updated 10/28/2004 9:56:13 AM ET 2004-10-28T13:56:13

China on Thursday announced it would hike interest rates for one-year loans by 0.27 percentage points to 5.58 percent, the first increase in more than nine years.

The adjustment, which takes effect Friday, comes as China's government struggles to curb investment growth that continues to keep economic growth at an annual rate of more than 9 percent and inflation at seven-year highs.

A statement posted on the People's Bank of China Web site announced the one-year lending rate would be increased from 5.31 percent, the first loan rate hike since July 1995.

In addition, the one-year deposit rate will be raised to 2.25 percent from 1.98 percent, the first increase in the interest rate paid on savings since July 1993, the bank said.

Raising interest rates will likely weaken pressure for China to re-value its currency, the yuan, to slow growth further. The United States has been pushing for China to raise the value of the yuan, saying the current rate is artificially low and gives Chinese imports an unfair advantage.

China's economy continues to boom despite efforts to cool growth, with gross domestic product climbing 9.1 percent in the third quarter and 9.5 percent in the first three quarters of this year compared with a year ago.

Policy makers fear sizzling growth will fuel inflation _ now running at 5.2 percent.

They have ordered banks and local governments to cut back on construction projects and redundant industrial investments, so far with limited results: Spending on construction, factory equipment and other fixed assets surged 27.7 percent in the first nine months of the year from a year earlier to 4.5102 trillion yuan ($543.4 billion).

While the rate hike came without warning, many market analysts had said China could no longer simply rely on administrative orders to cool the economy.

JPMorgan economist Ben Simpfendorfer predicted the move would be the first of a gradual tightening process that would possibly prompt a further rate hike before the end of this year.

"High real interest rates are a necessary curb for investment," Simpfendorfer told Dow Jones Newswires.

The PBOC also further liberalized the country's heavily regulated interest rate system by removing the upper limit on the floating range in which commercial banks can adjust lending rates to reflect credit risk.

However, the 10 percent discount on the lending rate remains in place to prevent banks from undercutting each other in a bid to attract the best customers.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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