Shanghai Daily news

It had been a topic of such intense speculation, and for so long, that when China did finally raise interest rates, the move was something of an anti-climax.
The central bank's decision last week to raise the benchmark one-year lending rate by 27 basis points to 5.58 percent "will have as much impact on the Chinese economy, as putting a bicycle in front of a speeding locomotive," said researchers Bob Prince and Jason Rotenberg of Bridgewater Associates, a Westport, Connecticut-based money manager.
How will a tiny increase in interest rates curb overheating when draconian measures to cut bank lending to aluminum, auto, cement, steel and real-estate companies have had only a limited impact on the economy since they were introduced in April?
Fixed-asset investments in China increased 28 percent from a year earlier in September. The deceleration in the economy - gross domestic product grew 9.1 percent in the third quarter, down from 9.6 percent in the previous three months - was merely due to a statistical base effect, according to Dong Tao, an economist at Credit Suisse First Boston in Hong Kong.
It is unlikely to put the inflation genie back into the bottle with a token increase in rates, when consumer prices have been rising close to a seven-year high of 5.3 percent for four months.
Still, the interest-rate decision isn't without its significance. To six strategists surveyed, the rate move came as a signal that the Chinese currency will be allowed to trade more freely by the end of next year.
The clue lies in what the central bank can - or can't - do next. One argument is that now that the political debate on the merits of raising interest rates has been resolved, the central bank, which last increased rates nine years ago, will make bigger increases.
That won't be easy. If the Chinese interest rates rise too much too fast, more foreign capital will flow into China. The central bank will have to buy the incoming dollars to maintain its "managed floating" mechanism, adding more liquidity in the banking system.
"A flexible exchange rate is needed," says Lehman Brothers economist Rob Subbaraman, "in order to have policy independence in moving interest rates."
Government controls on money coming into the country and leaving it aren't nearly as strict as they need to be for China to avoid facing up to the reality of "impossible trinity," an economic principle that says no country can simultaneously keep its exchange rate fixed, its monetary policy independent and its capital markets open to the world.
"China is excessively cheap and highly productive," said Bridgewater's Prince and Rotenberg. "The problem will eventually be rectified by a substantial exchange rate adjustment."

(The author is a Bloomberg columnist. The views expressed are his own.)