The U.S. investment bank Goldman Sachs has lifted forecast of China's inflation this year to 6.8 percent from 4.5 percent in light of the rapid growth in money supply.

M2, the broader measure of money supply, which covers cash in circulation plus all deposits, rose 18.94 percent by the end of January, 2.22 percentage points higher than a month earlier, the People's Bank of China (PBOC) said on Feb. 14.

Liang Hong, the bank's chief China economist, said in a recent research report that inflation may continue accelerating in the short term and rise by double digits in some coming months.

The bank also raised forecast for China's inflation next year to 3 percent from 2.5 percent.

Liang noted the high inflation would add pressure to the faster appreciation of the local currency and the yuan was expected to appreciate 12 percent in the coming 12 months.

The yuan's appreciation was the most practical and the best way to tame inflation and avoid an economic "hard landing", the report noted.

The yuan has appreciated more than 2.2 percent against the U.S. dollar so far this year, after climbing 6.9 percent against the greenback in 2007.

Analysts believed the PBOC was allowing faster appreciation of the yuan in an attempt to curb the rising inflation.

China's consumer price index (CPI), the main gauge of inflation, retouched an 11-year monthly high with a 7.1-percent rise in January. Huge increases in food prices had pushed up CPI by 4.8 percent in 2007, also the highest level since 1997.

Yi Gang, PBOC's vice governor, told a seminar in Beijing Sunday that the primary risk to China's economy was inflation and the government would stick to the tight monetary policy.

(Xinhua News Agency February 25, 2008)