Can China Get Too Hot For Comfort? (HAO)

Wednesday night brings new inflation numbers from China. After months of fretting about Asia getting too cold to keep the global economy going, get ready to see concerns that it is too hot.

Xinhua, the official Beijing news agency, is warning people that Chinese inflation will reach a peak above 4% early next year. Local economists expect pricing pressures to become “great” in the first quarter before receding.

More immediately, consensus is that the consumer price inflation gauge will surge to 4% as early as tomorrow night. Last month, the CPI hit a two-year high of 3.6%.

Given Beijing’s stated target of 3% for inflation — anything higher would cause mass unrest, they claim — this could be a real test of everyone’s nerves. Food inflation in particular has been a source of unease, since while the housing market can be regulated fairly directly, outright food shortages can be difficult to control.

Investors will definitely react to signs that this “Goldilocks” economy is too hot to keep prices stable. Not only does the threat of inflation create real risks that Beijing will intervene to raise interest rates aggressively — cooling the economy — but the prospect of political unrest may be unwelcome to all.

If you think the data will come in on the hot side, the small-cap sector will be especially exposed to any sudden moves from Beijing. That would be bearish for funds like the Guggenheim China Small Cap ETF (NYSE:HAO):

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

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