China announced a moderate increase in banks' reserve requirements on Friday in a further step to cool down excessive investment and credit growth.

Following a 27-basis-point interest rate hike less than two months ago, the People's Bank of China (PBOC), the central bank, raised the required reserve ratios of banks, excluding rural banks and cooperatives, by half a percentage point, effective July 5.

That will bring the required reserve ratio for major banks, including the four state-controlled lenders such as Hong Kong-listed China Construction Bank and Bank of China, to 8 percent. The ratio is the proportion of deposits a bank is required to have with the central bank as a way of managing their lending capacity.

The move followed economists' calls for further tightening after data showed that fixed-asset investment soared a worrisome 30.3 percent in the first five months of the year, compared to a 29.6 percent increase in the first four months.

The investment surge was fuelled by rapid growth in money supply, which rose by a faster-than-expected 19 percent in the first five months of the year.

"The main purpose of this increase in reserve requirements is to prevent the excessive growth in credits, and therefore provide a stable monetary and financial environment for the sustained and healthy development of the national economy," the PBOC said in a statement.

Although consumer prices remained in check, continued rapid growth of money supply will stoke an overheating of the economy and increase the risk of inflation, the bank said.

The increase in reserve requirements is estimated to freeze 150 billion yuan (US$18 billion) of funds in the banking system, but will not disrupt normal clearing and lending operations given the current ample liquidity, it said.

(China Daily June 17, 2006)