A long-awaited rise in US interest rates gives China more room to raise its own rates, but analysts say Beijing will remain cautious about tightening as it seeks to keep its economy expanding briskly.
Policy makers had been worried that if China lifted yuan rates before the US Federal Reserve, it would attract even more hot money into the country, which has much higher interest rates than the United States while offering little currency risk because the yuan is virtually pegged to the dollar.
Investors for much of the past year have speculated the yuan could be re-valued, causing more funds to flow into what was already a strong economy and contributing to concerns that China could overheat.
China, which has had to grapple with runaway inflation in the past, is worried not only about the threat of soaring prices but also about creating a boom-bust cycle in a country that needs to create millions of jobs every year to avert mass unemployment and potential social unrest.
Now that the Fed has moved, at least one argument against raising yuan rates has been removed, they say.
"The Fed decision makes the job much easier for China to act - if it wants to act," said Frank Gong, chief China economist at J.P. Morgan Securities in Hong Kong.
"If China hikes after the Fed and to a lesser extent, that won't contribute to any potential widening of the interest rate gap that they are worried about," he said.
The benchmark US federal funds rate is now 1.25 percent after the Fed's quarter-point increase. That compares with China's one-year yuan lending rate of 5.31 percent.
JURY STILL OUT: But many economists, who believe rate differentials have been a minor consideration for policy makers, say China is unlikely to take immediate action.
Much depends on whether inflation, which was 4.4 percent in the year through May, soon pierces danger levels of five percent.
Even if inflation does reach such levels, which senior Chinese officials have said could trigger rate rises, expectations of moderating consumer prices in the second half mean higher rates may not be on the cards, some analysts say.
So far, China has relied on administrative measures, including curbing investment projects in potentially overheated sectors such as steel, rather than a rate rise. One reason is that China is worried that higher rates would make it harder for ailing state firms to repay their debts.
Opposition from some quarters of the government and industry have also reflected fears monetary tightening could harm domestic stock and bond markets as well as the business environment.
BNP Paribas Peregrine economist Chen Xingdong said he did not think China would alter rates this year, since administrative measures to cool the economy appeared to be working.
Economic data for May released this month showed growth in fixed asset investment and money supply rising at their slowest annual pace in months. Chen expected inflation to moderate significantly in the second half of this year.
If interest rates were raised and the economy slowed down too much in 2004, the central bank could be blamed, he said.
"A rate hike would cause big political risk," he said.
MATTER OF TIME? But for other economists, rate rises in China are more a question of when than if. Partly that is because interest rates are lower than inflation, fuelling easy credit and an investment boom in some sectors such as property.
If inflation rises above five percent as expected in June or July, China was likely to raise rates by 0.25 percentage point, said Deutsche Bank economist Jun Ma.
Goldman Sachs economist Hong Liang said China was likely to raise rates in July or August following the release of June economic data towards the middle of this month.
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