Adviser: Inflation to hit 5%

He predicted that China's grain output will continue to increase at a solid pace, as the northeastern region, one of the country's main grain growing areas has seen temperate weather conditions, and recent rains have eased droughts which have affected some regions.

Something akin to traditional Chinese herbal medicine is the answer to rising inflation said Li. The ingredients should include monetary policy, fiscal support, and administrative intervention, he said.

"However, more tax cuts are needed. Our fiscal policy must be more aggressive (in controlling inflation)," he said.

Li said the ratio of the country's fiscal deficit to GDP should be 5 percent this year, 3 percentage points higher than the official target revealed in Premier Wen's report.

But he said faster yuan appreciation may not be a good tool to offset imported inflation.

"We are a very large economy and a huge importer of commodities; as soon as the yuan appreciation quickens, all the commodity suppliers are likely to raise their invoice prices accordingly. In the end, we still have to pay the price," said Li.

He added that yuan appreciation of between 5 and 6 percent, together with a 17 percent increase in the annual wage, would pose a serious threat to business.

Some analysts said that a rise in the nation's foreign exchange reserves, caused by the nation's trade surplus, has increased liquidity in the domestic market and, in turn, put more pressure on inflation controls.

Li said the ratio of China's trade surplus to GDP will decline to about 2 percent this year, and to 1.5 percent in 2012. In 2010, the ratio was slightly higher than 3 percent, down from the 5.8 percent in 2009.