SHANGHAI - Borrowing costs for China's banks will rise to the highest in more than two years in the first quarter as policy makers curb supplies of cash to fight inflation, according to a survey of bond analysts.

The seven-day repurchase rate, which measures interbank funding availability, may average 2.9 percent in the first quarter, compared with 2.75 percent in the previous three months, according to the median estimate in a Bloomberg survey of eight analysts. Both levels were the highest since the third quarter of 2008, when Lehman Brothers Holdings Inc's bankruptcy caused global credit markets to seize up.

China's central bank Governor Zhou Xiaochuan's tolerance of the funding shortage shows his determination to curb the fastest inflation in two years in a country where 150 million people live on less than $1 a day. The seven-day repo rate has doubled in the past year to 3.14 percent, as the one-week US dollar Libor remained little changed at around 0.25 percent.

"The pool of liquidity is getting smaller, but corporate demand for funds hasn't dropped as China is still an investment-driven economy," said Sheng Nan, an analyst in Shanghai at UOB Kayhian Investment Co, a unit of Singapore's United Overseas Bank Ltd. "That means higher borrowing costs for some companies, and for others there could be no funding available at all. That's certainly not conducive to economic growth, but the government's priority now is fighting inflation."

The People's Bank of China ordered lenders on Dec 10 to set aside more deposits as reserves for a third time in five weeks. Governor Zhou pledged on Dec 31 to keep prices "basically stable" this year, after a second interest-rate increase in three months on Dec 25. He said inflation pressures are rising, partly as a result of monetary easing in the US, according to an article posted on the website of the China Finance magazine on Jan 4.

While the seven-day repo rate has dropped 320 basis points, or 3.20 percentage points, from a three-year high of 6.34 percent in three days, it may rebound before the five-day Lunar New Year holiday that starts Feb 2, said Zhou Yan, a fixed-income analyst in Shanghai at Bank of Communications Ltd, the nation's fifth-biggest lender.

"The pre-holiday cash hoarding by financial institutions and the rising inflation expectations will cause a resurgence in money-market rates," said Zhou. "If banks extend more lending than targeted in January, the central bank may raise reserve ratios for major banks before the holidays, which will push up the repo rate even higher."

The spread between China's one-year savings rate and its US equivalent is at 207 basis points, the most since at least 1996, boosting the allure of holding yuan assets. The widening premium will lure more capital into China and quicken gains in the Chinese currency, UBS AG, the world's second-largest foreign-exchange trader, said last month.

The yield on China's 3.77 percent government bond due in December 2020 was little changed at 3.80 percent as of 10:59 am on Thursday in Shanghai, according to the National Interbank Funding Center. The premium of the yield over similar maturity US Treasuries widened to 39 basis points on Thursday from a discount of 20 basis points at the start of last year.

The cost of insuring the Chinese government's dollar-denominated debt for five years climbed 3 basis points on Wednesday to 69.

Bloomberg News