China is likely to raise interest rates in the coming days in a demonstration of the  government's resolve to tame inflation, an official newspaper said on Tuesday.

In a banner headline across its front page, the China  Securities Journal said this weekend offered a 'sensitive window' for a rate rise, which would be the country's second after a surprise increase in October, the central bank's first rate hike since 2007.

An increase in rates would also put flesh on the bones of Beijing's announcement late last week that it was switching to a 'prudent' monetary policy from the 'appropriately loose' stance of the past two years.

The report weighed on Asian stock markets in early trade, though the country's main index in Shanghai later pared losses. Chinese asset markets have tumbled in recent weeks as investors have priced in more tightening.

The newspaper said the timing was right for a rate rise with official monthly economic indicators, notably the consumer price index (CPI), likely to show an increase in inflationary pressure when released on Monday, December 13.

'With reference to the central bank's record of raising interest rates just ahead of the release of CPI, this weekend  will provide a window for a possible policy change,' the newspaper said, without citing any source.

China's CPI in November may have accelerated to a 27-month high of 4.7 per cent from a year earlier, according to a Reuters poll, up from a 4.4 per cent pace in October.

'The general trend of China's monetary policy is appropriate tightening on the basis of the previous extremely loose stance,' said Chen Jiagui, a senior government economist.

Traders in China's interbank market said big lenders have already prepared enough money for another 50 basis point increase in banks' required reserves, which are already at a record high for big banks.

So far, the People's Bank of China has relied primarily on reserve requirements to mop up excess cash in the economy,  officially ordering lenders to lock up more of their deposits five times this year.

Banks had also been holding back from lending in anticipation of more government moves to curb inflation, driving up short-term money market rates. But these rates tumbled on Tuesday after large banks caved into pressure from smaller institutions which had refused to borrow at the higher rates.

But concern over further hot money inflows could make Beijing hesitate before raising interest rates aggressively.

Comments from chairman Ben Bernanke that the Federal Reserve could increase its commitment to buy $600 billion in US government bonds has reinforced fears in Beijing that money printed in the United States will compound the inflationary headache in China.

'I don't think China should increase interest rates on a continuous basis,' said Chen Kexin, an economist with a  government-sponsored market monitoring agency in Beijing.

'Such a move will definitely attract hot money inflows. For domestic inflation, it would be adding fuel to the fire,'  he said.

Apart from raising rates, the Chinese government is also likely to force banks to tap the brakes on lending. The  Shanghai Securities News reported on Tuesday that banks lent 600 billion yuan ($90 billion) in November, taking total loans  for the first 11 months of 2010 to more than the government's full-year target of 7.5 trillion yuan in new loans.

China should be able to contain consumer price inflation  at 3.3 per cent next year, up just a touch from an expected 3.2  per cent pace this year, the Chinese Academy of Social Sciences, a top government think tank, forecast on Tuesday.

'China would be doing well if it keeps CPI below 6 per cent  next year,' said Zhang Hanya, a researcher affiliated with the  National Development and Reform Commission.

China's economic decision makers will meet this weekend to  chart the outline for policy next year. Many in the market  believe that the conclusion of the December 10-12 Central Economic  Work Conference could also present an opportunity for a rate rise.

The China Securities Journal has a fairly good track record in predicting policy moves. It reported on November 17 that  the central bank would raise interest rates two days later. On the predicted date, it announced an increase in banks'  required reserves, not interest rates.-Reuters