On Friday, Unilever PLC confirmed it agreed to defer price hikes previously scheduled for April 1 after pressure from Beijing. The request by the National Development and Reform Commission was prompted by panic buying ahead of reports that various product prices would increase by 10%-15%.

While Unilever agreed this time, it will be a difficult precedent to hold as higher input prices spread across the economy. Expecting state-owned companies to toe the line on price controls is one thing, but foreign companies and their shareholders will be surely loathe to accept a 'harmonious' margin squeeze.

These developments will be watched closely, as the base case various brokers have for strengthening mainland Chinese equities later in the year stems from inflation being successfully reined in. For now, investors appear to be giving Beijing the benefit of the doubt.

Credit Suisse First Boston reports that Chinese A and H shares are tipped to be the top performers among Asian markets in 2011, according to a survey of the 2,000-plus money managers at its recent Asian Investment Conference in Hong Kong. The bull case is that we are near the end of tightening and that undervalued mainland equities will rebound on an improving inflation outlook.

Eoin Treacy's view The Chinese authorities have long demonstrated a willingness of use every means at their disposal to achieve their policy aims. They have so far concentrated on raising reserve requirements, combating speculation in the property markets and directly targeting prices. Today's 25 basis point interest rate hike, the four in six months emphasizes China's determination to combat inflation. Following Google's experience in disobeying China's leadership, other companies know the price of non-compliance. Taken together, the odds appear in favour of China reining in inflationary pressures.

Forcing tighter margins on consumer companies is a short-term policy and relies on commodity price moderation for its success. Chinese officials have been quoted stating they expect inflation to moderate in the latter half of the year which is consistent with this view. However, energy prices remain on an upward trajectory and a wide number of food commodities recently found support in the region of their 200-day MAs. It is unclear whether companies can delay price increases indefinitely and this will prove an even greater struggle if commodity prices continue to trend higher.

Demands for higher wages have been a notable aspect of the Chinese economy over the last year. It is in the government's interests to ensure inflationary pressures are reined in. If they are successful, the stock market could be one of the primary beneficiaries.