After serving a rise in lending rates as an unexpected appetizer, will China dish up a speedier climb in the yuan as the main course of its monetary tightening?
The quarter point rate rise taking one-year lending rates to 5.85 percent announced on Thursday should help to curb credit, which is growing too fast for Beijing's comfort.
But the fundamental source of the easy money is China's bulging balance-of-payments surplus. To reduce that, economists agree, a higher yuan must be on the menu.
Although China has so far resisted U.S. demands that it let the yuan appreciate faster, some banks that have long tipped a sharp rise in the currency believe the increase in borrowing costs points to policy finally tilting their way.
Jim O'Neill, chief global economist at Goldman Sachs in London, said he would not be surprised if China followed up by letting the yuan rise or fall by 1 percent a day against the dollar, instead of 0.3 percent as now.
It's a very sensible thing to do as it would allow them to appreciate the currency and maintain their stance, O'Neill said.
Haizhou Huang with Barclays Capital in Hong Kong is thinking along similar lines in a note to clients.
Having hiked its benchmark rate, the People's Bank of China (PBOC) can now focus its attention on yuan reform. We thus believe the chances of widening the dollar/yuan trading band to plus or minus 1.5 percent in the coming weeks have increased on the rate hike move, it said.
China has conspicuously kept a lid on the yuan this week despite an explicit call by the Group of Seven industrial nations last weekend in Washington to let it rise more sharply.
PBOC governor Zhou Xiaochuan dangled the possibility of a faster rate of climb for the yuan during the Washington meetings, and Stephen Gilmore of Banque AIG in London is among those who do indeed expect the pace to quicken.
But Gilmore said the authorities were likely to stick to their gradualist approach. He sees no reason to change his year-end target of 7.70 per dollar.
China will not use the exchange rate as a lead part of monetary policy. There is no chance that dollar/China goes lower faster directly because of a desire to tighten monetary policy, said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.
But he said China might have no choice but to accept a stronger yuan as speculative capital chases juicier returns.
Not what they want. But it's what they now realize they must accept as the need to tighten takes precedence, he said.
It was partly to ward off speculative capital inflows that the central bank decided to keep its one-year benchmark deposit rate unchanged at 2.25 percent, some economists believe.
But Rob Subbaraman and Wenzhong Fan at Lehman Brothers in Hong Kong said the increase in the central bank's lending rate could be enough by itself to trigger more hot money inflows.
It will be important for the authorities to let the yuan/dollar appreciate at a faster pace to avoid a further liquidity build-up, they said in a note to clients.
Yet other economists say the impact of the rate rise might be transmitted to the exchange rate quite differently.
Michael Kurtz with Bear Stearns in Hong Kong said the PBOC's move might go down well in Washington, which says the yuan is unfairly undervalued, if it is interpreted as giving a modest lift to the Chinese currency against the dollar.
But Kurtz argued that tightening credit could actually put a brake on the yuan by undermining the property markets that have acted as such a powerful draw for illicit cross-border capital flows into China.
Jiming Ha, chief economist with China International Capital Corp, agreed. The rise in lending rates will restrain investment, including property investment, which will dampen hot money inflows, he said.
(Additional reporting by Jamie McGeever in New York)