Aug. 17 (Bloomberg) -- China will probably raise interest rates by the end of September to cool the economy after inflation accelerated to a 10-year high and record trade surpluses pumped cash into the financial system.

Rates will increase this quarter for the fourth time since March, 11 of 16 economists in a Bloomberg News survey said yesterday after the final economic data for July. Most expect the benchmark one-year lending rate to rise to 7.11 percent from 6.84 percent. The deposit rate is likely to be raised to 3.6 percent from 3.33 percent.

Central bank Governor Zhou Xiaochuan's efforts to tame inflation are complicated by inflows of export cash and a pork shortage that's pushed up food prices. July's data showed the fastest expansion of money supply in 14 months and little cooling of growth in factory spending and industrial production.

``Past measures were not strong enough to slow the Chinese economy,'' said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong. ``There's still the risk of overheating and precautions are needed.''

The trade surplus may reach $250 billion this year from $177.5 billion in 2006, according to economists surveyed separately this month. A fourth rate increase will compare with two last year.

`Out of Control'

``China is coping with a bigger inflow of liquidity,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai.

Consumer prices jumped 5.6 percent in July from a year earlier, the biggest increase since February 1997, as the costs of pork, eggs and poultry soared. M2, the broadest measure of money supply, rose 18.5 percent.

``With inflation higher, monetary policy has not been significantly tightened and real interest rates have not changed dramatically,'' said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

Economists are split on whether the acceleration in consumer prices is temporary and limited to food or ``getting out of control,'' a term used last month by Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong.

The government is also concerned about asset bubbles. Inflation is eating away at savings, encouraging households to switch money to property speculation and the stock market.

The key CSI 300 Index of shares has climbed more than 130 percent after more than doubling in 2006. The value of China's listed shares is $2.8 trillion and larger than last year's gross domestic product. In July, housing prices jumped 19.4 percent from a year earlier in Shenzhen and 10.4 percent in Beijing.

Banks' Cash Reserves

Household savings fell in July by 9.1 billion yuan ($1.2 billion) from the previous month. China this week reduced a tax on interest income to 5 percent from 20 percent to make deposits more attractive.

The People's Bank of China will order lenders to set aside more money as reserves at least once more this year, 11 economists said. Most expect the required reserve ratio to rise to 12.5 percent from 12 percent.

The central bank has already told commercial banks to increase reserves on six occasions this year, compared with three times last year. Chinese lenders extended 2.8 trillion yuan of new loans in the first seven months, 18 percent more than a year earlier.

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. Industrial production rose 18 percent in July, down from 19.4 percent in June.

Heat, Liquidity

``It's a very small moderation, the economy is still leaning toward being hot and liquidity is still ample,'' said Ha Jiming, chief economist at China International Capital Corp. in Beijing.

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.

The nation's foreign-exchange reserves, the world's largest, soared to a record $1.3 trillion at the end of June, 42 percent more than a year earlier. The trade surplus surged 81 percent in the first seven months to $136.8 billion.

The following table shows economists' estimates for changes in the benchmark one-year lending and deposit rates and the required reserve ratio for banks.

---------------------------------------------------------
                             Lending    Deposit   Reserve
                                rate       rate Req.Ratio
---------------------------------------------------------
Number of Estimates              16         16         15
---------------------------------------------------------
Action Economics             27 (3)     27 (3)     50 (3)
AMP Capital Investors     27 (soon)  27 (soon)  50 (2mo.)
Bank of China (Hong Kong) 27 (3, 4)  27 (3, 4)  50 (3, 4)
Brown Brothers Harriman   27 (3, 4)  27 (3, 4)  50 (3, 4)
CFC Seymour                  27 (3)     27 (3)     50 (4)
Citic Securities             27 (4)     27 (4)         nc
Forecast Ltd.             27 (soon)  27 (soon)  50 (soon)
HSBC #                       27 (3)     27 (3)  150 (3-4)
Industrial Bank              18 (3)     27 (3)  50 (3, 4)
JPMorgan Chase               27 (4)     27 (4)        n/a
Lehman Brothers           27 (soon)  27 (soon)         nc
Morgan Stanley *          27 (3, 4)  27 (3, 4)         4x
Nomura Securities            27 (4)     27 (4)  50 (3, 4)
Royal Bank of Scotland       27 (3)     27 (3)  50 (3, 4)
Shenyin Wanguo Sec.          18 (4)     27 (4)         nc
UOB Group                    27 (4)     27 (4)     50 (3)
---------------------------------------------------------

Note: 3, 4 = third quarter, fourth quarter

2x, 3x = number of times of increase this year

nc = no change in the rates

* Morgan Stanley expects RRR hikes if there's no issuance

of special MOF bonds.

# HSBC expects total of 150bp hike in the 3rd to 4th quarter.

To contact the reporters on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net; Patricia Chua in Singapore at pchua1@bloomberg.net

Last Updated: August 17, 2007 00:11 EDT