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The World Bank said Monday recent moves by China to clamp down on rampant lending were the "best way" to tackle the problem of rising inflation and the threat of asset bubbles.

"It is very tricky once you are in this situation of heavy credit growth to try to come off that. It is a very fine line between doing it too quickly and not doing enough," Ardo Hansson, lead economist of the World Bank in Beijing, said at a news conference.

"Trying small steps and seeing how the market reacts -- and hoping that the market reacts in a reasonable way -- is the best way to start."

Pedestrians pass a highrise building being constructed in Beijing

Beijing moved this month to calm growing inflationary pressures and soaring stock and property prices caused by runaway bank lending, which last year nearly doubled from 2008.

The People's Bank of China last Thursday raised the interest rate on its benchmark three-month treasury bills for the second time in two weeks in a bid to deter new lending.

It followed an earlier move on its benchmark one-year treasury bills and official data that showed the world's third-largest economy grew by 8.7 percent in 2009 and 10.7 percent in the fourth quarter.

Chinese banks have also been ordered to increase their capital reserves -- effectively limiting the amount of money they can lend -- amid mounting fears over bad debts as consumers go on a spending spree on property and cars.

But if the banking sector does not heed government orders to rein in lending, Beijing should raise interest rates, Hansson said.

He said fears that higher interest rates will attract a flood of speculative "hot money" into the country were "overstated".

"China has quite tight capital controls. There is some money coming in but it's really domestic policy that has been driving this credit growth," Hansson said.

"I think there will and should be an interest rate increase at some point in time."

Raising rates may encourage investors to buy higher-yielding yuan-denominated assets, exacerbating inflation and putting pressure on the yuan to appreciate.

In its annual report on the global economy released last week, the World Bank said it expected China to grow by 9.0 percent in 2010, which would dwarf the global rate of 2.7 percent.

AFP/ls