July 20 (Bloomberg) -- China raised interest rates for the third time since March to cool an economy that grew at its fastest pace in 12 years last quarter, stoking inflation.

The benchmark one-year lending rate will increase to 6.84 percent -- the highest in more than eight years -- from 6.57 percent, starting tomorrow, the People's Bank of China said today on its Web site. The one-year deposit rate will jump to 3.33 percent from 3.06 percent.

China is trying to stop the flood of cash from record trade surpluses from fueling inflation, asset bubbles and overcapacity in manufacturing. Consumer prices rose by the most in almost three years in June because of a spike in food costs. Factory and property investment has surged.

``Tightening measures so far haven't reined in growth,'' said Tai Hui, an economist at Standard Chartered Bank Plc in Hong Kong. ``With inflation increasing, interest rates need to rise to be at a reasonable level.''

The inflation rate was 4.4 percent last month. That's more than returns on bank deposits, encouraging households to bet on stocks instead and making it harder for the government to cool the share market.

Urban fixed-asset investment climbed 26.7 percent in the first six months, accelerating from the 24.5 percent increase for all of 2006.

China is under pressure to allow faster appreciation of the yuan to slow the flood of money into the economy from an export boom and ease trade tensions with the U.S. and Europe.

Export Boom

The world's fourth-largest economy expanded 11.9 percent in the second quarter from a year earlier. China exported $112.5 billion more than it imported in the first six months, an increase of 84 percent from a year earlier.

The CSI 300 Index of stocks has climbed 95 percent this year after more than doubling in 2006.

Rising food prices, high stock and property prices and excessive liquidity from the trade surplus ``may in combination push inflation further,'' Li Xiaochao, spokesman for the statistics bureau, said July 19.

To make savings more attractive, lawmakers last month passed legislation that will allow the cabinet to scrap or reduce a 20 percent tax on interest income. In May, the government increased the stamp duty on share trades to cool the stock market.

Banks extended 2.5 trillion yuan of new loans in the first six months of 2007, already 80 percent of last year's total.

Reserves

The central bank has ordered lenders to set aside larger reserves of money five times this year. The government also plans to soak up cash by selling 1.55 trillion yuan ($205 billion) of bonds as part of setting up an agency to manage some of the country's $1.3 trillion of foreign-exchange reserves.

The National Development and Reform Commission, China's top economic planning agency, forecasts the trade surplus will widen to a record $250 billion to $300 billion this year, up from $177.5 billion in 2006.

Premier Wen Jiabao called on June 13 for a ``moderate tightening'' of monetary policy, citing the pace of growth in investment and industrial production, excess money in the financial system and inflation pressures.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at [email protected]
Last Updated: July 20, 2007 05:30 EDT