SHANGHAI, Aug. 25 -- CHINESE assistant central bank governor Yi Gang said China needs positive real deposit rates, in a sign that the monetary authority still plans to raise interest rates this year to keep pace with inflation. China's 3.6-percent one-year deposit rate is "in the negative territory" after adjusting for inflation tracked by the Consumer Price Index, which surged in July to a 10-year record of 5.6 percent, Yi said.

"We must prevent real deposit rates from being in the negative territory over an extended period," Yi said yesterday at a Beijing financial forum. "That would distort and harm the economy."

The People's Bank of China this week raised rates for the fourth time since March, increasing the one-year savings rate to 3.6 percent while boosting the cost of money to 7.02 percent. That won't be enough, according to a Bloomberg News survey of 16 economists, 11 of whom expect the key loan rate to rise to 7.11 percent.

China's consumer prices surged last month, prompting more funds to flow into a stock market that has more than doubled this year to surpass Hong Kong as Asia's second-largest equity market. Shrinking returns from bank savings and concerns for higher consumer prices have prompted China's households to pour money into the stock market to seek higher returns.

The central bank "will continue to be resolute in fighting inflation," Yi said yesterday, stressing that the government will stick to a three-percent inflation target for 2007. Most economists say China's inflation may breach the target and accelerate to between four percent and five percent this year.

China should continue to curb excess financial liquidity, boost domestic consumption, adjust economic structure and allow capital outflow in an "orderly" way to prevent economic risks, Yi said.

"China faces a large trade surplus, increasing capital inflows, a strengthening currency and excess liquidity, exactly the opposite type of problems that caused the Asian financial crisis 10 years ago," Yi said. "Failure to effectively resolve those problems may lead to drastic changes to the economy."

Yi reiterated the central bank's pledge to open the country's capital account.

"China will resolutely push for opening the capital account, which is always a set agenda, but we need to control the pace of the opening in an orderly manner," he said.