China’s 4.9% rolling 12-month inflation has scared many investors away this year, but the pressure of rising real estate prices, commodities and wages isn’t likely to let up until sometime in the second half of 2011, says Richard Gao, manager of the $2.8 billion Matthews China fund (MICFX).

“I expect you will start to see that the macro measures to curb credit expansion and the rising interest rates will reduce inflation pressure later this year,” Gao says from his office in San Fran.

Higher inflation means higher interest rates, and higher interest rates are damaging to growth stocks.

On Tuesday, China’s National Bureau of Statistics showed that year-to-date real estate prices were up by as much as 3.3% in some of China’s biggest cities. Price increases have slowed, however, but that doesn’t mean they are not still rising.  See China’s Real Estate Bubble (Slowly) Deflating for real estate inflation data for Beijing, Shanghai, Shenzhen and Guangzhou.

Earlier this week,  Vikram Nehru, the World Bank’s chief economist for East Asia and Pacific, warned that China’s inflation woes may get another shot in the arm from Japan. As Japan rebuilds from the March 11 earthquake, it could drive up the prices of commodities in which China also imports, mainly oil and iron ore.

Gao thinks long term for the Matthews China fund — at least three years out — so he says investors who like China as a hold shouldn’t short this market near-term because of Japan.

“The question is how much weight does Japan really have on oil and iron ore demand? It’s decent enough that it could drive prices higher so that China ends up importing some of that inflation,” he says, but adds he doesn’t think Japan is a large enough player in those markets to make for big price jumps in commodities like the kind we have seen following political unrest in North Africa.

Source: www.forbes.com