Beijing (AsiaNews) – The People's Bank of China raised interest rates by 25 basis points late yesterday after markets closed. This brings one-year deposit rates to 2.5 per cent and one-year lending rates to 5.56 per cent, the highest in three years. China’s central bank has thus sent a clear signal that it intends to keep a lid on inflation, which is up again, at least in terms of food prices.

According to Chinese bankers, China’s real estate sector is also in need of “cooling measures” in order to stave the bursting of a real estate bubble that might grow even larger as a result of a growing GDP, higher prices and the huge amount of liquidity in the economy.

Raising the cost of money is a cautionary measure to prevent any sudden (and painful) break later on, even if it means slowing growth in the real economy. In fact, reducing access to credit might be the first act in a policy of monetary tightening.

The decision might also be part of an attempt to devalue the yuan. Unlike other countries, China does not allow its currency to float freely but sets its rate. Today the yuan had its greatest drop in two months.

The People’s Bank of China set the daily reference rate 0.3 per cent weaker at 6.6754 per dollar, the biggest decline since August. The yuan slid 0.21 per cent to 6.6585 in Shanghai, from 6.6447 yesterday, the biggest drop since 22 June.

Speculators are betting that with higher interest rates Beijing may not have to revalue its currency to fight inflation.

At the same time, by playing with interest rates, the authorities are trying to control social unrest that might be caused by economic expansion and inflation.

Consider only China's industrial output, which rose 16.3 per cent in the January-September period from a year earlier, or its 16.6 per cent growth in the first eight months, compared to 13 per cent the Industry Ministry forecast.

The huge mass of money supply in the economy is in fact worrying Beijing. Excessive inflation, whose latest figures should be made public tomorrow, might lead to unrest. However, by cutting into the purchasing power of lower middle class Chinese (at least 800 million), the government might be called to account for a declining standard of living.

Until now, inflation has been masked by so-called “price adjustments”, but the price of basic items (food and fertiliser) have jumped 8.5 per cent, reducing the purchasing power of large sections of the population. If the authorities respond by printing more money, it could lead to major social unrest.