China's first interest rate hike in nearly a decade sends a signal that policymakers are eyeing market-based tools to guide the sound growth of the economy.

The People's Bank of China (PBOC), the central bank, raised the benchmark rate of one-year yuan loans from 5.31 per cent to 5.58 per cent and the rate of one-year deposits to 2.25 per cent from 1.98 per cent.

The central bank also moved a step forward toward the goal of interest rate liberalization, scrapping the upper limits on yuan lending rates. Banks can now charge as much as they want - at least "in principle" - for yuan loans.

The last time the PBOC raised lending rates was in July 1995, and the rates were last changed in February 2002, when they were lowered to boost a sluggish economy.

In the past nine years, the economy has grown robustly on the whole, which, combined with accelerated economic growth since last year, has prompted analysts to urge central authorities to adjust rates to cool down the economy.

The central authorities have previously adopted administrative measures since April to dampen the investment fever across the country. The measures have achieved "temporary success" in reining in excessive investment. But such measures cannot be sustained and there are signs investment may rebound to previous highs.

Production and investment in some red-hot sectors, such as steel and cement, dropped in May and June, when the contractionary policies from central authorities were fully implemented. But in June, statistics show, they had risen dramatically. Steel prices rose by 18 per cent year on year. And those of aluminium, rose by 34.7 per cent for the year.

The currency volume in the market last year also remained at a high level, demanding cooling measures from financial authorities. The PBOC resorted to open market operations to balance currency supplies. Seen from the current situation, those manoeuvres have not worked effectively.

With all this, policymakers have chosen the interest rate tool, a more market-oriented cure.

The new adjustment may not strike home instantly, given the small margin of the hike. It can be well interpreted as a test within a cycle.

The impact of the policy will include attracting more deposits into banks and a predictable pinch in the real estate market.

Chinese people have seen their bank deposits contracting as the interest rates remain at a minus level given the high inflation rate. The rate of one-year deposits, for example, has been at 1.98 per cent while the country's inflation has been over 5 per cent in recent months.

In the first seven months, growth of people's bank deposits declined by 4 per cent over the previous year. The growth rate has dropped continually in recent months, with the banks being stretched by lack of funds to provide credit.

Real estate developers, especially those who rely heavily on bank loans, may see their good days numbered. This will help squeeze out potential bubbles in the fast-growing industry.

All these substantial impacts, however, are not so significant as the symbolic meaning of the authorities' transition to a market-based means in handling the economy.

The next step will be to gradually give more say to the market in deciding the rates.

Besides raising interest rates , the central bank is also giving commercial banks more room in deciding their own interest rates. The banks can now offer a deposit rate lower than the benchmark rate, a practice that was not allowed before. This is a significant move in liberalizing the rates.