China sent the markets into turmoil after it increased its benchmark interest rate by 25 basis points.
The move to raise rates by a quarter point was flagged by the Chinese authorities as an internal signal to property developers that rampant house-price inflation was intolerable and would be controlled by the Beijing government.
However, the rise was seen more widely as appeasing United States policymakers who have called for China to increase the value of its currency.
The International Monetary Fund warned last week that the world economy was threatened by attempts to depress currency values artificially.
China has long been accused by the US administration of maintaining low interest rates to keep the value of its currency low and exports cheap.
Hitendra Dave, head of global markets at HSBC India, said internal pressures led to the rise. “China hasn’t raised so far and [they] have only been raising the reserve requirements.
With all the asset price speculation, they had to raise rates to normalise policy.
It is the local factors that led them to take this decision.”
Chris Turner, head of foreign exchange at Dutch bank ING, said: “This is part of the moderate tightening cycle that we are seeing from Chinese authorities to balance their economy.
It is part of the normalisation of interest rates in an economy that is growing at a modestly fast clip.
The market is reacting as if there is an increased risk of hard landing with the commodity currencies like the Aussie being sold off, but I don’t think that is the case.”
Simon Derrick, of Bank of New York Mellon, said the move was fuelling speculation that Beijing was involved in backdoor deals with the US to nudge its currency upwards.
“The move follows a clear need by the Chinese authorities to take out some of the heat from the economy. Whether this will lead to a broader move on its currency is open to debate.
It certainly leads to speculation that the US and China are in some sort of a deal which will perhaps see the US taking a more gradualist approach to quantitative easing. —