Monetary policy should look to the future, not the past. It should also be based on macroeconomic conditions, not micro issues.
The capital market has expected an increase in interest rates for some time, but many domestic economists don't agree with the move.
The ongoing dispute about whether China should increase the interest rate somewhat reflects a traditional viewpoint on the role of monetary policy.
One group argues that state-owned enterprises (SOEs) and big investors are not sensitive to the interest rate. Therefore, even if the central bank increases the rate, it will not help curb over-investment in the economy.
Moreover, they believe increasing the interest rate may, on the contrary, impact the weak stock market and at the same time raise the financial burden of SOEs. So, they argue, raising the rate is a poor choice.
In my mind, monetary policymakers should consider macro issues, not micro issues, such as the financial burden of enterprises. Even though some enterprises may be insensitive to the increase, macroeconomic statistics indicate increasing the interest rate is inversely proportional to the growth of investment.
The other group takes the view that the consumer price index should determine whether rates are raised.
However, the logic is problematic since the CPI reflects past economic performance while monetary policy needs to focus on future prospects.
Modifying the interest rate at the beginning of last year was well timed as steel and cement prices soared. The purpose of raising the rate is to curb inflation.
Yet the administrative measures were taken to curb over-investment. As people find it hard to predict how long the macroeconomic regulations will exist, they look back when making investment decisions.
But monetary policymakers should by no means look back. The vast majority of economists predict China's fast economic growth will continue, therefore inflationary pressure will linger. Correspondingly, monetary policy changes need to factor in economic forecasts, not just react to the past.
Since 1994, the renminbi exchange rate has almost been fixed. The undervalued renminbi has helped Chinese exports grow but has also led to a large foreign exchange surplus.
Under the current foreign exchange regime, China has to increase its money supply - the real reason why over-investment has become a serious problem.
A huge foreign exchange surplus isn't necessarily a good thing. A balanced international payment is more favorable.
It is not accurate to say that over-investment results from local governments' plans to boost economic growth in their respective regions. Investment today is largely market-based given that the private sector has become a strong force of growth.
Business people are profit-driven. When they see the price of money is low, they will invest. This can't be called irrational.
What's "wrong" is the prolonged distortion of interest rates, and thus over-investment is understandable in the market where the real interest rate is extremely low.
Increasingly, raising the interest rate doesn't necessarily cool down investment as intended. Thus monetary policy should look ahead.

(Zhang Jun, the author, is professor of economics at Fudan University.)