China will have to tighten its monetary policy toward the end of next year to curb inflation and clean up mounting local government debts, Standard Chartered Bank’s head of research for Korea said Wednesday.

Inflation in China, which is currently in the 2-percent range, is expected to rise to an average of 4 percent, or even to 5 percent on a monthly basis, next year, SC Bank economist Oh Suk-tae told reporters.

“Beijing will have to do something about the local governments’ sour loans, and will seek structural reforms of its economy. The Chinese central bank is expected to raise the policy rate late next year,” he said.

“Instead of trying to boost growth, China is likely to focus on strengthening its economic fundamentals next year.”

Chinese local government debts amounted to 10.7 trillion yuan ($1.7 trillion) late last year, about 23 percent of the country’s GDP. The maturity date for 3.1 trillion yuan in loans fell this year. Loans worth 2.5 trillion yuan will expire next year.

Standard Chartered forecast that China’s GDP will grow 7.8 percent next year, and the world economy by 2.8 percent.

Korea’s GDP is projected to grow 3 percent next year, 3.8 percent in 2014, and 3.6 percent in 2015, according to the Korean unit of Standard Chartered.

“The Korean economy will gradually recover next year as exports pick up on rising demand from advanced and emerging economies,” Oh said.

“Domestic consumption will recover from its low as household debts stabilize and the housing market slowly rebounds.”

Inflation in Korea will be 3 percent both next year and in 2014, and 2.8 percent in 2015, the bank said.

SC’s outlook for Seoul’s policy rate next year is 2.5 percent, down 0.25 percent from this year.

SC forecast next year’s won-dollar exchange rate at 1,035 won per dollar, and 990 won per dollar in 2014.

By Kim So-hyun (sophie@heraldcorp.com)