BEIJING -- Friday saw a mixed picture in China equity markets. Hong Kong's Hang Seng Index managed a gain, rising 1.2% to 15,629. But the Shanghai Composite, which has lately lost ground after a shoot-the-lights-out performance for most of 2006, declined 2.5% to 1551.

In Thursday New York trading, China plays took it on the chin. The Internet sector was especially hurting:

eLong

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fell 8.6% to $13.51;

Tom Online

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was down 6.5% to $18.98; and

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lost 4.8% to $23.70.

The unhappy theme of the week was interest rates. As investors in the U.S. gird for a further increase in late June, Europe's central bank staged tightening of its own on Thursday. For good measure, two more big Asian economies joined the crowd, with India and South Korea both hiking borrowing rates to fend off inflation.

Japan is also likely to raise rates from their current 0% level in the next few months. Could China follow?

An official in the research arm of the People's Bank of China (PBOC) recently said further rate increases are unlikely in the short-term, following a small tightening in April.

ING chief Asia economist Tim Condon says he's not expecting any more hikes in the lending rate this year, writing, "We believe the central bank is in a wait-and-see mode, assessing the effectiveness of the April rate hike and the recently announced measures to cool the property market."

But other analysts don't rule out further tightening within the year.

The PBOC flagged concerns about inflation in its latest quarterly report on monetary policy. Among the culprits: rising costs of both raw material and labor on the mainland, combined with higher global energy prices that are being partly passed on to Chinese consumers.

Though M2 money supply figures have yet to be officially released, local press reported money supply growth rose 19.5% over last year's levels in May, accelerating from an 18.9% increase in May, notes JP Morgan economist Grace Ng.

Another major issue on the inflation front is the hot real estate sector, which has been cause for much grousing in Chinese big cities.

In Beijing, for example, huge swathes of centrally located, low-cost housing has been razed to make room for upscale office buildings, pushing those in search of affordable housing ever farther from the city center. It's common to see the Chinese character for "chai" -- indicating a looming demolition -- splashed in huge painted strokes across half-deserted apartment blocks that used to house middle-income families.

On June 1 authorities rolled out policies aimed at tamping down urban housing speculation by requiring higher mortgage down-payment ratios and extending a capital gains tax (mostly applicable to second homes), among other things.

In the meantime, the inflation picture remains murky. Given the lagging effect of April's rate hike, policymakers will likely scour macro indicators on fixed investment, money supply and loan growth for at least the next couple of months, looking for further evidence of inflationary trends before making any moves.