The interest rate hike announced last week is likely to herald future hikes, analysts said.

The central People's Bank of China on Thursday jacked up interest rates for the first time in nine years. The benchmark rate for one-year renminbi loans was lifted to 5.58 per cent from 5.31 per cent and the rate on one-year deposits to 2.25 per cent from 1.98 per cent.

"The rate rise will help to strengthen the impact of macro-economy controls on the economic development and will help to prevent companies from over maintaining capital," said Su Ning, deputy governor of the People's Bank of China (PBOC).

"One of the aims of the rate rise is to decrease investment in construction projects and redundant industrial investment," said Su.

It is widely believed that the prime target for the rate hike is the property sector, which is seen as being over-invested. A 13 per cent annual increase in property prices nationwide during the first three quarters of the year the fastest pace since 1996 greatly worried the central bank, as seen in its latest monetary policy report.

Low interest rates, both for house developers and buyers, were regarded as a main reason for the overheating.

Fred Hu, managing director and chief economist for Goldman Sachs (Asia) said China's decision to raise the interest rate will help prevent over-heating investment in real estate.

He said that the current rate would encourage investors to borrow more to invest in real estate which is regarded as somewhat of a "cash-machine" in China.

"Sydney rose its rates one year ago and the policy proved effective to prevent over-heating investments in real estate," said Hu.

Morgan Stanley analyst Andy Xie said it is understandable if the central bank increases the interest rate in a gradual manner, but given the fact that the size of bubble in the property market is unprecedented in China's history, a 27-basis-points rate hike should not be enough.

The rate hike "could be the first of several steps upwards in rates," a report issued by Morgan Stanley said right after the announcement by the central bank.

Many economists at other firms agree with Morgan Stanley's views, although they differ in their predictions of the magnitude and timing of further rate hikes.

In addition to cooling down the real estate sector, argument for a further rate rise could be also justified by the need of depositors.

Given the facts that depositors have to pay the 20 per cent in interest tax and the consumer price index (CPI) key indicator for inflation increased by 5.1 per cent in September, the new one-year term deposit rate still gives a negative real interest rate, said Joe Zhang, chief China analyst with the investment bank UBS.

Depositors' behaviour was part of the reason for the rate hike last week.

While the growth rate of banking deposits slid for months, investment growth was maintained at a high level, which led to the conclusion that an increasing number of companies and individuals were stopping to put money into banks and part of their money could have directly financed new fixed asset investments.

The interest rate hike will help attract the depositors back, analysts say.

No austerity

The rate rise indicates the central government's determination to cap speculation in the property sector and excessive growth in order to lead the economy towards a more sustainable development path.

But it by no means implies the government will impose an austere policy, economists said.

"The rate change does not mean the government will change its goal on macro adjustments," said Jun Ma, chief China economist for Deutsche Bank.

"We believe the growth rate goal is still between 8 and 9 per cent and inflation 3 to 4 per cent. The difference that the rate rise brought is that the government is now using a better instrument to achieve its goal."

Forex policy

While raising interest rates, the central bank also gave commercial banks more freedom in setting their own interest rates, a significant liberalizing move.

The central bank has long been saying it will make the renminbi's exchange rate more flexible.

So it was just natural that the interest rate rise has led to guesses as to the implications on foreign exchange policy.

However, most economists say they do not see the interest rate move as a prelude to forex policy changes.

"We do not interpret the rate hike as a signal of an imminent change to the fixed exchange rate regime," said the Morgan Stanley report.

The rate hike is only consistent with catching up with the 75-basis-point interest rate increase in the United States under the pegged regime, and does not necessarily lead to more inflows into renminbi, it said.

"In fact, reduced speculation on asset prices amid tighter liquidity conditions could help ease appreciation pressure on the currency."

Deutsche Bank's Ma said the overwhelming short-term goal for the government is economic stability.

Interest rates are a more convenient tool than exchange rates for this purpose.

A stable economic environment will be conducive for the preparation of a more flexible forex policy, he said.

Change of approach

The move by the central bank is also seen by economists as a shift to greater use of market-based measures instead of administrative ones.

Before interest rates rose last week, steps taken by the government in rectifying unhealthy measures include banning new investments in certain sectors and imposing tougher rules for converting farmland into industrial use, as well as repeated increases of the required reserves for commercial banks.

The administrative measures, which proved to be effective to some extent, hurt small and medium-sized companies and private businesses more than they did State companies because the large companies and State companies have more resources to circumvent the restrictive measures, a report by JP Morgan indicated.

But interest rate hikes will not bring about that problem, it said.

Influenced companies

The interest rate hike could influence the profitability of companies since borrowing will be more expensive, said Wang Songtao, an analyst with the joint venture investment bank Xiangcai ABN AMBO.

Companies that have high asset-liability ratios will bear the bigger impacts, he said.

UBS' Joe Zhang said that after the rate rise, market sentiment towards property stocks along with auto companies are likely to turn negative, while insurance stocks may benefit.

GTJA Allianz analysts said raw material companies will also be among the most influenced ones. But impacts on airline companies likely will not be big because their borrowing is mainly in foreign currencies.

Experts also noted that the interest rate rise will have impacts on China's steel, cement electrolytic aluminium industries.

"The steel companies, especially the medium-scale ones, are likely to suffer a 8 per cent loss in its benefits because of the rate rise," said Wang Changxing, president from a Shandong-based Xingye Mining Company.