The People's Bank of China, the country's central bank, announced yesterday that it will raise the deposit reserve ratio of banks, excluding rural cooperative banks and credit cooperatives, by 0.5 percentage points from August 15.

The hike will bring the reserves that most banks are required to deposit with the central bank to 8.5 percent. The central bank raised the deposit reserve ratio of banks last month by 0.5 percentage points.

"The move aims to tighten up the 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 comes as a surprise to many economists, who have been calling on the central bank to raise interest rates to prevent possible overheating of the economy through a reduction in the money available for investment.

China's economy surged 10.9 percent in the first half of 2006, the fastest 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.

Total investment in roads, factory equipment and other fixed assets soared 29.8 percent, an increase of 4.4 percent from the same period last year, according to official figures released earlier this week by the National Bureau of Statistics (NBS).

Tang Min, chief economist with the China Mission of the Asian Development Bank (ADB), said on Thursday he expects China to raise its interest rates soon.

"The overheating of the economy has become more and more obvious during the first half of the year so 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 some sectors troubled by overcapacity and control excessive supplies of monetary credit but it seems very cautious in 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 of 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 for sustainable economic development in the long-run.

(Xinhua News Agency July 22, 2006)