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Can China get too hot for comfort?

|Includes: PS China Small Shs (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  HAO:

 

Disclosure: no positions