China Economy
Andy Wong  /  AP
A window cleaner works on a high rise office building next to another building under construction in Beijing, China, Sunday. China tightened credit again Monday in an effort to cool its sizzling economy, ordering banks to increase their reserves for a sixth time this year.
updated 7/30/2007 10:29:57 AM ET 2007-07-30T14:29:57

China tightened credit Monday in a new effort to cool its sizzling economy, ordering banks to shrink the pool of money for lending by increasing their reserves for a sixth time this year.

The move was widely expected after the economy grew by 11.9 percent last quarter, its fastest rate in 12 years despite earlier efforts to slow the expansion. Beijing raised interest rates on July 20 for a third time this year.

The amount of reserves that lenders must keep with the central bank was raised 0.5 point to 12 percent of their deposits, the central bank said. The increase takes effect Aug. 15.

China's communist leaders want to keep overall growth high to reduce poverty. But they worry that runaway investment in real estate and other industries could push up politically volatile inflation or spark a debt crisis if borrowers default.

Regulators have tried to target individual industries with investment curbs while keeping interest rate hikes small in an effort to avoid derailing growth. Even after three rises this year, the key lending rate stands at just 6.84 percent on a one-year loan.

But economic planners worry that the export-fueled flood of cash surging through China's economy is driving dangerously fast investment in stocks, real estate and other assets.

The surge in the money supply is straining the central bank's ability to contain pressure for prices to rise. It drains billions of dollars a month from the economy through bond sales, piling up reserves that have topped $1.3 trillion.

Still, Chinese banks are so flush with cash that moves such as Monday's reserve increase are considered to be just a government signal to curtail lending, not a real constraint on credit.

Bank deposits total more than 31 trillion yuan ($4 trillion) and are growing by tens of billions of dollars a month, leaving plenty of money for new lending.

The government has tried to rein in China's export surge by cutting rebates of value-added taxes and imposing new taxes on shipments of some goods such as steel. But the Chinese trade surplus soared to a new monthly high in June, widening 85.5 percent from the year-earlier period to $26.9 billion.

Outside analysts are forecasting economic growth of up to 11.5 percent this year. They raised earlier estimates after the second-quarter growth figures exceeded all expectations.

The rapid growth in money supply has helped to drive a boom in Chinese stock prices. The main index has risen by more than 60 percent this year, after more than doubling in 2006.

On Monday, the benchmark Shanghai Composite Index rose 2.2 percent to close at a new all-time high of 4,440.77, breaking the previous closing high of 4346.46 set on Thursday.

Inflation has crept up, hitting 4.4 percent in June _ its highest level in more than two years _ driven by a 7.6 percent jump in food prices. That is well above the official 3 percent target this year.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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