Much of the commentary about China's decision to increase interest rates last week has focused on the wrong target. The move is aimed primarily at inflation, not economic overheating.

Of course, the rate increase, the first for nine years, is meant to kill several birds with one stone. As a symbolic shift away from administrative controls towards market-based measures, it is hugely encouraging. Coupled with the central bank's removal of the upper ceiling on the commercial bank lending rate (announced, unexpectedly, at the same time), it is a step on the road to proper market-based pricing of credit.