China announced on July 20 it will raise interest rates for the third time this year and slash interest tax for bank savings, one day after the release of strong first-half economic data.

China will raise one-year benchmark deposit and lending rates by 27 basis points to 3.33 percent and 6.84 percent respectively from July 21, the central bank said.

The move would "guide rational growth in lending and investment, adjust and stabilize inflationary expectations and maintain general price stability", the People's Bank of China (PBOC) said in a statement on its website.

Meanwhile, the State Council, or cabinet, announced Friday the reduction of tax on the interest on personal bank savings from 20 to five percent from Aug. 15. The tax was introduced in November 1999 to encourage domestic consumption.

The reduction in savings interest tax would increase earnings from bank savings and would slow rapid increases in investment and rising inflation, the State Council said in a news release.

Experts said the measures would help to slow down China's fast economic growth, rapid increases in fixed asset investment and inflation.

Cai Zhizhou, deputy director of the China Center for National Accounting and Economic Growth at Peking University, predicted slower economic growth in the second half due to a series of macro-control policies.

The government unveiled a series of macro-control measures between January and June to slow down economic growth.

China's gross domestic product was 11.5 percent higher in the first half than the same period of the previous year, half a percentage point up for the 2006 first-half rise, and fixed assets investment soared 25.9 percent, the National Bureau of Statistics (NBS) said on Thursday.

In May the PBoC simultaneously raised the interest rates and ordered banks to set aside more money in reserve for the first time in ten years. The central bank has raised the bank reserve ratio five times this year.

Meanwhile, the Ministry of Finance has launched a series of financial policies, including cuts in export rebates to curb growth in high energy-consuming and polluting sectors.

Analysts said the interest rate hike and cut in the savings interest tax would narrow the gap between the deposit rate and inflation to make bank savings more attractive and to curb excess liquidity.

Despite the interest rate hike, the real deposit rate is still in negative territory as consumer inflation accelerated to a 32-month-high of 4.4 percent in June, said Li Yan, an analyst with the Harvest Fund Management Co. Ltd..

"Residents would see their bank savings shrink much faster if with no tax cut for interest income to cushion rising inflation," said An Tifu, a professor at the Renmin University of China.

The negative deposit rate has prompted residents to transfer bank savings to the stock market for higher earnings. Chinese share prices have surged 52 percent since the beginning of the year.

The interest rate hike and interest income tax cut would have limited impact on the capital markets as they were expected and the market had already started to digest their influence, said He Qiang, a researcher at the Central University of Finance and Economics.

Analysts said the latest moves may usher in more control measures that would help the country slow rapid growth in investment and inflation.

Fan Zhigang, an analyst at Industrial and Commercial Bank of China, said the moves highlighted the government's orientation towards more tight macro control.

Li Xiaochao, spokesman of the NBS, told reporters on Thursday that China would further strengthen and improve macro control and implement policies set by the central government.

Editor: Yan