From the Bloomberg News (link):
The yuan may decline after China unexpectedly raised benchmark interest rates yesterday to curb surging investment, stoking speculation the central bank won’t need to rely on faster currency gains to cool economic growth.
China is under pressure from the U.S. and the Group of Seven nations to rely less on a weak currency and exports to fuel its economy. Allowing the yuan to rise would help slow growth by making Chinese products more expensive abroad and reducing the amount of yuan the central bank has to pump into the economy to soak up foreign-currency earnings from exports.
“Authorities are opting for direct monetary policy instruments instead of allowing faster appreciation of the yuan to achieve the tightening effect,” said Qing Wang, a senior currency strategist at Bank of America Corp. in Hong Kong. “The pace of yuan appreciation will likely be rather moderate in the coming weeks.”
Also see “China lifts lending rate to cut loans surge” from the Financial Times (link):
China moved to tackle a surge in new bank loans and investment on Thursday by lifting the benchmark one-year lending rate by 0.27 per cent, sparking a sell-off by investors worried that the rise signalled a slowdown in the Chinese economy.
The rate rise, the first by the People’s Bank of China since October 2004, surprised the markets, which had expected Beijing to use a combination of administrative measures and higher reserve requirements for banks to rein in credit growth.
The key benchmark one-year lending rate will rise from 5.58 per cent to 5.85 per cent, effective from Friday, just days before a week’s national holidays for May Day.