June 7 (Bloomberg) -- China told lenders to set aside more money for a fifth time this year to cool inflation that is close to an 11-year high in the world's fastest-growing major economy.

Banks must put aside a record 17 percent of deposits as reserves starting June 15, which rises to 17.5 percent from June 25, the People's Bank of China said today on its Web site. The current requirement is 16.5 percent.

China's banking system is being flooded with cash from a trade surplus, foreign investment and speculative money betting on a rising yuan. The government is trying to slow inflation from April's 8.5 percent pace without triggering a slump in the economy that contributes the most to global growth.

``Liquidity is still a prominent problem in China,'' said Henry Li, an economist at Core Pacific Yamaichi International Ltd. in Hong Kong. ``The central bank will keep using the reserve requirement to curb inflation as it has a milder impact on economic growth compared to interest rates.''

Today's move will drain about 422 billion yuan ($60 billion) from the financial system. Local-currency deposits stood at 42.2 trillion yuan at the end of April.

Banks in areas severely affected by the May 12 earthquake are excluded from the changes, the central bank said.

Economic Growth

China's economy, the world's fourth largest, expanded 10.6 percent in the first quarter from a year earlier, the ninth quarter of growth above 10 percent.

The trade surplus has pumped $58 billion into the financial system in the first four months and foreign direct investment has injected $35 billion. The extra cash may fuel higher inflation and adds to the risk of asset bubbles.

The benchmark CSI 300 Index of shares has tumbled 35 percent this year after gaining 162 percent in 2007, on concern that a global slowdown and tightening measures at home may dent company profits.

House prices in China's 70 major cities rose 10.1 percent in April from a year earlier, slowing for a third month after the government raised mortgage rates and imposed stricter down- payment requirements.

April's inflation was close to February's 8.7 percent pace, the fastest since May 1996. It is also more than 3 percentage points above the government's 4.8 percent target for this year.

In addition, China's strongest earthquake in 58 years that hit the Sichuan province on May 12 has disrupted food supplies and is likely to escalate inflation.

Besides reserve requirements, China has allowed the yuan to appreciate versus the U.S. dollar this year to reduce import costs. It has resisted raising interest rates after six increases in 2007 as the U.S. Federal Reserve cut borrowing costs. A widening of rates between the two countries may attract more capital inflows into China.

China's top economic priority is to combat surging prices, according to Premier Wen Jiabao, who also stressed the need to avoid an economic slowdown.

To contact the reporter on this story: Nipa Piboontanasawat in Beijing at npiboontanas@bloomberg.net

Last Updated: June 7, 2008 08:01 EDT