China's money supply is continuing to grow at a faster-than-desired clip in August, adding to worries about inflation and overheating of the economy.

The central bank said it will maintain its "prudent'' monetary policy to maintain consistency, but will step up open market operations to ensure stable growth of the nation's money supply.

M2, the broad measure for money supply that covers cash in circulation and all deposits, soared by 21.6 per cent on a year-on-year basis to over 21 trillion yuan (US$2.5 trillion) at the end of August, the fastest pace since May, 1997, the People's Bank of China said in its monetary policy report released yesterday.

China's money supply growth has been hovering at levels a few percentage points above the 17 per cent target this year, as commercial banks accelerated loans to tap a recovery in economic activity.

Financial institutions carved out 2.1 trillion yuan (US$253 billion) in renminbi loans in the first eight months of the year, far outstripping the total of 1.84 trillion yuan (US$221 billion) lent for all of last year.

The rapid loan increases, coupled with pressure from additional money supplies released in absorbing excess dollars, have led to inflation concerns within the central bank.

The bank announced last month it would raise required reserves at commercial banks to 7 per cent of their total deposits, from 6 per cent currently.

The move, which takes effect at the end of next month, is widely estimated to be able to freeze some 600 billion yuan (US$72 billion) of China's money supply.

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