The central bank jacked up interest rates over the weekend, just days after official figures revealed rapid growth both in credit and the trade surplus during the first two months of the year.
While it is agreed that the latest developments justified a fresh tightening move, observers differ over what tools managers of the economy should employ.
Some doubt the effectiveness of a small interest rate hike, saying that policymakers should turn to a more flexible yuan.
However, few believe the central bank will buy this argument.
Although a wider trading band may indeed be in policymakers' toolbox for taming possibly resurgent credit and investment growth, it is less significant compared with tools such as the interest rate, reserve requirements for banks, and even administrative measures.
The experience of both China and other countries has shown that currency revaluation alone does not dampen export growth.
There is no doubt that a 27-basis-point increase in the interest rate will not do much to check loan and investment growth. But more cooling-down steps could come if the temperature of credit and investment continues to climb.
Repeating the approaches of the past few years, any economic adjustment package will be a combination of measures. In addition, policymakers have shown increasing finesse in promptly responding to short-term developments.
China is well aware that it should let the yuan fluctuate more freely for its own benefit, and the country has been making headway in that direction.
Nevertheless, at least for the moment, policymakers do not seem to have any intention of making changes in the foreign exchange system as a key to addressing short-term problems.
They firmly believe that radical changes in the yuan's value will do much more harm than good to the country. There is no possibility that China will abandon its cautious approach in managing the evolution of the foreign exchange system.
The hefty foreign trade surplus in 2006 triggered related government departments' search for ways to reduce the imbalance. Tax rebate rates were already cut for some exports and tariffs slashed for some imports.
The figures for the first two months of 2007 add a sense of urgency for economic authorities to come up with more ideas. However, it is certain that a sharp appreciation of the renminbi will not be among them.
(China Daily March 19, 2007)