Shanghai's stock market took another heavy beating yesterday after the Chinese central bank admitted that surging fuel prices and steep inflation may prompt a rise in interest rates.

Speaking in the wake of a surprise decision by Beijing to raise fuel prices by 18 per cent last week, Zhou Xiaochuan, Governor of the People's Bank of China, said that the resulting leap in pump prices had put pressure on the consumer prices index and that the central bank might need to adopt a “stronger policy against inflation”.

Amid rising fears that the full impact of the American sub-prime crisis has not yet emerged, he ordered banks to “keep a close watch on the financial situation at home and abroad” and to enhance their ability to “pre-warn” of trouble.

He also described the Beijing Olympics in August as an “unprecedented test” for the banking industry and its need to project an image of stability. Desperate that the Games should succeed in their perceived role as China's “coming-out party” into the small cabal of global economic superpowers, Beijing has fought hard to suppress market forces - particularly the soaring price of crude oil - that visibly threaten stability.

The gambit of raising fuel prices last week was aimed at securing adequate supplies for the moment when the eyes of the world are fixed on Beijing.

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