The People's Bank of China, the central bank, on January 20 increased the reserve requirement ratio for banks in a move to siphon excess liquidity out of the market, a trigger for runaway inflation. It was the first hike this year after six increases in 2010.

Commercial banks will have to set aside an additional 0.5 percent of their deposits in reserve, locking about 350 billion yuan ($52.7 billion) they could otherwise lend.

A flood of low-interest credit has found its way into the economy, forcing up prices across the country, including consumer goods and properties. The broad money supply (M2), which covers cash in circulation and all deposits, had stood at 72.58 trillion yuan ($11 trillion) by the end of 2010, up 19.7 percent year on year, topping the government's target of 17 percent.

In the wake of proliferating inflationary fears, China has vowed to take a prudent monetary stance this year, marking a switch from the moderately loose policy adopted to counter the financial crisis. Last year, the central bank also raised interest rates twice and drained liquidity through a series of market operations.

Since issuing central bank bills has turned out to be less effective, more reserve requirement rate increases are probably in the pipeline, said Wu Shijin, an analyst with the Guoxin Securities Co. Ltd.

Lian Ping, an economist with the Shanghai-based Bank of Communications, expected more interest rate hikes around the Spring Festival, which falls on February 3.

"The one-year deposit rate remains negative in real terms given soaring inflation," he said. "But a drastic increase is less likely as a large gap in rates with the United States would attract torrential inflows of speculative hot money."