China’s tight liquidity just got a little tighter. At the end of May, Goldman Sachs’ financial conditions index – a blend of interbank rates, single-A corporate bond yields, the trade-weighted currency, and equities – was nudging the same levels as August 2008, consistent with a determined tightening. Since then, a surge in short-dated interbank rates above longer-maturity contracts has been accompanied by confirmation of a slump in renminbi loan growth, down almost a fifth in May, year-on-year. Just when the nation seemed to be crying out for a little liquidity relief, then, the People’s Bank obliged on Wednesday with a quarter-point increase in one-year interest rates, effective on Thursday.

The problem, as ever, is inflation. Despite Premier Wen Jiabao’s recent assurances to this newspaper that domestic policies had “worked,” and that “price rises [would] be firmly under control this year,” June’s consumer price inflation numbers – due to be reported in the coming days – are expected to be significantly higher than May’s. A recent survey of banks and brokers by publisher Caixin put the June index rise at 6.3 per cent, up from 5.5 per cent in May.

That led to a predictable “risk off” spasm in other world markets. Investors are alarmed by any development that appears to raise the chances of a Chinese hard landing.