April 5 (Bloomberg) -- China ordered banks to set aside more money as reserves for the sixth time in less than a year to slow inflation as economic growth shows no sign of moderating.

The deposit-reserve ratio, the amount banks must hold rather than lend, will rise by 0.5 percentage point to 10.5 percent starting April 16, the People's Bank of China said today. That matches the size of the previous five increases.

Central bank Governor Zhou Xiaochuan wants to cut excess investment as he tries to cool an economy that probably grew 11 percent last quarter, rather than let the yuan appreciate at a faster pace. He last month raised interest rates to an eight- year high to reduce the risk of loans fueling inflation and asset bubbles.

``Chinese authorities have a significant liquidity problem on their hands,'' said Tim Condon, an economist at ING Bank NV in Singapore. ``The government's probably acting in response to the very buoyant loans growth we saw in January and February. They're going to keep watching this.''

A 0.5 percentage point increase removes about 170 billion yuan ($22 billion) from the financial system, reducing the funds banks have available to lend.

China's economy may grow as much as 11 percent in the first quarter, the State Information Center said in a report last month. It expanded 10.7 percent last year, compared with an official target of 8 percent. The center is a research unit of the National Development and Reform Commission, the government's top economic planning agency.

`Multiple Tools'

The central bank ``will continue to carry out prudent monetary policies, use multiple tools to strengthen liquidity controls to maintain liquidity at a moderate level and to prevent money supply and lending from growing too rapidly,'' according to today's statement.

M2, China's broadest measure of money supply, grew 17.8 percent in February, the fastest pace in six months, while outstanding loans climbed 17.2 percent. New lending was 981 billion yuan for the first two months combined, almost a third of the total for all of 2006.

China's expansion is spurring demand for raw materials such as copper, steel and oil needed to build skyscrapers, bridges and cars. Morgan Stanley Chief Economist Stephen Roach estimates China accounted for about 50 percent of the gain in metals and oil during the past four years.

Possible `Curse'

Failure to curb investment in factories, real estate and other fixed assets may lead to overcapacity and falling prices, turning China's economic expansion into a ``curse,'' the Asian Development Bank said in a report last week.

The central bank uses reserve requirements, interest rates and treasury bill sales to soak up cash from a trade surplus that reached $177.5 billion last year. The trade surplus surged ninefold in February from a year earlier to $23.8 billion, the second-highest on record.

China has resisted calls to allow faster gains in the yuan, which would reduce the surplus by making the nation's exports more expensive. The yuan has risen about 7 percent against the dollar since a decade-old fixed rate ended in July 2005. The currency closed at 7.7243 to the dollar today in Shanghai.

``If the yuan appreciation doesn't get faster, China's trade surplus will likely widen to $30 billion monthly in the second half of this year from an average of $20 billion currently,'' said Shen Minggao, an economist with Citigroup Inc. in Shanghai.

Further Increases Forecast

Stephen Green, an economist at Standard Chartered Plc in Shanghai, forecasts China will raise the reserve ratio a further three times this year to 12 percent. ING's Condon predicts the ratio will reach 11 percent.

India, the second fastest-growing major economy, raised its deposit reserve ratio to 6.5 percent effective April 28. The U.S. has a sliding scale of up to 10 percent depending on the size and type of a bank's liabilities.

Central bank Deputy Governor Wu Xiaoling said on March 31 that the bank may be forced to tighten liquidity further as the trade surplus expands and price pressures increase. Inflation accelerated to 2.7 percent from 2.2 percent in January. The central bank aims to cap this year's increase in the consumer price index at 3 percent.

``The M2 broad money supply growth normally leads the growth of CPI by 10 to 12 months, which means last year's M2 growth will continue to add pressure on this year's inflation, and we will closely monitor the trend,'' Wu said at a conference in Beijing.

Interest Rates

The previous increase in bank reserve ratios took effect on Feb. 25. The central bank lifted the benchmark one-year lending rate to 6.39 percent from 6.12 percent on March 18.

China's stock market has reached record highs this year, and also had the biggest drop in a decade on Feb. 27, underscoring government concerns about boom-and-bust cycles fueled by cash from the trade surplus.

The central bank prints yuan to convert foreign currency derived from exports of clothes, electronics and steel. It then sells treasury bills to lenders to remove money from the financial system.

That tool is less attractive to the government than lifting bank reserve requirements because it costs more, economists say. The People's Bank of China pays lenders 1.89 percent interest for reserves lodged with it, less than the yield on one-year government debt.

To contact the reporter on this story: Li Yanping in Beijing on yli16@bloomberg.net

Last Updated: April 5, 2007 11:04 EDT