China's central bank surprised markets yesterday by raising the interest rate on its three-month bills for the first time since last August, intensifying its grip on liquidity a day after it promised to keep credit growth in check.

While analysts said the move was just a withdrawal of surplus cash in the system, markets feared the worst, taking it as a sign the central bank could be getting ready to use more forceful measures to cool growth and fight inflation, such as raising benchmark lending rates.

The move was accompanied by the biggest weekly net drain from money markets in 11 weeks.

Analysts said the move should be seen more as an effort by the People's Bank of China to even out the flow of liquidity into the system, in particular to press banks not to repeat the start-of-the-year rush to lend that marked 2009.

"We don't read much into this as it is a one-off case," Chris Leung, an economist with DBS in Hong Kong, told Reuters. "Monetary accommodation will remain in place and though overall bank lending will be lesser this year than last, it is still too early to talk about a withdrawal."

The PBOC yesterday sold three-month bills at a yield of 1.3684 percent, up 4.04 basis points from 1.3280 percent last week.

Meanwhile, the yuan yesterday hit a one-month high against the United States dollar in benchmark offshore one-year non-deliverable forwards on expectations of higher rates.

Commodities bore the brunt of the investor exodus, with oil slipping below US$83 a barrel on concerns about demand from China and Shanghai copper futures losing all of an almost 5 percent gain to snap a 10-day winning streak.

"The strong reaction of the markets appears to have excessively implied that China might be signaling an imminent interest rate hike, but this is very unlikely until at least late in the second quarter," said a dealer at a European bank in Shanghai.

"China typically uses open market operations, including auction yields of its bills, to signal the momentum of quantitative tightening," the dealer said.

"Only hikes of official interest rates will really signal a monetary-policy tightening."

The PBOC is set to mop up a net 137 billion yuan (US$20.06 billion) from the money market via bills and bond repurchase agreements this week, its biggest weekly drain in about four months.

"Let's put this in context," said Robert Rennie, chief strategist for Asia at Westpac Banking Corp in Singapore.

Over the past eight months, the PBOC's assets, or its reserves, had risen by about 1.6 trillion yuan while its liabilities - bills, bonds, repurchase agreements and reserve requirements - were roughly unchanged, Rennie said.

"So the fact that the PBOC has drained 137 billion yuan and raised rates by 4.04 basis points suggests they are moving to withdraw some of this very rapid rise in liquidity," he said.

Rennie said it was a long bow to describe the move as a tightening.

"Market talk is that some banks have intentions to lend about50 percent of their planned new loans for 2010 in the first quarterto offset the impact of possiblemonetary tightening later in the year," said a senior dealer at a Chinese state bank in Shanghai.