Despite generally downbeat market predictions for 2011, some analysts, such as Henry Wu, head of China equity research at Nomura Securities, are bucking the trend by predicting a rebound, expecting a boost from undervalued banking and property shares despite inflationary risk and uncertainties in the government's macroeconomic policies.

Wu forecast a positive outlook for the A-share market in 2011, saying that the buying opportunity for investors may emerge in the end of the first quarter or the beginning of the second quarter as inflationary pressure may start to ease in March or April.

"The stock market can still rebound even if the rate of inflation stays at a high level because such expectation has already been factored into current prices." Wu said. "As long as the situation is not getting worse than expected, the market is unlikely to overreact."

Nomura Securities predicted China's annual consumer price index, a main gauge of inflation, will rise to 4.5 percent this year and may climb even higher to 5 percent in 2012.

While inflation remains a big risk in the market, Wu said that blue chips, such as banking and property shares, are likely to be the main driver of the index's rebound given their low valuations and good earning abilities.

"We think that new-loan growth in 2011 may exceed the government's target to top 8 trillion yuan ($1.2 trillion) and the continued interest rate hikes could also help improve the profitability of Chinese banks," he said.

Chinese banks are expected to post unprecedented profits of more than 800 billion yuan in 2010. They will continue to secure profit growth rates as high as 20 percent this year, said industry analysts.

The valuations of banking and property shares have been depressed by government measures to tighten credit growth and to cool the overheated property market. Wu said that blue chips have gained enough momentum to rebound as the negative factors have been fully digested by the market.

CITIC Securities, China's biggest listed brokerage forecast gains of at least 25 percent in the benchmark Shanghai Composite Index, while Shenyin & Wanguo Securities said the index will jump to 3,800 in 2011 as policy tightening eases.

But Guotai Junan Securities differed from the positive prediction of the A-share market, saying that the market may slump for a second year with inflation remaining the biggest risk.

The Shanghai Composite Index fell 14 percent in 2010, making it the worst performer among benchmark indexes in the world's 10 biggest markets.

"There will be no gains again," Zhang Kun, a Shanghai-based strategist at Guotai Junan Securities was quoted by Bloomberg as saying. The brokerage correctly predicted the index's drop in 2010. "Inflation is the biggest risk. The government will keep tightening," he said.