Changes reserve ratio level in third paragraph to 18.5 percent, not 19 percent

BEIJING - China's central bank on Friday increased the amount of money that lenders must keep on reserve for the third time in one month, a move to mop up excess cash in the economy and rein in inflation.

But the decision to raise banks' required reserves rather than interest rates means that officials have opted for a milder form of monetary tightening for the time being, suggesting that they believe prices pressures are still well within their ability to control.

The 50 basis point increase, which takes effect on Dec 20, will leave required reserve ratios at 18.5 percent, a record high for the majority of the country's banks.

The People's Bank of China offered no explanation.

We expected the RRR rise this time, and I think it is perfectly timed to help manage excessive liquidity, said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.

There is still much scope for the central bank to raise reserve ratios next year. We expect several increases in the first quarter of next year and the ratio could reach as high as 23 percent in 2011, he added.

The move came just one week after China's top leaders announced a shift to a prudent monetary policy from the previous moderately loose stance. Analysts said the change of wording could pave the way for more interest rate increases and lending controls.

Chinese stock markets have shed more than 10 percent over the past month on concerns that the government would ratchet up its monetary policy tightening in face of rising inflation.

Chinese consumer price inflation may have hit 5.1 percent in the year to November, a 28-month high, state media reported on Friday. The figure is due to be published on Saturday.

Along with playing a key role in the fight against inflation, policy tightening also signals the government's confidence that the world's second-largest economy is on solid ground, even as the U.S. and European recoveries remain fragile.

(Additional reporting by Aileen Wang and Kevin Yao)

China