China will raise one-year deposit and loan interest rates by 27 basis points to 3.6 percent and 7.02percent respectively as of Aug. 22, the central bank announced on Tuesday.

This is the fourth time that China raised the one-year benchmark interest rates this year and only one month after the last rise on July 21.

The move is not unexpected as China's consumer price index (CPI) in July rose by a record high in the past ten years, said Tan Yaling, a financial researcher with the Bank of China.

The move aims to control fast credit growth and curb the hovering risks of inflation, the People's Bank of China (PBoC) said in a statement on its Web site.

CPI, the main gauge of inflation, rose by 5.6 percent in July from the same month of last year, following a year-on-year growth of 4.4 percent in June. Both are well above the government's target of 3 percent for 2007.

Although the central government said inflation has not occurred because a 15.4-percent rise in food prices mainly contributed to the CPI rise in July, worries about inflation risks have been swelling.

The further rise of interest rate will make bank savings more attractive as the deposit interest rate of 3.6 percent is finally higher than the CPI rise of 3.5 percent in the first seven months of this year.

Curbing excess liquidity is the main reason for the central bank to raise the interest rate so frequently, said Tan.

According to the central bank, financial institutions registered a 16.63-percent increase in RMB loan balance from the same period of last year to 25.31 trillion yuan at the end of July. In July alone, the figure rose by 231.4 billion yuan.

The outstanding amount of narrow money, or M1 (cash plus corporate current deposits), stood at 13.62 trillion yuan, a growth of 20.94 percent year-on-year, and up 0.02 percentage points over a month earlier.

The outstanding amount of broad money, or M2 (M1 plus residential savings deposits), stood at 38.39 trillion yuan, up 18.48 percent year-on-year, 1.42 percentage points higher than the month-earlier level.

Too much cash flows swelled both the CPI growth and the mainland's stock market. Chinese share prices continued an upward trend on Tuesday as the benchmark Shanghai Composite Index went up1.02 percent to a record high of 4,955.20, close to the 5,000 mark after breaking the 3,000 mark in March and 4,000 mark in May respectively.

Yi Xianrong, a researcher with the Institute of Finance and Banking of the Chinese Academy of Social Sciences, said that the rise of interest rate is still not strong enough.

Yi insisted that a larger rise in the deposit interest rate, which would double the current level to 54 basis points, might be more reasonable.

The government should send stronger signals to both enterprises and individuals to affect their investment behaviors, he said.

Despite a range of tightening measures, China's GDP expanded 11.9 percent in the second quarter this year, lifting first-half growth to 11.5 percent.

China elevated the reserve requirement ratio of financial institutions on six occasions to curb excess liquidity. Meanwhile, the nation has loosened control on individual overseas investment to reduce the build-up of cash in its financial system.

A central bank report published earlier this month warned that China's economy remains on the brink of overheating following another 12 months of soaring industrial output and money supply.

China raised the one-year deposit and loan interest rate by 27 basis points in March, by 27 and 18 basis points respectively in May, by 27 basis points both in July, and reduced the withholding tax on interest income to 5 percent from 20 percent as of Aug. 15.