I believe that the emerging markets are in for a big correction. But because of what I call "informational risk", understand when that will happen is difficult. [Informational Risk - probability that the information given to the market is false. A function of the economic incentives, economic disincentives and legal disincentives for supplying accurate, complete and timely information within a given legal infrastructure]. Still I think I have come up with a theory. As follows:

As I said yesterday, what is happening in China is that the flood of loans (about $700 billion in the first quarter) has put the overcapacity into overdrive, which explains why the jump in industrial commodities. (see: John Authers video yesterday on FT.com) The Chinese did the supply side but don't have the demand. So all of the stuff produced right now will have to be dumped somewhere soon at a large loss. The other side is that in April, the Chinese authorities figured out that the banks had gone wild, and turned off the faucet. The loans slowed significantly.

If I am correct, you should start to see the effects of the above in a drop in the demand for industrial commodities in a few months. You also should see a large drop in the price for finished goods, which will be harder to spot, but expect howls and charges of dumping. The losses at Chinese state owned companies will be covered up because the loans from the banks will never be repaid. The Chinese banks won't admit to it. They will simply not classify the loans as nonperforming or problem. No one wants to take responsibility for this mistake. So the main indication will be the fall in the demand for industrial commodities, which will signal the fall in the China recovery story and probably reverberate through other emerging markets although the collapse of the Latvian bond auction and other indications have already given some people a little reality. So much for decoupling ( see  Beware information deficit in emerging nations William Gamble, Financial Times, Letters, October 31, 2007 http://www.ft.com/cms/s/0/92139c3a-8755-11dc-a3ff-0000779fd2ac.html)