(Reuters)
Updated: 2007-01-26 13:59

"Signs are clear that regulators have noticed the stock market is overheated. So appropriate cooling steps are expected to be taken one after another," said Zheng Weigang, analyst at Shanghai Securities.

The government also announced annual consumer price inflation in December surged to 2.8 percent, far above economists' forecasts of 2.0 percent and November inflation of 1.9 percent.

Analysts said the data could cause the central bank to accelerate its monetary tightening campaign, which remained moderate last year.

"The jump in CPI growth on month is surprising, indicating a strong uptrend in inflation," said Wang Haoyu at First Capital Securities.

"Macroeconomic adjustments will certainly be strengthened, and an interest rate hike is possible soon."

Analysts said stocks and bonds were unlikely to develop into fully-fledged bear markets. The government is keen to have more top Chinese companies list shares this year, and a stock market crash would threaten such plans.

"Abundant liquidity and expectations of a quicker pace of yuan appreciation this year are still likely to keep the market bubbly for some time," Wang said.

In the bond market, the central bank is unlikely to encourage a big rise in yields because a much smaller China-U.S. interest rate gap, now at about 2.6 percent, would spur fresh inflows of speculative money from abroad.

But Thursday's events suggest the yuan may appreciate faster against the dollar in coming months as the rate gap narrows slightly, and as authorities use the yuan to help dampen inflation, traders said.

The yuan hit an intra-day high of 7.7680 against the dollar on Thursday afternoon, its highest level since its peg to the dollar was abolished in 2005.

"Recent events add to the pressure for the yuan to rise faster," said a dealer at a European bank, though he and others still expect Beijing to limit total appreciation this year to about 5 percent, to protect Chinese jobs and exports.

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