Dec. 5 (Bloomberg) -- China plans to shift to a ``tight'' monetary policy in 2008, signaling the government may raise interest rates further and allow quicker currency appreciation as the economy heads for its fastest expansion in 12 years.

The central bank changed its stance from the ``moderate tightening'' bias of recent months and ``prudent'' policy of the preceding decade, in a statement released today at the end of a three-day meeting of China's top leaders and financial officials.

The change underscores the government's failure to cool the world's fastest-growing major economy after five interest rate increases this year. China's economy grew 11.5 percent in the third quarter, inflation is running at a decade high and the benchmark stock index has more than doubled in 2007, as an export boom pumps cash into the financial system.

``China needs to take tougher monetary policy measures including continued rate increases to tame inflation, control fixed-asset investment expansion and damp asset prices,'' said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. ``The central banks' rate increases this year have been outpaced by surging inflation.''

The so-called Central Economic Work Conference is held annually before the end of the year to set policies and targets for next year. Before this week's conference, the Communist Party's ruling Politburo highlighted economic overheating and sustained inflation as key risks in the economy in 2008.

Consumer prices in China rose 6.5 percent in October from a year earlier and fixed-asset investment in urban areas increased 26.9 percent through October from a year ago, up from 24.5 percent in all of 2006.

`Forceful Measures'

In response to the government's policy announcement, the People's Bank of China said today it will ``use a combination of monetary policy tools'' and ``take forceful measures to strengthen liquidity control,'' according to a statement on the central bank's Web site.

The central bank has pushed the key one-year lending rate to a nine-year high of 7.29 percent since January. It has ordered lenders to set aside more money as reserves on nine occasions this year, raising the proportion of deposits to 13.5 percent, the highest since at least 1987.

``The government has already shifted from the `prudent' monetary policy set at last year's work conference to gradual tightening throughout this year, and today's announcement is a confirmation of that shift,'' said Ma Jun, an economist at Deutsche Bank AG in Hong Kong.

Bank Lending

The government will ``strictly'' control bank lending growth next year, the state-run Xinhua News agency said in a report today following the meeting, without elaborating.

Chinese banks extended 3.5 trillion yuan ($471 billion) of new loans in the first 10 months, taking the total to 26 trillion yuan, a 15.6 percent increase from loans outstanding at the end of last year, according to central bank data. The banking regulator, over the past month, has frequently ordered commercial lenders to limit loan growth or cut existing debt as bank lending grew more than desired.

The People's Bank of China today also reiterated its pledge to improve the nation's exchange-rate system, without providing further details.

A stronger yuan would help cool the economy by slowing inflows of cash from record exports. Premier Wen Jiabao last week reiterated a policy of ``gradualism'' in currency changes.

Hong Kong newspaper Ta Kung Pao reported Nov. 27 that the People's Bank of China had proposed widening the yuan's daily trading band or making a big one-off revaluation. The central bank later said it wasn't aware of such suggestions.

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

Last Updated: December 5, 2007 07:05 EST