China raises interest rates

CHINA unexpectedly raised interest rates for the first time in nine years today, in a desperate bid to slow its rampant economy.

In a move that caught the City on the hop, China's central bank lifted its benchmark one-year yuan lending rate from 5.31% to 5.58%. It marks a shift away from the central directives the government has so far used to cool the world's seventh-biggest economy.

China's economy has become a major focus of global markets, as it sucks in imports from the rest of the world and helps drive up prices of oil and other commodities. It has slowed in recent months, but still grew at a 9.1% annual pace in the third quarter.

Most economists said the bold move was good news for the UK economy. 'Not only will it reduce pressure on commodity prices, notably oil, it will also reduce the chances of a hard landing for China's economy,' said Philip Shaw at Investec.

Some, however, were concerned it would dampen global growth at a time when the recovery is still precarious.

China's unexpected show of flexibility and willingness to use market-based policies triggered speculation it may revalue the yuan, or even abandon its controversial peg to the dollar. At 8.28 to the greenback, US industrialists have complained that an unfairly-low yuan is destroying US manufacturing jobs.

But Larry Kantor at Barclays Capital, was sceptical: 'If the dollar continues to weaken, this will provide further stimulus to the Chinese economy through the peg. A precipitous fall in the dollar would hasten a Chinese revaluation, but we are not there yet.'