IT is a commonplace observation that China's rapid ascent as a global economic power has increased tensions with the United States. Last week's high-level talks between Henry Paulson, the US Treasury secretary and vice-premier Wu Yi leave many issues unresolved.The Americans want to force the pace of change regarding structural reforms, the openness of the economy and currency appreciation. The Chinese are in agreement with many of the goals but wish to proceed at a slower speed. Paulson, who has plenty of experience in China, expressed disappointment and impatience on how much change Chinese authorities are willing to deliver.

Policymakers in China are keeping to their game plan of gradualism in changing the mix between exports and domestic demand, as well as how fast the yuan is allowed to appreciate. In the recent talks they gave away just enough to ease tensions a little but without surrendering much regarding their overall strategy. Being accomplished tacticians, they feel that it is unnecessary to reward a US administration as unpopular as the current one.

However, they also have to keep an eye on Congress where lawmakers are very unhappy about the US-China economic relationship and are pledging to proceed with sanctions on Chinese imports. It is no secret that Democrats are generally more hawkish on these issues than Republicans.

As for the populace, they are becoming increasingly hostile towards China. Globalisation is not viewed in a positive light among the majority of Americans, and China, because of its size and importance, serves as a lightning rod for their discontent.

So, calls for sanctions to counter "unfair" trade and "currency manipulation" may become more strident. In the current atmosphere, it is unlikely that tensions over economic issues will ease. At the same time, there is geopolitical strategic jockeying by the two countries, as China expands its influence in Asia and elsewhere.

Protectionist sentiment is definitely on the rise in the US. It is difficult to sell abstract arguments about the efficiency gains of globalisation to the average Joe. Job losses are increasingly being blamed on the outsourcing practices of corporations. An economic downturn will lead to even more pressure for greater protection.

As far as trends are concerned, outsourcing by American corporations is expected to increase in the future. A study conducted by Alan Blinder (former vice-chairman at the Federal Reserve), a few months ago, concluded that many categories of service-sector jobs are likely to be moved offshore. This includes not only lower-level functions but also jobs with high educational and technical content.

Educational standards and skill levels are rising rapidly in many emerging countries and it makes economic and business sense to locate activities in those regions. But as the threat to higher-end jobs becomes evident in America, as well as in Europe, it is likely that protectionist sentiment will rise in concert. In most countries, the highly-educated are liable to make more political noise than the less-educated.

The deflationary forces of globalisation have been a significant factor in keeping inflation under wraps in the developed world. Any impediments to globalisation, such as rising protectionism will increase the risks of higher inflation.

Of course, in the short term there is also the problem of cyclical overheating and capacity constraints that could make inflation a nagging problem. Recently, the OECD in its Economic Outlook report warned about the persistence of inflation and advised central banks to implement a bias towards tightness.

Global growth is fairly robust, liquidity is plentiful and inflation pressures are rising. And, as we know, authorities have generally been slow to mop up liquidity. China, in particular, is still adding to already massive foreign exchange reserves by keeping its currency at a low exchange rate relative to developed-country currencies.

It is buying lots of dollars, even as it tries to diversify out of dollar assets. The news that China's new state investment corporation has invested three billion dollars in Blackstone represents the start of many more investments in potentially higher-return assets and away from the huge holdings of government debt.

For now, the agency oversees a relatively small part of China's total foreign exchange reserves. It is broadly modelled after a successful state enterprise in Singapore. Many other Asian and oil-surplus countries are also diversifying into assets other than government securities. And, this has the potential of bidding up asset prices globally.

"Lies, damn lies, and statistics" goes the old saying. And it is reported that when a corporate executive heard this he said that they would like to hire people who are accomplished in all three areas. The reality is that reported statistics have inherent biases and deficiencies that may give a misleading indication of underlying trends.

For example, in the case of the US, many analysts believe that hedonic adjustments to CPI data, to capture quality improvements, aren't entirely warranted and the reported numbers underestimate actual inflation. And, of course, many individuals because of their lifestyle and choice of goods and services have an inflation exposure that is inadequately captured by the representative basket on which the index is based. For example, the rising cost of healthcare and education may result in a personal inflation number that is a good deal higher than the CPI.

Inflation is a particularly important statistic because of its impact on such things as wage setting and the calculation of real asset returns. And governments are generally motivated to report low inflation figures.

The moral of all this is that it's wise to treat all measured statistics with a degree of scepticism. One is reminded of Paul Volcker's view on this topic. Volcker was, of course, the Fed chairman who applied an axe to inflation, clearing up the mess created by previous incumbents. As an example, he said that in determining the state of the construction industry one should not simply trust the statistics. One should look for some kind of verification by going out and counting the number of cranes populating the skyline.

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Speaking of former Fed chairmen, Greenspan has declared that the Chinese stock market bubble is likely to burst. The noted bubble-meister, who had a hand in creating the tech-stock and the housing bubbles, knows an inflated balloon when he sees one.

There are press reports of taxi-drivers who have become day traders and ten-year-olds giving hot stock tips. If you're playing the Chinese stock market, you know this means trouble ahead. The famed American financier Bernard Baruch sold his holdings before the 1929 crash when he started getting stock recommendations from barbers and shoe-shine boys.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com