The real estate market may be the main target of the interest rate rise this time as prices have been climbing in some areas and the sector relies heavily on the banking industry.

Housing prices in 70 large and medium Chinese cities rose an average of 5.5 percent in the first quarter from the same period in 2005, the National Development and Reform Commission's recent report shows.

Prices in Dalian, a coastal city in Liaoning Province, rose 14.9 percent, the highest of all cities. It was followed by Hohhot in Inner Mongolia, Shenzhen in Guangdong Province, Chengdu in Sichuan Province, and Qingdao in Shandong Province.

The benchmark rate for one-year loans will rise to 5.85 percent from 5.58 percent, up 0.27 percentage point, the People's Bank of China announced yesterday on its Website.

Yi Xianrong, a research fellow with the Financial Research Center of the Chinese Academy of Social Sciences, said the rate adjustment will be the most effective way to drive speculative capital out of an overheated real estate market.

Yi said the housing price spike in the UK halted after the central bank raised mortgage loan interest rates five times in a row in 2003. The escalating housing price in the US real estate market also slowed down after the rates were raised 15 times last year.

Despite the rate increase putting more burden on home buyers in the short term, Yi said it will result in housing prices falling and will be good for potential home buyers in the long run.

"When the total price of an apartment drops, buyers are able to pay a higher downpayment and feel less pressured from the rate change," he said.

As most banks opt for a 10 percent discount of the central bank's benchmark rate to woo loan applicants, the annual interest rate for a house mortgage before yesterday was 5.78 percent and the current rate is 6.05 percent.

So a home buyer who applies for a 500,000 yuan (US$62,500) loan spread over 20 years, the current monthly payment will be 3,596.59 yuan, a 77.6 yuan increase from the previous 3,518.99 yuan.

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