Key risks to watch in Asia in 2011 and what may happen in the US and the World if China has high inflation

The 2011 Asia outlook is clouded by China’s growing clout, the volatile situation on the Korean peninsula and corruption scandals in India

1. Currency tension between China and the United States.
2. How China uses its regional influence and the maritime territorial disputes with several countries
3. China’s inflation looks like it will significantly exceed the 4% target, policymakers may raise interest rates sharply.
4. Will there be war with North Korea or will North Korea implode or will things muddle along
5. India’s corruption issue may continue to paralyze parliament with an emboldened opposition blocking proceedings, or that the scandals result in a less business-friendly policy environment.
6. The current leadership in Japan and Australia may not be strong enough to enact needed reforms
7. Southeast Asia’s financial markets may run out of steam in 2011

Bo Peng at Seeking Alpha analyzes what may happen if inflation gets too high in China

1. US Inflation will pick up, effectively exported back to the US through higher costs of imports (and in this regard the Chinese import price is arguably as important as raw commodities, if not more. So, be careful what you wish for)

2. Unless/until an Euro crisis materializes, or at least grabs headlines again, interest rates will be rising worldwide, but BEFORE the developed economies are in solid recovery ground AND as emerging economies are still trying to cool down. This is a pre-emptive strike that will most likely kill any prospect of sustained recovery in the developed world, but may play right into the hands of emerging economies

3. Even if I’m wrong about the timing and method in China’s effort of fighting inflation, the inevitable fact is they will have to cool it down one way or the other, be it a soft landing, hard landing, or revolution. And sooner rather than later. When that happens, expect a pull-back in commodities and equities worldwide

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