The Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, GMO CEO Jeremy Grantham says.

“Deciphering the strength of the Chinese economy will also play a major role in formulating our view of any future relative strength of emerging (markets),” Grantham writes in a note to investors.

“My colleague, Edward Chancellor, strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors.”

Grantham acknowledged that being pro-emerging markets yet anti-China poses a dilemma, one he is “working to resolve.”

“Meanwhile, emerging equities, like most risky asset components, are moderately overpriced,” he says.

“Only U.S. quality feels (and measures) like a real outlier,” Grantham says.

“As for the rest, if you feel yourself becoming overconfident about anything, take a cold shower and start again,” Grantham counsels.

“Just be patient.”

According to data complied by international fund tracking firm EPFR Global, the BRICs (Brazil, Russia, India, China) theme continued to resonate with investors, with equity funds dedicated to the region receiving $2.1 billion inflows, The Business Standard reports.

"Funds that invest in each of the four markets also absorbed fresh money, with China equity funds taking in $243 million, India equity funds $148 million, Russia equity funds $102 million and Brazil equity funds $82 million," the EPFR said in its latest report.