China is trying to stop a flood of cash from a surging trade surplus from fueling inflation, asset bubbles and overcapacity in manufacturing. Consumer prices climbed 5.6 percent in July, the fastest pace in more than a decade, as the cost of food soared.
"The central bank is a little concerned about potential overheating" said David Cohen, an economist at Action Economics in Singapore. "That was a set of strong economic data last week and inflation reaching a 10-year high has got their attention.''
A stronger yuan would help to ease the flow of money into the Chinese financial system and tension with trading partners including the U.S. The currency has gained 9 percent versus the dollar since a revaluation in July 2005. U.S. manufacturers say the yuan is kept weak to make China's products cheap.
Besides raising rates, the People's Bank of China has ordered lenders to set aside larger reserves on six occasions this year. It has also sold bills to soak up cash.
The top priority is to prevent the economy from overheating and keep prices tamed, the central bank said in a quarterly monetary-policy report released Aug. 8.