Further, freezing weather in the south of the country and winter droughts that hit the north will also push up farm produce prices.

Of note, the central bank has put "price control" as the first priority of this year's work, as liquidity management remains daunting.

Chinese banks lent 7.95 trillion yuan last year, according to figures released by the central bank Tuesday. Although the data was 1.65 trillion yuan less than the 2009 level of 9.6 trillion yuan, it still was greater than the government-set full-year ceiling of 7.5 trillion yuan.

Media reports said nearly 500 billion yuan in loans were issued in the first week of 2011, as banks routinely rushed to lend more at the beginning of the year to secure profits, while turning a deaf ear to the regulator's call for credit control.

Zhao Qingming, researcher with the China Construction Bank (CCB), said runaway credit growth would exacerbate inflation while it already is high. Higher reserve rates would counterbalance that.

Further, the nation's foreign exchange reserves topped US$2.85 trillion as of the end of 2010, following robust export growth and speculative money inflow betting on a stronger yuan.

That will also push up inflation as the central bank had to issue the same amount of Renminbi to offset inflows, which blows up domestic liquidity.

To mop up liquidity, the central bank issued currency worth 376 billion yuan in the past 9 weeks, but that hardly checked the inundation.

Wu Shijin, analyst with the Guoxin Securities, said as the central bank bills proved to be ineffective, more reserve requirement rate increases are a must.

However, a reserve requirement rate rise could not solve all the problems. Negative interest rates amid high inflation could eat up residents' deposits, said Tang Min, deputy secretary general of the China Development Research Foundation.

Lian Ping, economist with the Shanghai-based Bank of Communications, expected more interest rate hikes around the Spring Festival to tame prices.

However, he ruled out the possibility of a drastic increase, saying large gaps in rates with the United States would attract increasing inflows of speculative money.

(Xinhua News Agency January 15, 2011)