China's Central Bank Looks At Higher Short-Term Interest Rates

The benchmark overnight Shanghai Interbank Offered Rate hit its highest point (2.3 percent) in 20 months on Wednesday – special circumstances aside. Long-term rates were also surging, with 10-year government bonds at a year-to-date high of 3.23 percent.

These moves signal a shift in the Central Bank’s priorities, “from supporting the economy to containing real estate inflation with higher short-term interest rates and moves to discourage rapid lending growth,” according to a Nikkei report.

Moreover, the decisions seem to be aligned with the Communist Party Politburo’s express intention to contain any asset-price bubbles that could lead to a financial crisis like the one seen in 2008 in the U.S.

However, the tightening of monetary policy – which comes on the same day as the U.S. Federal Reserve finally decided to hike interest rates - doesn't only seek to control bubbles, but also to stop the depreciation of the yuan versus the U.S. dollar by reducing the gap between the two countries' interest rates.