Wen Jiabao, the Chinese Premier, sent a clear signal today that interest rates will have to rise in order to curb inflation.

Shares in China fell as Wen admitted that the Chinese government’s 4.8 per cent inflation target for 2008 will be “difficult” to achieve and pledged to take “forceful” steps to damp inflation, currently running at an 11-year high of 8.7 per cent.

Zhou Xiaochuan, governor of the central bank, said there was scope to further raise interest rates and increase reserve ratios for commercial lenders.

The remarks indicate that overheating remains the main concern for the Chinese government, even as turmoil in the financial markets threatens global growth.

However, it is expected that monetary policy may soften in coming months in response to an expected drop in GDP growth in the first quarter, caused by severe winter weather earlier this year.

James Liu, of APS Asset Management in Shanghai, said: “Fighting inflation remains the top priority for the Chinese Government and there's room for more tightening.

“A slowing Chinese economy won't be good for Asian neighbours as it will affect demand.”

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