Tourists shop at a duty-free shopping mall in Sanya City, south China's Hainan Province, Oct. 5, 2020. (Xinhua/Guo Cheng)

China's gross domestic product (GDP) would increase 10 percent and its economy would continue to be a global outperformer in 2021 while Chinese central bank will start to hike lending rates next year, according to a recent research note by international economic research firm Capital Economics.

Chinese GDP would expand 10 percent in 2021, higher than the current market consensus of 7.9 percent, thanks to tailwind from fiscal stimulus, rebound in consumption and services, accelerating income growth and flattering base effects, said the note.

"Looking ahead, while the analyst consensus has turned more upbeat in recent months, we think there is still room for further upside surprises," said Julian Evans-Pritchard, senior China economist, and Mark Williams, chief Asia economist with Capital Economics.

Capital Economics forecasted that Chinese GDP would increase 2.5 percent in 2020 in comparison to analyst consensus of 2 percent.

The economists said China's domestic drivers of growth will stay strong in the near term while the recent strength of exports will start to unwind amid vaccine rollouts in developed markets.

A surge in savings rate earlier 2020 means Chinese households have plenty of room to step up spending as confidence improves, said Evans-Pritchard and Williams.

China's economic output in the fourth quarter of 2020 is on track to be higher than Capital Economics' forecast a year ago and the economic output would remain above trend for much of 2021, according to the note.

Meanwhile, the economic strength will pave the way for some policy tightening next year with focus to be shifted back to controlling the rapid growth in government debt, said Capital Economics.

China's central bank will start to hike the rates on its lending facilities in 2021 and modest policy rate hikes would largely just be formalizing a shift in monetary conditions which has already happened, said the note.

"This policy reversal is unlikely to derail the recovery and we expect China's economy to remain a global outperformer next year," the economists said.

Chinese currency RMB is expected to appreciate further in 2021 and China's continued economic growth should pave the way for further rises in onshore and offshore equities, according to the note.

Chinese equity benchmark CSI 300 Index would rise to 5,700 points by the end of 2021, up from the close of 4,942.7 points on Wednesday, according to the firm.

However, Chinese economy faces some important downside risks from the property sector and credit markets, said Evans-Pritchard and Williams.

China's economic growth would slow down to 4 percent to 5 percent by the end of 2021 and the appreciation of RMB would level off, the note added.

Meanwhile, the yield of 10-year China government bond was forecasted to decline to 2.8 percent from over 3.3 percent on Wednesday as China's bond market would start to price in slower medium-term growth and lower equilibrium interest rates.