STAFF REPORTERS and AGENCIES

China's surging importance in the global economy was graphically illustrated yesterday as Beijing's surprise announcement of an interest rate rise continued to send shock waves through world markets.

Commodity and stock markets fell and currencies went on a rollercoaster, as analysts predicted that Thursday's rise - the first in nine years - was the start of a cycle of increases.

Experts and officials said the speed of the reaction, which began within an hour of the announcement, showed how the mainland economy was rapidly integrating with the rest of the world.

"The indication is that China's a lot bigger," said Jonathan Anderson, a managing director and head of Asia-Pacific economics at UBS Securities Asia.

"Interest rates indicate where the economy is going and that has implications for the global commodity prices."

Commodity stocks such as Australia's BHP Billiton and Rio Tinto declined, as did stocks related to China trade, including exporters such as Nippon Steel of Japan and China Steel of Taiwan.

But the declines were limited, as analysts and investors believe that China's appetite for steel, coal, iron ore and oil will remain unquenched.

Mainland stocks took a beating, with the Shanghai Composite sliding 1.6 per cent and the Shenzhen Composite 1.9 per cent.

The news also helped push down crude oil prices to around US$50 a barrel from recent highs of $55 amid beliefs the rate rise would dampen China's huge thirst for oil.

But some analysts said the country's imminent power-supply crunch meant it would continue to need large supplies of oil, keeping crude prices high. Asian currencies rose, led by the Korean won, driven by the rate rise as well as continued weakness in the US dollar.

Yi Xianrong, an economist from the Chinese Academy of Social Sciences in Beijing, said the rate increase signalled the country's financial system was entering a gradual normalisation process. This had far greater significance than the immediate effects of the rise.

Tao Dong , regional chief economist of CSFB, said it marked the start of an upward cycle, which would probably accumulate to a rise two or three percentage points over the next 12 to 18 months.

Gao Shanwen , chief economist with Everbright Securities, predicted the central bank would raise rates up to between 1.5 and 3 percentage points by the end of next year.

The central government said on Thursday night it would raise the benchmark one-year lending and deposit rates by 0.27 percentage points to 5.58 per cent and 2.25 per cent respectively from yesterday.

It also ended a cap on lending rates, bringing it closer to international standards. The cap remains, however, for urban and rural credit co-operatives, which the government is in the midst of cleaning up.

"The mainland economy is now the seventh-largest in the world," Hong Kong Monetary Authority chief executive Joseph Yam said. "Whether its macroeconomic controls are successful will have huge impact on the world.

"We have seen the movements in the international financial markets since the decision was announced. This just showed how significant the mainland's influence on the whole world is."

Bloomberg, Reuters