Beijing reports last month’s inflation data Friday night. This has become a huge release for emerging markets investors and will be even bigger this time around.
Many economists currently suspect that inflation in China remained at or near record levels in May, somewhere around 5.2% to the 5.3% reported in April.
In the face of that kind of sustained inflation — and what looks like the worst drought in centuries emerging in the Yangtze valley — Beijing needs to take serious measures to keep its 1.3 billion people fed.
This could provoke that interest rate hike we talked about last week. It should also encourage the authorities to let the local yuan currency appreciate faster against the dollar.
This, in turn, would generate upside for yuan-linked ETF portfolios like WisdomTree Dreyfus Chinese Yuan ETF (NYSE:CYB) and Market Vectors Chinese Renminbi/USD ETN (NYSE:CNY), assuming of course that they accurately track movements in the currency markets:
In theory, a stronger yuan would let drought-wary Chinese buy more food and other commodities from overseas vendors, alleviating the real impact of inflation on the typical consumer budget.
Meanwhile, the prospect of higher interest rates ahead for China could slow corporate activity as well. This would not be a positive for equity funds like iShares FTSE China 25 Index Fund (NYSE:FXI), which depend on robust economic growth as part of their investment proposition where global traders are concerned:
Either way, after last week’s disappointing U.S. job market numbers, China has never been more important. One of the two primary engines of global economic growth seems to be slowing.
If the other — China — is running too hot, things could get very interesting indeed.
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.