Sept. 28 (Bloomberg) -- China's central bank said it will maintain a ``moderately tight'' monetary policy in the last quarter of 2007 to curb inflation, limit asset prices and prevent the economy from overheating.

China's economy ``still faces prominent problems such as investment growth that's too rapid, a large trade surplus, excessive lending and continued inflation and asset price rises,'' the People's Bank of China said in a statement on its Web site today, after a quarterly meeting of its monetary policy committee.

China is trying to slow the pace of consumer-price gains, which surged 6.5 percent in August, the fastest rate in 10 years and more than double the central bank's targeted growth for the full year. Of 20,000 households surveyed in a central bank quarterly report released Sept. 20, a record 61.3 percent said they expect inflation to quicken in the fourth quarter.

The central bank said today that it will study different factors that caused recent inflation and asset price increases and take ``targeted'' measures. It didn't elaborate.

``The central bank may need to raise key interest rates again before year-end to keep pace with rising inflation,'' Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong said today. Surging inflation eroded returns of household savings, prompting more people to pour money into stocks and buy houses.

Interest Rate Rises

China, since late July, has asked local authorities to freeze all government-regulated prices until the end of the year, to help curb inflation. The central bank, on Sept. 14, raised key interest rates for the fifth time this year.

The central bank is trying to tame an inflow of cash from record trade surpluses that threatens to stoke inflation and asset bubbles. Housing prices in 70 major cities rose 8.2 percent last month, the biggest gain since the government began the monthly survey in August 2005. China's benchmark CSI 300 Index of stocks more than quadrupled in the past year.

The People's Bank has ordered lenders to set aside larger reserves on seven occasions since January and sold bills to soak up cash from the financial system.

The bank has also raised interest rates on some mortgages and increased the minimum deposit on second homes yesterday to curb property speculation and cool prices.

U.S. Subprime Impact

China needs to ``closely'' monitor the impact of the financial crisis caused by U.S. subprime loans on the country's economy, the bank said in today's statement, adding that the damage to China's financial system is ``limited'' so far.

Defaults on home loans to people with poor credit in the U.S. have prompted a sell-off of asset-backed securities that spread to wider credit markets and wiped more than $5.5 trillion off the value of equities worldwide. China's three biggest banks hold a combined $12 billion of such investments as of June 30.

The research bureau at the People's Bank said in a report today it expects China's inflation to quicken to 4.6 percent for 2007 from 1.5 percent last year. The bureau also forecast the country's gross domestic product to expand by 11.6 percent this year, accelerating from 11.1 percent in 2006. The world's fourth-largest economy expanded by 11.9 percent in the second quarter, the fastest pace in 12 years.

The central bank today reiterated its pledge to further boost the flexibility of its currency and allow market demand and supply to play ``a much bigger'' role in deciding the yuan's value.

Widening Trade Gaps

China's major trading partners are calling for faster yuan appreciation to help ease their widening trade gaps with the Asian country. China needs to allow its currency to rise against the euro to help ease the increasing trade gap the European Union has with China, said Joaquin Almunia, EU Commissioner for Economic and Monetary Affairs on Sept. 18.

U.S. Treasury Undersecretary David McCormick said on Sept. 20 during his visit to Beijing that China needs to let the yuan rise faster to help narrow its trade surplus and rebalance economic growth.

The Chinese currency posted its strongest close since the end of a dollar link in July 2005 on Sept. 21, reaching 7.5036 against the U.S. dollar in Shanghai. It has gained 10.2 percent during the period.

A higher yuan would lower the price of imported goods and, as exports become less competitive, create incentives for companies to make products for consumers at home, economists say.

The central bank's monetary policy committee, a 13-member panel with head officials from all major economic regulatory agencies, has regular meetings every three months to decide policies for the next quarter.

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

Last Updated: September 28, 2007 07:32 EDT