China's inflation will be mild and controllable this year despite a recent surge and it is risky to introduce aggressive and prolonged credit tightening measures, an industry report said yesterday.

Due to abundant food supply, overcapacity in the consumer manufacturing sector and rapid growth in labor productivity, consumer prices are expected to rise 2.8 percent on an annual basis in 2010, Nomura International (Hong Kong) Ltd said in a report.

Nomura's forecast is even lower than the People's Bank of China's goal to keep inflation under 3 percent this year.

"Given the firm economic recovery, policy makers have begun to tighten policies, including raising banks' reserve requirement ratio and reintroducing loan quotas in January," said Sun Mingchun, an economist at Nomura.

"However, tightening liquidity without tightening public investment could be dangerous as banks tend to give lending priority to public projects, crowding out private and manufacturing projects," Sun cautioned.

"Such practice will not only make the economy even more unbalanced, but also increase inflation risks in 2011 as overcapacity - the anchor of China's low non-food CPI over the past decade - is being eliminated in the manufacturing sector," he added.

His conclusion was that an aggressive and prolonged credit tightening may instead derail China's economy from its low-inflation growth path.

The Consumer Price Index, the main gauge of inflation, surged 2.7 percent year on year in February. It was already higher than the benchmark one-year deposit rate of 2.25 percent for the first time in 18 months.

The Producer Price Index, the factory-gate measurement of inflation, climbed 5.4 percent from a year earlier in February, the strongest increase since November 2008.

Economists and analysts forecast CPI and PPI to rise in March. The CPI may post a smaller rise but may still gain 2.3 to 2.5 percent last month.