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Gao Xueyu  /  AP
A Chinese flag flutters in front of the headquarters of the People's Bank of China in Beijing. China raised its benchmark lending rate for the first time since emerging from the global crisis.
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updated 10/19/2010 9:06:06 AM ET 2010-10-19T13:06:06

China raised its key lending rate Tuesday for the first time since emerging from the global crisis as Beijing tries to cool inflation and guide rapid growth to a more sustainable level.

The rate hike, China's first since 2007, bucked a regional trend as other Asian economies try to stoke growth amid signs the global recovery is faltering. It reflected China's unusually strong expansion and official concern about controlling a credit boom and keeping growth from surging out of control.

The timing of the hike might have been triggered by a surge in September bank lending despite government efforts to control credit, said economist Mark Williams of Capital Economics in London.

"The most likely explanation is that the bank is worried about the pace of lending," said Williams. "I suspect the People's Bank feels it needs to give a strong signal to banks that this has to stop."

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The interest rate on a one-year loan was raised by 0.25 percentage points to 5.56 percent effective Wednesday, said the People's Bank of China, the central bank. The one-year rate paid on deposits was raised, also by 0.25 percentage points, to 2.5 percent.

Communist leaders are trying to guide China's economy back to a more sustainable growth rate after it expanded by 10.3 percent in the second quarter.

The country's state-owned banking industry was ordered to step up lending in support of Beijing's stimulus, which helped China rebound quickly from the global crisis. But regulators tightened controls early this year after the credit boom fueled a surge in stock and real estate prices.

News reports said major banks were ordered last week to increase reserves in a move to shrink the pool of money for lending.

At the time, analysts said that the move suggested the central bank faced opposition to a rate increase from Chinese leaders who worried it might derail growth. Authorities have warned that despite a robust expansion at home, global markets are still uncertain.

Inflation has steadily crept up this year, hitting 3.5 percent in August over a year earlier — above the official annual target of 3 percent. Analysts believe September inflation, due to be reported Thursday, rose still further.

"The fact that inflation has been rising does provide some cover for the People's Bank to raise rates if they thought they were too low," Williams said. "It's easier to raise rates when inflation is rising than when it is falling."

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China's rate hike came despite mounting caution by some other governments in the region.

Australia's central bank raised interest rates six times beginning in October but more recently has held rates steady, citing Europe's debt crisis. South Korea also was expected to consider a hike but has held its key rate steady.

Higher interest rates in China might attract more inflows of speculative "hot money" that regulators worry might be fueling a dangerous bubble in stock and real estate prices. Beijing has tried to block such flows, and analysts suggested earlier that might have been a reason for delaying a rate increase.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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