China's central bank tightens policy

China's economy continued to expand at breakneck speed last month, prompting the central bank to tighten monetary policy amid fears that excessive investment and credit could lead to overheating.

Late on Friday, the People's Bank of China ordered banks to set aside more in reserves to slow lending growth, raising the Required Deposit Reserve Ratio for commercial lenders by 0.5 percentage points to 8 percent from July 5.

"This hike ... is to prevent credit from growing too fast and to provide a stable currency and financial environment for the country's sustainable and healthy development," the central bank said in a statement.

The latest move will freeze 150 billion yuan (US$18.75 billion) in inter-bank liquidity, the bank said.

"Currently, fixed asset investment is growing too quickly, money supply is growing too fast," it said.

The comments echoed a statement issued last week by the government of Premier Wen Jiabao (溫家寶), which said the rapid expansion in fixed-asset investment and credit had become a major problem for the economy.

"[We] must change the way of just going after economic growth and blind expansion of investment. [We] must improve our economic structure, improve the quality and efficiency of our economic growth," the statement said.

Some analysts were sceptical about the impact of the measures to cool down the red-hot economy.

Yi Xianrong (易憲容), an economist at the Chinese Academy of Social Sciences, an influential government research body, said the monetary tightening would not be effective enough.

"Its influence won't be very large -- liquidity in the commercial banks is huge," he said.

Economic data issued last week for last month, the first since the central bank announced a 27 basis point increase to the one-year lending rate in April, showed strong growth in China's money supply, fixed-asset investment growth and the ever-sensitive trade surplus.

"All the news so far is very supportive of our view that China is in the midst of a full-fledged liquidity boom," Macquarie Research said in a note to clients. "This is a trend that makes more policy tightening inevitable."

M2, a broad measure of money supply, rose 19.1 percent year-on-year at the end of last month, overshooting the official 16 percent full-year target for the fifth month in a row.

The loose, cheap credit conditions helped push urban fixed-asset investment to its highest levels this year, up 30.3 percent year-on-year for the January to May period from the 29.6 percent posted in the first four months.

Producer and consumer prices followed suit, albeit more modestly, up 2.4 and 1.4 percent year-on-year respectively last month.

Industrial output sailed past consensus expectations, rising 17.9 percent last month to 706 billion yuan and 17.0 percent in the January-May period.

And China's monthly trade surplus hit a record US$13 billion over the same period, with official media reporting that the country's foreign exchange reserves have now exceeded US$900 billion.

Second-quarter data for the year is still weeks away, but chances are rising of an expansion akin to the 10.3 percent growth seen in the first quarter.

The statements by Wen's Cabinet and the central bank have highlighted policymakers' concerns over the direction of economic growth.

The public pronouncements came after a recent crackdown on luxury property developments, which saw down payment requirements rise and new ownership transfer taxes introduced.