Inflationary concerns in overheating Chinese economy warranted

China GDP growth of 11.1% for the first quarter is not a good number for the world's central bankers.

What is most worrisome about the recent economic reports is that China's monetary authorities have been attempting to slow down growth for quite some time. Short-term rates have been pushed up over 100 basis points during the past year with little effect. The stock market continues to boom with retail investors opening more than one million stock trading accounts the last week and 10 million the last four months -- greater than the previous four years combined, according to the Financial Times.

Getting economic growth down to the 9% targeted growth rate has remained elusive as the most recent above-par GDP growth rate follows a 10.6% reading for the first quarter of 2006.

U.S. investors have added more fuel to the fire purchasing $5.2 billion of Chinese equities. While this might not seem like a lot by U.S. stock market standards, this level of investment can often be too much for an emerging market to handle. Further, the appreciating yuan is somewhat of a liability this late in an economic expansion. As the yuan appreciates versus the dollar, Chinese companies convert dollar to yuan to profit from the currency appreciation, adding further liquidity to the economy.

Both government and monetary heads were hoping not to have to take a sledgehammer to the Chinese economy prior to the 2008 Olympics. However, they might not have a choice. This also means the Fed will remain on hold until the U.S. economy shows data indicating meaningful economic weakness, not wanting to add more fuel to China's overheating economy.

From a US investment perspective, if stronger than expected economic data come out the next month or so, take some money off of the table. This means central bankers around the world will tighten to keep world-wide inflation from taking off.