The People's Bank of China, China's central bank, raised banks' deposit reserve ratio Tuesday by 0.5 percentage points to rein in excessive bank lending.

The hike brings the reserves that most banks are required to deposit with the central bank to 8.5 percent. The central bank raised the bank deposit reserve ratio by the same margin of 0.5 percentage points in June.

The central bank expects the two hikes - one percentage point in total - will take 300 billion yuan out of circulation.

"The move aims to tighten up banks' liquidity management, curb the excessive growth of money and credit and maintain the development of the economy," said the central bank in a statement posted on its website.

The move came as a surprise to many economists, who have been calling on the central bank to raise interest rates to reduce the money available for investment and prevent possible overheating of the economy.

China's economy surged 10.9 percent in the first half of 2006, the fastest growth in a decade and higher than the targeted annual growth rate of eight percent set by the government for this year.

The economy continues to roar ahead despite a slew of measures imposed by the government to ease the blistering growth of investment.

China's commercial banks lent 2.34 trillion yuan in the first seven months of the year, consuming 94 percent of their annual loan quota, according to statistics from the People's Bank of China.

New loans, which had dropped in June, picked up speed again in July despite government efforts to curb the money supply and tighten credit. In July alone banks lent 171.8 billion yuan.

Economists attributed the excessive growth to loose liquidity, which contributes to an unbalanced economic structure and could cause hiccups in the economy.

Ha Jiming, chief economist of China International Capital Corporation Limited (CICC), expected the central bank to further raise the deposit reserve ratio by the end of this year to cool down the economy.

Some economists, however, suggest the central bank raise the benchmark interest rate, which is a more stringent means of reining in excessive loans.

Tang Min, chief economist with the China Mission of the Asian

Development Bank (ADB), said he expects China to raise its interest rates soon.

"The overheating of the economy has become more and more obvious in the first six months of the year. The country needs to raise interest rates to solve the problem," he said.

The government has vowed to slow down the surge in fixed assets investment in sectors troubled by overcapacity and to control excessive money and credit supply but it seems to be very cautious about raising interest rates.

The last time the central bank adjusted interest rates was on April 27, when it raised the benchmark one-year loan interest rate from 5.58 percent to 5.85 percent, but did not change the rate for deposits.

Analysts said a higher interest rate on deposits may help curb excessive investment, but would also discourage consumption and investment in stock markets, which the government has been working hard to encourage so as to sustain economic development over the long term.

Source: Xinhua