The Global Imbalance

Emerging stock markets are always high risk for investors.

The case is no different for China where inflation appears to have become a major issue especially for food. Of all the products in a modern economy that can go up in price, food is perhaps the worst as it affects the poorest of the population in a disproportionate way.

The Chinese stock markets have experienced sharp losses during the past two sessions. Some believe that in spite of near 10% GDP growth for 2010, China will end the year negative in terms of stock price gains. If this happens, it is a very bad sign for 2011.

This statement published in the WSJ today is extremely important:

"China's recent slide is reflective of the great divide that separates emerging markets with fast-growing economies and inflation fears from those in the developed world, where deflation and economic stagnation are the main concerns."

Frangos, Alex, Fung, Esther, 2010. Inflation fears hit china stocks. The Wall Street Journal, Nov. 16.

In my view the "great divide" mentioned above is a direct result of pegging the Yuan and other measures that China has taken to ensure domestic economic growth. This has caused widely acknowledged imbalances in the global flows of capital and balance of trade.

I think the WSJ and other business publications need to focus on this issue through thought full analysis. In my view, not enough has been published on the issue during the past 10 years. Other domestic issues always seemed to take the front page!