SHANGHAI • China's central bank raised short-term interest rates yesterday, in what economists said was a bid to stave off capital outflows and keep the yuan currency stable after the Federal Reserve raised United States rates overnight.

The increase in short-term rates was China's third in as many months, and came a day after the end of the annual session of Parliament where leaders warned that tackling risks from a rapid build up in debt would be a top policy priority this year.

Hours earlier, the Fed had raised its benchmark policy rate, as had been widely expected, and signalled more hikes were on the way as the US economy picks up steam.

"The timing says it all. China is no longer insulated from the Fed and, more generally, from international financial conditions," said Ms Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis.

Some analysts had expected another money market rate rise as China looks to contain risks from years of debt-fuelled stimulus, and make it more costly for speculators to bet against the yuan.

"The higher US rates and tightening of US monetary policy could trigger further capital outflows and have some negative impact on China's financial system," Nomura economist Yang Zhao said. "I think they want to stabilise the currency at this time."

The People's Bank of China (PBOC) also strengthened the yuan's daily mid-point reference rate by the most in about two months yesterday.

The yuan fell 6.5 per cent against the US dollar last year in the face of dollar strength and uncertainty over China's economy, prompting the government to clamp down on capital outflows to ease a drain on its foreign exchange reserves.

The yuan has been largely stable this year as the dollar has paused, but China's government has remained alert as many market watchers expect that the dollar will eventually resume its climb.

After years of super-loose policy, the PBOC has cautiously shifted to a modest tightening bias in recent months, though it is treading cautiously to avoid hurting growth.

The economy is on more solid footing now than early last year, giving policymakers more room to push through reforms.

In keeping with that cautious tone, most of the rate increases yesterday were a very modest 10 basis points, or a tenth of a percentage point.

The rates on open market operation reverse repos for seven-day, 14-day and 28-day tenors were bumped up for the second time in six weeks, to 2.45 per cent, 2.60 per cent and 2.75 per cent, respectively.

The PBOC insisted the moves did not indicate a change in its monetary policy or constitute a hike in its benchmark policy rate, although some economists say the seven-day reverse repurchase rate has become a de facto policy rate.

REUTERS