China's central bank yesterday raised its benchmark interest rates for the first time in nine years.
The move steps up efforts to curb inflation and alleviate power and materials shortages.
The rise, which takes effect today, comes as the government struggles to curb investment that has pushed economic growth to more than 9 percent a year and inflation to a seven-year high.
The People's Bank of China said the one-year lending rate would rise to 5.58 percent from 5.31 percent, the first loan rate rise since July 1995.
The one-year deposit rate will rise to 2.25 percent from 1.98 percent, the first increase in the interest rate paid on savings since July 1993, the bank said.
Raising interest rates is likely to weaken pressure on China to re-value its currency.
China's economy continues to boom despite efforts to cool growth, with gross domestic product climbing 9.1 percent in the third quarter and 9.5 percent in the first three quarters of this year compared with a year earlier.
Policy makers fear sizzling growth will fuel inflation - now 5.2 percent.
They have ordered banks and local governments to cut back on construction projects and redundant industrial investments.
Spending on construction, factory equipment and other fixed assets surged 27.7 percent in the first nine months of the year from a year earlier to 4.5102 trillion yuan (US$543.4 billion).
While the rate rise came without warning, many analysts had said China could no longer simply rely on administrative orders to cool the economy.
"China's bid to curb inflation has been effective so far but investment is still growing too quickly," said Yiping Huang, Hong Kong-based chief China economist at Citigroup Global Markets Asia Ltd.
"There is a strong possibility the Chinese central bank will raise rates further in the near term."
JPMorgan economist Ben Simpfendorfer predicted the move would be the first of a gradual tightening process that would possibly prompt a further rate rise before the end of the year.
The PBOC also further liberalized the country's heavily regulated interest-rate system by removing the upper limit on the floating range in which commercial banks can adjust lending rates to price credit risk.
However, a 10 percent discount on the lending rate remains in place to prevent banks undercutting each other to attract the best customers.
Copper prices and shares in mining companies fell after the rate decision.
Copper for delivery in three months fell US$46, or 1.6 percent, to US$2,754 a metric ton on the London Metal Exchange.
Shares in BHP Billiton, the world's biggest mining company, fell 5 percent in London.
The last time China used higher interest rates to cool the economy, growth almost halved to 7.1 percent in 1999 from 12.8 percent in 1994.