China will be able to keep a grip on inflation next year, but will have a harder time in coping with hot money inflows fanned by loose polices in the West, chief banking regulator Liu Mingkang said on Friday.

Chinese consumer inflation raced to a 28-month high in November, rising 5.1 percent from a year earlier, and the country's top leaders have declared that stabilizing prices is a priority next year.

China has the power to control inflation, Liu told a forum. I think we will be able to keep inflation at a relatively reasonable level next year but that still poses a challenge to our economic policies and management of various sectors.

Liu, who sits on the central bank's 15-member monetary policy committee, said that inflation could present a particularly sharp challenge for upstream industries, because it was difficult for producers to pass on price rises with competition so fierce in an environment of industrial overcapacity.

Noting that there were structural and cyclical factors behind China's inflation, Liu said the problem was not yet broad-based.

Food costs did account for three-quarters of November's year-on-year jump in inflation, but there was also evidence that pressures were spreading beyond food to a wider range of consumer goods.

Liu cautioned that there could be volatility in store for China's asset markets as speculative funds flow into emerging markets, fanned by loose monetary policy in developed economies.

ROOM FOR FURTHER RRR RISES

Last week, the central bank raised banks' reserve requirement ratio (RRR) for the sixth time this year, the latest in a series of steps to steer money and credit growth back to normal and put a lid on inflation.

Xia Bin, an academic adviser to the People's Bank of China said that China has scope to raise banks' reserve requirements further and should move to turn real interest rates from negative to positive.

I have been always saying that I support the (real) interest rate to be changed to positive from negative, Xia, who sits on the central bank's monetary policy committee, told reporters on the sidelines of the forum.

China's short-term market rates jumped but long-term yields remained stable on Friday, causing the yield curve to flatten sharply as the market factored in another reserve requirement rise at the weekend.

China has set a 4 percent target for inflation next year, up from this year's 3 percent objective, an indication that the authorities will desist from aggressive tightening even as price pressures mount.

DOVISH SIGNAL

The dovish tone was reinforced by Zhang Ping, head of the National Development and Reform Commission (NDRC), who said that a change in China monetary policy setting announced earlier this month does not imply tightening next year.

The shift of monetary policy from moderately loose to prudent does not mean a simple tightening, the powerful planning chief said in comments reported on state television on Friday.

He added that the government would ensure that there is a sufficient supply of money and credit to support real economic activity.

Meanwhile, Liu Shijin, vice head of the Development Research Center under the State Council, predicted that inflation would peak near 6 percent year on year at some point in the first quarter of 2011.

China may face imported inflation pressure in the coming year, as U.S. quantitative easing policies have greatly increased the global money supply, he told the same forum where Liu Mingkang spoke.

(Additional reporting by Langi Chiang and Simon Rabinovitch; Editing by Kazunori Takada)

China Inflation