China raised banks' reserve requirements for the fifth time thisyear to restrain prices, underscoring the risk that tighteningmeasures will cause a slowdown in the world's second-biggesteconomy.

Reserve ratios will increase 0.5 percentage point from May 18,the People's Bank of China said on its website today. That willboost levels for the nation's biggest lenders to a record 21percent.

The central bank moved after reports yesterday showed inflationand lending exceeded economists' estimates in April, with consumerprices rising more than 5 percent for a second month. Premier WenJiabao aims to tame inflation that is spreading beyond food toother goods, while sustaining growth as the economy shows signs ofcooling.

“Controlling inflation will definitely entail a slowdown ingrowth and the authorities understand that,” said Wang Qing, chiefChina economist at Morgan Stanley. “The slowdown we've seen so fardoesn't indicate there is a risk of a hard landing, that's why thepolicy priority at the moment is still to control inflation.”

Commodities extended declines after the announcement, with theStandard & Poor's GSCI Index of 24 raw materials sliding 1.7percent to 669.25 points at 11:42 a.m. in London.

Stronger Yuan Besides raising interest ratesand reserve requirements, and guiding banks to limit credit growth,officials have accelerated gains in the yuan, which broke 6.5 perdollar for the first time since 1993 on April 29. U.S. TreasurySecretary Timothy F. Geithner pushed at talks in Washington thisweek for faster appreciation that he says would boost consumptionin China, ease inflation and limit global economic imbalances.

Jim O'Neill, who chairs Goldman Sachs Asset Management andcoined the acronym BRIC for the economies of Brazil, Russia, Indiaand China, said today that China's inflation “won't be a problem”in the second half of this year. The nations' stocks may have a“big rally” as price gains moderate and tightening ends, he toldreporters in Hong Kong.

Weaker growth in industrial production, detailed in yesterday'sstatistics bureau report in Beijing, came after a manufacturingindex declined in April, signaling economic growth may be coolingafter a 9.7 percent expansion in the first quarter. Power shortagesin some provinces may also have affected the output numbers. Theeconomy's growth peaked at 11.9 percent during last year.

Locking Up Cash Today's move locks up about 370billion yuan ($57 billion), according to Barclays Capital. It mayhave been triggered by the extra cash entering the financial systemfrom maturing central bank bills, according to Royal Bank ofScotland Plc.

Inflows of so-called hot money, or speculative capital, may alsohave been a factor, said Lu Ting, a Hong Kong-based economist forBank of America Merrill Lynch.

The ruling Communist Party aims to prevent increases in food andhousing costs from fueling social unrest. Consumer prices jumped5.4 percent in March, the most since July 2008. In April, the gainwas 5.3 percent.

Clothing costs climbed 1.4 percent last month from a yearearlier, the biggest gain since 1997, a statistics bureau reportshowed yesterday. Non-food inflation held at 2.7 percent, thefastest pace in at least six years. Food inflation, the biggestsingle driver of the consumer-price index, exceeded 11 percent fora third month.

Higher commodity costs, inflows of capital, and the extra cashin the economy from a stimulus program started in late 2008 haveadded to inflation risks. The nation's world-recordforeign-exchange reserves exceeded $3 trillion for the first timein March.

Unilever, the world's second-largest consumer-goods maker, saidMarch 31 that it was among companies to have postponed priceincreases at the government's request. Officials later announcedthat the company will be fined for telling the media of its plansto raise prices.

Bloomberg News