Updated from 10:13 a.m. EDT

For tech watchers, a

complex demand picture in China grew more confusing on Thursday when Beijing pushed through an interest rate hike calculated to further slow an already decelerating economy.

The increase comes as U.S. semiconductor makers are still struggling through a noxious inventory buildup in the Chinese cell-phone and DVD market. The inventory problem, which hurt third-quarter sales at the likes of

Analog Devices

(ADI) - Get Report

,

Texas Instruments

(TXN) - Get Report

and

Zoran

(ZRAN)

, stems from earlier efforts by the Chinese government to put the brakes on an economy that is expected to grow by more than 9% in 2004.

U.S. chip suppliers were hurt as Beijing tightened credit in certain business sectors last spring. By summer, some of China's small cell-phone and DVD vendors ran short on working capital and couldn't carry on their business. That caused hardware stocks to pile up, depressing sales of component chips in the third quarter.

China's entrepreneurs have since managed to find credit through informal channels, but chip suppliers think the inventory situation will take another quarter or so to be resolved.

Now further trouble could loom if China's central bank is entering a prolonged rate-tightening mode.

Despite rumors of a rate increase circulating throughout this year, the news of the nominally small 27-basis-point hike took the market by surprise on Thursday. Outside China, commodities reacted most sharply. Oil prices dropped, along with the share prices of materials companies such as

Alcoa

(AA) - Get Report

. Traders speculated that lower growth in China will sap some of the demand that has lately propelled prices of oil, copper and aluminum to highs not seen in years.

"I think market reaction might be a little worse than expected, because people are thinking it's the first of many increases," said Romeo Dator, manager of the

(USCOX) - Get Report

U.S. Global Investors China Region Opportunity fund. Dator, who likewise expects more hikes to come, believes the general direction of economic growth in China will be lower going forward.

Already, China's GDP growth has steadily ebbed throughout 2004 -- from 9.8% year-over-year growth in the first quarter to 9.1% in the third quarter.

A further deceleration would almost certainly hurt sales at U.S.-based technology hardware companies, given China's standing as the world's biggest purchaser of cell phones and the second-biggest PC market.

The country's fourth-quarter GDP may be somewhere in the 8% range, Dator said. "I think the government will say that's too high and use it

as a justification to increase interest rates again in the first quarter of '05," he said.

But any initial rate hikes are largely symbolic, said Morris Goldstein, a senior fellow at the Institute for International Economics, since even now the inflation-adjusted lending rate in China remains in negative territory. (Though Chinese banks charge a nominal interest rate of 5%, inflation in prices of corporate goods is running at around 9%, which puts real interest rates at around -4%, he reasons.)

Goldstein believes the central bank would need to raise rates by a couple hundred basis points to have any real effect.

He casts Beijing's decision to hike rates as a sign of policymakers' growing sophistication. "You can't run a complex large economy by administrative controls," said Goldstein, referring to the blunt curbs on lending that the government put in place last spring. "You eventually want to move to market mechanisms."

And although Beijing authorities have aggressively sought to cool investments in sectors such as real estate and steel, they are eager to preserve consumer buying power, said Kalpesh Kapadia, managing director and senior analyst for C.E. Unterberg Towbin.

Lately, China's consumers have been only too happy to oblige, with retail spending up a hefty 14% in September.

Indeed, third-quarter PC shipments in the China market increased 11%, in line with expectations, according to Gartner, which is looking for PC growth of 15.3% in 2004 to just under 15 million units.

At least in computer hardware, a macroeconomic slowdown in China actually may not turn out to be as damaging as some might fear. The appetite for PCs in emerging markets like China tends to remain steady regardless of a country's economic growth, as consumers and small businesses acquire computers for the first time, noted Charles Smulders, vice president and computer analyst at Gartner.

In 2003, Gartner estimated that fewer than 4% of households in China, or around 46 million people, owned a computer.

In the big-picture view, the monetary tightening marks a hopeful sign for China watchers. Investors can only hope it doesn't exact too much of a short-term price from Silicon Valley.