China should raise interest rates further and even "adjust" the yuan exchange rate "if necessary" to keep policy in balance with the global economy, a leading state-run financial newspaper said on Monday.

The central bank raised interest rates on Aug. 18 for the second time in four months to curb rapid investment and credit growth, despite tentative signs that growth slowed in July after a raft of monetary and administrative tightening steps.

The Financial News, which is published by the People's Bank of China and other financial regulators, praised the rate rise as a wise move at a time when the gap between Chinese interest rates and those of other major economies had widened.

"The central bank should adjust interest rates in a timely manner in the future and even adjust the exchange rate if necessary to help maintain a balance between domestic and global policies and the domestic and global economies," the newspaper said in a front-page commentary.

The newspaper said the central bank has a tough job steering monetary policy because some of its economic goals conflict with the recent need to tighten to slow investment and credit growth.

For example, it was wary of raising interest rates too sharply for fear of generating upward pressure on the yuan, the paper said. It also faced a tricky task reining in fixed-asset investment while stimulating consumption at the same time.

China's surging foreign exchange reserves, which hit a record $941 billion at the end of June, had diluted the effectiveness of the central bank's tightening policies, the newspaper said.

"All parts of society hope the central bank can keep the currency stable and spur economic growth while promoting balance in international payments and employment, which indeed is a difficult task," it said.

China's current- and capital-account surpluses are unlikely to disappear any time soon and consumer inflation may rise in the long term, the newspaper said.

The pace of the yuan's appreciation has quickened a bit in recent weeks amid calls by Chinese economists and officials to use the exchange rate as a tool to cool the economy.

But the yuan has gained just a further 1.7 percent since it was revalued by 2.1 percent to 8.11 per dollar on July 21, 2005.
 
Editor: Yan