Analysts expect China to release strong economic data for May but warn of an inflation after-taste.

The combination would lay the basis for the country to exit gradually from a relatively easy fiscal and monetary policy stance, they said.

Key economic data for May to be released on Friday will be critical in China's timetable for a retreat from stimulus and expansionary policies.

"China has actually been tightening policies since the beginning of this year," said Li Maoyu, an analyst at Changjiang Securities.

"An official announcement will work primarily on sentiment, making people more aware of the risk of inflation and economic overheating."

Li estimated the consumer price index, the main gauge of inflation, may rise to a 20-month high of 3 percent in May, up from the increase of 2.8 percent in April.

Some other estimates have the figure as high as 3.5 percent, according to a Reuters analysis report.

Li said the producer price index, the factory-gate measure of inflation, could increase 6.9 percent in May from a year earlier and up from April's 6.8 percent.

This indicated consumer prices would continue to grow faster in coming months as higher production costs would eventually carry over to day-to-day consumption, Li said.

However, Nomura economist Sun Mingchun said inflation may not be as bad as many expect because it was mainly driven by higher food costs after poor weather in the first few months of this year.

"For the whole of 2010, we expect inflation to be mild, averaging 3 percent year on year, due to abundant food supplies, overcapacity in the consumer-manufacturing sectors and rapid growth in labor productivity," Sun said.

He did anticipate more tightening measures, such as a 27-basis-point interest-rate rise this month and one more reserve-requirement ratio increase in the third quarter, "in light of solid economic expansion and rising inflationary pressure."

Zhou Xiaochuan, governor of the People's Bank of China, said on Sunday at the Group of 20's meeting of finance ministers and central bank chiefs in South Korea that China's exit from stimulus measures would largely depend on conditions in the domestic market.

The Chinese government is still wary of announcing an exit from the stimulus package over fears of disturbing the economic-recovery process and losing achievements already gained.

Robust economic growth and runaway property prices have made the government raise the reserve-requirement ratio twice in a year and introduce tighter mortgage policies.

China's gross domestic product grew 11.9 percent year on year in the first quarter, the fastest pace in more than two years.

The State Information Center, a unit under the National Development and Reform Commission, forecast GDP growth would moderate to 10.7 percent in the second quarter after tightening measures take effect.

China has shown signs of a cooling economy, according to some analysts.

For example, expansion in industrial production eased 0.3 percentage point from a month earlier to 17.8 percent in April and may further retreat to 17.1 percent in May.

Urban-fixed-asset investment is tipped to lift 25.7 percent in May, down from 26.1 percent in April.