HONG KONG - China's consumer price index (CPI) inflation is likely to rise to 4.0 percent for 2011 from 3.3 percent last year, which is to peak in January at as high as 6.0 percent, forecast Daiwa Capital Markets in its outlook report released on Friday.

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Daiwa, a wholly-owned investment banking arm of Daiwa Securities Group, one of Japan's three biggest security firms, said this round of CPI inflation is again driven by food prices, which went up 11.7 percent for November in 2010.

However, they noted that food prices are usually volatile and big swings may appear once supply increase.

Daiwa also forecast the Chinese gross domestic product to drop to 9.6 percent, weaker than 10.2 percent in 2010, with Domestic demand being the main drivers; no contribution is expected from net exports.

According to the report, the outlook for China stock market is much better in 2011. The Morgan Stanley Capital International (MSCI) China Index is likely to experience an upside of 17 percent to 26 percent.

Despite some investor concerns around inflation, overheating and monetary tightening, these will be allayed during 2011, leading China to outperform regional markets, said Daiwa.