The People's Bank of China will raise rates "gradually" as a more aggressive policy would risk unsettling the stock and property markets, PBOC adviser Li Daokui said in a Dec. 3 interview.

While China's officials have faulted the U.S. Federal Reserve's plan to purchase $600 billion of Treasury securities for the risk of a wave of capital flooding into emerging markets and pushing up asset prices, there's little sign yet of a jump in American liquidity.

The U.S. M2 measure rose 3.2 percent in October from a year before. Consumer prices in the U.S., excluding food and fuel, gained 0.6 percent in October from a year before, the least in records going back to 1958.

"If anyone is printing money it is China's central bank, not the U.S.," said Stephen Green, head of research for Greater China at Standard Chartered Plc. in Shanghai. Actual price increases faced by Chinese consumers and businesses are probably even higher than official reports, and pushing up rates now "is the wisest course of action," he said.

Eoin Treacy's view China's drive to become the workshop of the world forced prices for just about all manufactured goods lower; allowing North America and Europe to import healthy deflation. However, the Chinese trend towards tighter margins, increased cost efficiencies and cheaper labour has probably ended. While China is still a competitive place to manufacture goods, the trend of ever lower prices for end products has probably bottomed and inflation is now more likely to be exported from China.

China has run a negative real interest rate policy for quite some time which has fuelled bull markets in property, infrastructure and the stock market. The introduction of gold investing has been an additional avenue for savings but has done nothing to close the disparity between the deposit and lending rates. The Chinese authorities continue to walk a fine line between cooling inflationary pressures and fostering domestic and export growth. However as long as they are seen to be behind the curve in terms of managing inflationary expectations, the environment for the stock market is likely to remain relatively sanguine.

The Shanghai A-Share market encountered resistance in the region of the medium-term progression of lower rally highs a month ago and has pulled back to the 200-day MA. A sustained move below 2890 would be required to question potential for some additional steadying in this area with a view to reasserting demand dominance over the next few months. Large cap Chinese shares have been one of the worst performing sectors in Asia this year and are far less overbought than neighbouring markets. 2011 could offer a chance for A-Shares to outperform but price action will have to support this view which as yet is conjecture.