China tightening and the global recovery

With global commodity prices skyrocketing in the recent months, the world had been caught up in the classic chicken or the egg problem. The west has been arguing that ballooning Chinese demand has stoked food and fuel prices, whereas the Chinese have been retorting that it is actually global price hike that is responsible for higher inflation in China.
Thankfully, and without delving into whether the chicken came first or the egg, Chinese monetary managers lately decided to squeeze money supply.
China hiked the required reserves ratios (RRR) for its banks for the second time in two weeks on November 19. The second 50-basis-points RRR hike was preceded by a 25-bps interest rate hike for the one-year lending and deposit rates on October 19.
Elsewhere in the region, the so-called emerged India is also seen hawkish on its inflation. Earlier this month, the Reserve Bank of India (RBI) jacked up the repo and reverse repo rates by 25-bps each with the policy statement reiterating RBIs commitment to fighting inflation.
Tracking these moves, S&P GSCI Index of commodities tumbled 2.8 percent last week, its biggest weekly slide since August, when cotton futures alone saw its biggest weekly loss in 20 months.
And if regional tightening is really the main factor behind easing commodities, then perhaps the bullish commodities wave can be expected to wave goodbye as further tightening in both India and China is seen on the cards.
In a recent interview to the Wall Street Journal, Royal Bank of Canadas senior emerging-markets strategist, Brian Jackson, said that the RBI is likely to hike interest rates by another 75 basis points since inflation remains "uncomfortably high despite all the rate hikes that have already been delivered." Standard Chartered economist, Anubhuti Sahay, said that the RBI can hike rates by Q1 2011 if "inflation surprises on the upside by a wide margin."
As for the Chinese economy, analysts at the Roubini Global Economics expect "at least four additional 25-bp interest rate hikes between the conclusion of the (Chinese) Central Economic Work Conference in early December and the end of 2011".
Economists at the Standard Chartered Bank share somewhat the same view citing that they expect four more 25bps hikes, after which they believe the Peoples Bank of China to move to quantitative controls. SCB economists also expect four to five more 50 bps reserve rate hikes - "needed to keep pace with FX inflows via trade and capital accounts."
From a global perspective, regional tightening is creating a global diversion with the US Federal Reserve opting for second round of quantitative easing while emerging economies tighten their money supplies.
It is yet uncertain whether these forces will balance out each other or whether one will supersede the other. In the case of former, commodity prices will likely remain within the current range, only to find a direction in case either party wins.
But one of the more fearful factors is that if China and India - two of worlds growth drivers -- respond by tightening too much, as is advocated by the famed doom seer Nouriel Roubini, the global recovery could potentially come under a threat.
In his recent report titled "How Should Emerging Markets Manage Capital Inflows and Currency Appreciation", Roubini called for increasing the pace of tightening by emerging economies, saying that "base money is growing too fast and policy rates are too low for too long, leading to overheating, excessive growth above potential, rising goods and services inflation and dangerous credit and asset bubbles."