to be between 6.8 trillion and 8.5 trillion yuan (897 billion to 1.12 trillion U.S. dollars) across the country, into deposit accounts of fixed maturity.

    The rest of the capital would flow to more rewarding investments. The estate market, an alternative investment tool for the stock market, has become sluggish and risky in many cities as a result of the cooling policies introduced by the government.

    So it is not difficult to predict the stock market, which is in a relatively low position than it was, would soon receive money inflows following the sixth rate rise.

    This rise will have a minor impact on home-buyers, most of whom have chosen to repay their mortgage loans over a 10-year period or even longer.

    But those seeking investment revenue from estate deals may see potentially higher costs. Most estate speculators borrow loans over a five-year maturity period or even shorter, the rate has also been raised this time.

    But estate developers, especially those not listed and relying on banks for financing, would feel an even more substantial blow to their expansion or even everyday operations.

    After six rounds of interest rate hikes, the actual interest rate of the country, the interest rate minus the growth rate in the consumer price index and the tax for interest income, is still under zero.

    With a negative actual interest rate, bank deposits would decrease at a surprising rate, this needs to be addressed urgently.

    The author is an economist with the State Information Center