Aug. 21 (Bloomberg) -- China raised interest rates for a fourth time this year to cool the world's fastest-growing major economy after inflation and money supply surged.

The benchmark one-year lending rate will increase to 7.02 percent from 6.84 percent, starting tomorrow, the People's Bank of China said today on its Web site. The one-year deposit rate will rise to 3.6 percent from 3.33 percent.

China is trying to stop a flood of cash from a surging trade surplus from fueling inflation, asset bubbles and overcapacity in manufacturing. Consumer prices climbed 5.6 percent in July, the fastest pace in more than a decade, as the cost of food soared.

``The central bank is a little concerned about potential overheating,'' said David Cohen, an economist at Action Economics in Singapore. ``That was a set of strong economic data last week and inflation reaching a 10-year high has got their attention.''

A stronger yuan would help to ease the flow of money into the Chinese financial system and tension with trading partners including the U.S. The currency has gained 9 percent versus the dollar since a revaluation in July 2005. U.S. manufacturers say the yuan is kept weak to make China's products cheap.

Besides raising rates, the People's Bank of China has ordered lenders to set aside larger reserves on six occasions this year. It has also sold bills to soak up cash.

The top priority is to prevent the economy from overheating and keep prices tamed, the central bank said in a quarterly monetary-policy report released Aug. 8.

Energy, Labor

Consumer-price increases aren't solely the result of ``temporary factors,'' the People's Bank of China said then, highlighting energy and labor costs and people's expectations for inflation.

China's economy, the world's fourth largest, expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years, on exports and investment.

The trade surplus surged 67 percent in July from a year earlier to $24.4 billion, the second-highest monthly total. Money supply climbed 18.5 percent, the biggest increase in more than a year.

Fixed-asset investment in urban areas increased 26.6 percent in the first seven months from a year earlier, close to the 26.7 expansion in the first half.

Inflation has outstripped returns on bank savings. That has encouraged households to switch money to stock and property markets. The government reduced a tax on interest income to 5 percent from 20 percent to make deposits more attractive.

The key CSI 300 Index has climbed 143 percent this year after more than doubling in 2006. In July, housing prices jumped 19.4 percent from a year earlier in Shenzhen and 10.4 percent in Beijing.

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

Last Updated: August 21, 2007 06:37 EDT