Analysts said the decision to raise interest rates for the first time in 18 months was only the first in a series of measures aimed at preventing the booming economy from overheating.

Chinese 100-yuan banknotes. China's central bank is seeking to cool down overheating economic sectors such as real estate as well as cut massive foreign exchange reserves, a top government official revealed.[AFP]

"We will make adjustments (in the interest rate) if it is appropriate. We will gradually adjust the rate," junior finance minister Li said.

Li added that China's foreign exchange reserves had increased dramatically and "personally I do not like that ... foreign exchange reserves will be reduced to a certain extent." He did not say by how much.

China's foreign exchange reserves, the world's largest, hit 875.1 billion dollars by the end of March, the central bank said.

"The forex regime is linked to a basket of currencies based on the demand and supply of the market. The equilibrium is more appropriate when decided by the market," Li said.

China abandoned its dollar peg last year and revalued the yuan upward by 2.1 percent.

Li warned that "the indigenous inertia of investment-boosted growth is still strong and more sectors were plagued by overcapacity."

"The increasing price of primary products in the world market exerts a mounting pressure on China's sustained and balanced economic development," he added.