May 12 (Bloomberg) -- China ordered banks to set aside more deposits as reserves for the fourth time this year after inflation accelerated, approaching the fastest pace since 1996.

Banks must park a record 16.5 percent of deposits with the central bank, up from 16 percent, the People's Bank of China said today on its Web site. Consumer prices rose 8.5 percent in April from a year earlier driven by food costs, the statistics bureau said today.

The increase will freeze about 208 billion yuan ($30 billion) in the banking system, helping to cool the world's fastest-growing major economy by restraining lending. A 7.5 percentage point increase in the requirement since the start of last year has failed to stop lending growth that's helped Chinese banks to record profits.

``The central bank needs to do more and do it sooner rather than later,'' said Kevin Lai, senior economist at Daiwa Institute of Research in Hong Kong. ``The reserve requirement is not sufficient to curb inflation.''

The ratio becomes effective May 20.

Inflation quickened from 8.3 percent in March and topped the 8.2 percent median estimate of 22 economists surveyed by Bloomberg News. It's the fastest in the world's 10 biggest economies and compares with 5.04 percent in Brazil and 4 percent in the U.S.

The yuan closed at 6.9882 versus the dollar at 5:30 p.m. in Shanghai, from 6.9833 before the inflation data was released. The CSI 300 Index of stocks gained 0.7 percent.

Banks' Profits

Central banks around the world are grappling with faster inflation and slowing growth. In Asia, Bank Indonesia on May 6 raised interest rates for the first time in more than two years and the Reserve Bank of India last month twice ordered lenders to set aside more reserves.

China's economy expanded 10.6 percent in the first quarter from a year earlier, down from 11.9 percent pace for all of 2007, as exports cooled. China's 12 publicly traded lenders posted an average 118 percent jump in profit.

Consumer prices rose 8.7 percent in February, the biggest gain since May 1996.

``If we don't handle financial risks well, this could cause turbulence in the overall economy and undermine social and political stability,'' Vice Premier Wang Qishan said May 9.

Interest Rates

China will raise the bank reserve ratio to 19 percent by year's end and ``it is doubtful whether this alone will be enough to temper inflation expectations,'' said Mark Williams, an economist at Capital Economics Ltd. in London. ``A hike to interest rates would send a stronger message and must now be considered likely.''

Central bank Governor Zhou Xiaochuan said May 5 that there's a possibility rates will rise. The central bank has kept the benchmark one-year lending rate unchanged at a nine-year high of 7.47 percent this year after six increases in 2007. The government has also slowed the pace of yuan gains since April.

The government is concerned that rates higher than in the U.S. and the strengthening yuan are attracting overseas money to an economy already awash with trade cash -- threatening to fuel inflation.

China's foreign-exchange reserves, the world's largest, surged 40 percent to $1.68 trillion at the end of March from a year earlier. Foreign direct investment climbed 59 percent in the first four months from a year earlier to $35 billion, the government said today.

Currency Gains

China's currency has climbed about 0.4 percent versus the dollar since March 31 after a 4.2 increase in the first quarter that was the biggest jump since the end of a fixed exchange rate in 2005.

``There is a need to combine exchange rate policy with other monetary policies, including interest rates, to reduce the trade surplus and contain inflationary pressures,'' said Ha Jiming, chief Asia economist at China International Capital Corp. in Beijing.

Food costs, which increased 22 percent in April from a year earlier, are driving this year's surge in inflation. Meat prices climbed 48 percent last month.

Grain ``may lead another wave of food price inflation'' as meat shortages ease in the second half of this year, said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. Food prices remain the government's biggest challenge and inflation's spread into other areas ``is still limited,'' Sun said.

Wheat Prices

Wheat has climbed 63 percent in the past year and rice, a staple for half the world, has more than doubled. United Nations Secretary-General Ban Ki-moon said April 29 that basic foods were becoming beyond the reach of the world's poorest people.

Soaring inflation helped trigger the Tiananmen Square protests that were crushed by the army in June 1989.

The government is targeting inflation of 4.8 percent this year, the same as the actual rate in 2007. Non-food prices rose 1.8 percent in April, an unchanged pace.

``While we expect the impact of food prices will start to mitigate late this year, we do now start to see some filtering- through of raw material prices as well,'' said Louis Kuijs, senior China economist with the World Bank in Beijing

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

Last Updated: May 12, 2008 07:23 EDT