The People’s Bank of China could hike interest rates in the first quarter of the year, an adviser to the central bank said on Tuesday.

Li Daokui, an adviser to the Chinese central bank, told reporters in Beijing that it would be “understandable” if the central bank raised rates to bolster its fight against inflation, a report in Marketwatch said.

A commodity price boom and fears of an asset bubble have forced Chinese policymakers in recent times to tighten monetary policy. Chinese central bank raised the bank reserve ratio last Friday by half a percentage point to curb the rise in inflation even as rising prices in China was highlighted by the U.S. as a factor affecting the trade imbalances.

A rise in inflation will push up the value of yuan, helping correct the exchange rate imbalance against the U.S. dollar to an extent.
U.S. Treasury Secretary Timothy Geithner had said last week that rising inflation in China will warrant changes in exchange rates which the U.S. believe are skewed in favor of Chinese exporters. However, Chinese President Hu Jintao played down the importance of inflation in assessing yuan's value as well as rejected calls for appreciation of yuan before he embarked on a state visit to the U.S.

Li Daokui said on Tuesday a drop in China’s trade surplus was on the cards. He said the surplus as a percentage of gross domestic product would have fallen to 3.3 percent as of 2010 from 5.8 percent in the prior year. Marketwatch quoted him as saying that this would further fall to 1 percent this year.

Meanwhile, Chinese premier Wen Jiabao said the government will fight inflation “resolutely” by using multiple monetary policy tools, Bloomberg reported on Tuesday. The premier said the focus would be on targeting 'abnormal' credit growth that spawns excessive liquidity in the fastest-growing major economy of the world.

The Chinese central bank had raised interest rates by 25 basis points to 5.81 percent in December. China stepped off the stimulus route by raising rates in October last year, the first rate hike in nearly three years.

China has also repeatedly told banks to keep away larger deposits as reserves, a move that will cripple banks' capacity to lend. This measure jells with Beijing's broader objective of mopping up stimulus and tightening policy in the long term.

China’s economy grew an average 10.6 percent in the first three quarters of 2010 though signals of a moderation in the pace of growth have risen of late.

As a commodity boom, possible rise in labor costs as well as a highly liquid financial system threaten to drive inflation higher, the focus is on China's monetary tightening policies this year.

The Chinese Communist Party's politburo announced early last month the country will shift to prudent monetary policy in 2011. It was a marked defection from the professed “moderately loose” monetary policy followed by the government since late 2008.