Chinese inflation hit a 28-month high in November, underscoring the challenge the government faces: how to rein in soaring inflation without slowing growth too much?

China's consumer price index (CPI), a major gauge of inflation, rose 5.1 percent year on year in November, the National Bureau of Statistics (NBS) said Saturday.

Accelerating inflation has fueled expectations the government will raise interest rates.

Other economic data released Saturday - including investment, industrial production and retail sales - pointed to a stabilization of Chinese economic growth, which, experts said, lays the foundation for further tightening moves.

Prices soar

The growth rate of CPI picked up from 4.4 percent in October, according to the NBS. An 11.7 percent surge in food prices drove the CPI higher. Food prices have a one-third weighting in the calculation of China's CPI.

"November's price rises are beyond people's expectations," NBS spokesman Sheng Laiyun said, citing rises in food prices and housing utility costs as the main drivers of the inflation increase.

Measures taken by the central government to control prices need time to take effect, he added. "Prices will be stable as long as ministries and regional authorities earnestly implement the central government's measures," he said.

The data also showed that China's CPI rose 3.2 percent year on year in the first 11 months, surpassing the government's target ceiling of 3 percent for the year.

There other signs of price rises as the producer price index (PPI) for China's industrial products rose 6.1 percent year on year in November, compared with a 5.0 percent gain in October.

Property prices in China's major cities rose 0.3 percent in November from October, the NBS said Friday.

Rising prices have prompted the government to take measures to rein in price hikes. The measures include boosting supply of essential goods, giving financial aid to the needy, and mopping up excessive liquidity. Economists have blamed excess liquidity for helping to push up prices.

The central bank on Friday ordered banks to hold more funds in reserve. It was the sixth such order this year. The central bank announced in October its first interest rate hike in nearly three years.

The move came after the central bank earlier Friday said that new yuan loans in November totaled 564 billion yuan (84.7 billion U.S. dollars), a figure that took total new loans in the first 11 months of the year to 7.45 trillion yuan - just shy of the government's 7.5-trillion-yuan full-year target.

In another step to cool prices, the State Council, China's cabinet, on Friday increased on penalties on Chinese vendors who collude to fix prices. Price fixers will face fines of up to 5 million yuan under the new penalties, up from the previous 1 million yuan.

Speculation on rate hike

Recent rises in inflation has heightened expectations Chinese authorities will raise raise interest rates. Some experts believe a rate hike is necessary and will effectively control inflation and rein in housing prices.

Worries about imminent rate hikes have driven down China's stock market by almost 7 percent from the beginning of November.

Liu Yuanchun, a professor at Beijing's Renmin University, said the administrative restrictions cannot slow inflation anytime soon, with the increase in the PPI showing that inflation has spread.

Given the quickening inflation, Liu added that an interest rate hike will definitely be on the government's agenda.

Zhang Xiaojing, an expert at the Chinese Academy of Social Sciences (CASS), a government think tank, said the full-year 2010 CPI will definitely exceed the government's target ceiling but be below 3.5 percent.

"China faces great inflation pressures in the mid- and long-term. I suggest hiking rates," Zhang said.

Still, Zheng Lei, vice president of CMB International, a wholly owned subsidiary of China Merchants Bank, is cautious. He said an interest rate hike will depend on the December inflation figure.

"If the government measures put in place check the December inflation figure, the rate hike will probably be postponed," he said.

But he added that another increase in banks' reserve requirement ratio is possible.

The National Development and Reform Commission said in a statement after the data release the November CPI is likely the peak for the year. It forecast the December CPI figure to fall below 5 percent as government measures to control prices take effect.

Foundation for tightening

The NBS said Saturday industrial value-added output rose 13.3 percent year on year in November; urban fixed asset investment increased 24.9 percent from a year earlier in the first 11 months; and that retail sales grew 18.7 percent year on year.

The three indicators all point to faster growth.

Exports rose 34.9 percent year on year in November while imports jumped 37.7 percent, the General Administration of Customs (GAC) said Friday.

Liu Yuanchun said the economic data shows China's real economy is growing. "There are solid reasons for hiking interest rates," he said.

But any rate hike will prompt further speculative capital inflows, which the government does not want.

Analysts said China's move Friday to again hike banks' reserve requirement ratio rather than hike rates reflects authorities' caution.

Although the central bank felt the need to do something to show its determination to tame inflation, it had no intention of killing growth with an aggressive rate hike or imposing a lending squeeze, Bank of America-Merrill Lynch economist Lu Ting said in a note Friday.

China adopted its "relatively loose" monetary policy and proactive fiscal policy in late 2008 to buoy the economy amid the global financial crisis.

Official data showed China's GDP grew 9.6 percent in the third quarter, lower than the 10.3 percent in the second quarter and 11.9 percent in the first quarter.

A CASS report said Tuesday China's economy will grow 9.9 percent in 2010.

Gross domestic product (GDP) is expected to grow by around 10 percent in 2011 with effective macroeconomic controls, the report added.

On Dec. 3, the government said it will next year switch its monetary policy stance from "relatively loose" to "prudent", while maintaining the proactive fiscal policy, to tackle inflation while keeping economic growth sustainable.