HONG KONG — China’s central bank raised a key interest rate slightly Thursday for the first time in nearly five months, in what economists interpreted as the beginning of a broader move to tighten monetary policy and forestall inflation.
After breaking stride a year ago during the global economic slowdown, the Chinese economy resumed galloping growth over the summer. Government investments, real estate construction and consumer spending are all rising briskly, thanks to a surge in lending by government-controlled banks.
Even exports have begun to recover despite continued economic weakness in the European Union and the United States, China’s two biggest overseas markets.
Raising interest rates may help discourage speculative investments by Chinese companies and individuals in real estate projects and other areas of economic activity. China’s dilemma is that higher rates may also prompt overseas investors seeking higher returns to redouble their efforts to push money into China, despite the country’s stringent capital controls.
The People’s Bank of China announced Thursday that the yield from its weekly sale of three-month central bank bills had inched up to 1.3684 percent. The yield had been stuck at 1.328 percent since Aug. 13.
An increase of less than 0.05 of a percentage point might sound small, but economists said it was a harbinger of more interest rate increases to come.
They cited expectations that consumer and producer prices would rise in the months ahead, particularly compared with low price levels a year ago, when demand temporarily slumped in China as well as the rest of the world.
“It is a turning point,” said Ben Simpfendorfer, an economist in the Hong Kong offices of Royal Bank of Scotland. “There is a convergence of events that will lead to higher rates.”
The increase in the interest rate turned mainland China’s stock markets into Asia’s worst performers Thursday. The CSI 300 index of shares on the Shanghai and Shenzhen stock markets slumped 1.98 percent.
Air freight capacity out of mainland China and Hong Kong was almost fully booked in December, according to shippers, making it likely that China would post strong exports when it released a flood of monthly and annual economic data next week. But in interviews this week, senior corporate executives voiced a range of opinions about whether this strength would continue into the new year, or whether the surge in December represented a flurry of restocking by retailers who went into the Christmas season with meager inventories.
Victor Fung, the nonexecutive chairman of Li & Fung, a Hong Kong-based trading and supply chain management company that is one of the world’s largest, said that overseas demand had not been strong enough to sustain the strength in shipments seen last month. But he added that his own staff was somewhat more optimistic than he is, as are some investment bank economists.
Central banks around the world have a history of taking small steps at first when they begin raising interest rates after a long period of keeping them low in response to an economic downturn. Because China does not have a well-developed bond trading market, the yields on the weekly sales of central bank bills are widely watched as a barometer of the central bank’s intentions.
The central bank sells its bills mainly to banks, which pay in renminbi that the central bank then effectively takes out of circulation, slowing growth in the country’s money supply.
Weekly sales of central bank bills are part of a process that economists describe as “sterilization” of China’s extensive intervention in currency markets.
As U.S. dollars and other foreign currencies pour into China from its trade surplus and foreign investment, the central bank prints vast sums of renminbi and issues them to buy those dollars and other currencies.
To prevent all those extra renminbi from feeding inflation, the central bank then claws back the renminbi from the market through a series of measures that include the sale of central bank bills. China also requires commercial banks to keep large reserves on deposit at the central bank, partly to keep the banks from lending too recklessly but also so that the central bank can use that money to finance further purchases of dollars and other foreign exchange.
The goal of sterilization is to keep inflation under control in China while keeping the renminbi weak. That helps make China’s exports competitive overseas and preserves jobs in China, while contributing to unemployment in countries producing rival goods.
The U.S. dollars and other currencies go into China’s foreign exchange reserves, which stood at $2.27 trillion at the end of September; monthly figures through the end of December are due for release next week. China has the biggest foreign exchange reserves of any country, by far.
Because the central bank has essentially borrowed at home to finance that accumulation of reserves, there is considerable worry in China about losses on those reserves if the value of the U.S. dollar weakens further.
Comments on Internet bulletin boards in China about possible currency losses on the foreign exchange reserves are quickly deleted by censors, a sign of officials’ sensitivity.
China’s foreign-exchange regulators have redoubled their efforts in the past two months to prevent inflows of so-called hot money — capital that moves on a short notice to any country providing better returns.
With the exception of investments that bring the transfer of scarce technologies or management expertise, China has a dwindling need for foreign capital. A domestic savings rate of close to 40 percent has made ample money available for new projects.
The central bank is already buying more than $300 billion a year of foreign currencies, mainly dollars, to keep the renminbi weak and preserve the competitiveness of Chinese exports in foreign markets. So the central bank has had little appetite to buy more foreign currencies so as to allow foreigners to invest in China’s growth while preventing the renminbi from appreciating.