Zhao Xijun, an economist from the Renmin University of China, said the next two months would be crucial. "The decision to raise the interest rate will depend on the situation in the next two months," he told China Daily. "If the CPI exceeds the 3 percent mark in January and February, the central bank may take some measures."

Regarding liquidity, the central bank said in the report that it would "improve its management". "We will use different ways, including open market operation and raising reserve requirements, to effectively control liquidity in the banking system," it said.

Since April, China has raised the reserve requirement ratio, or the ratio of money banks must hold in reserve, four times, and has twice raised the interest rate.

Meanwhile, China may allow another 20 foreign banks to incorporate locally this year.

Banking industry sources said the China Banking Regulatory Commission could approve the local incorporation of another 10 foreign banks as early as next month.

Another 10 banks may get the go-ahead in the second half of the year, taking the total number of approved foreign banks to about 30.

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