Will China’s Rate Hike Crush the Global Recovery?

This week’s most important economic event was not Apple (AAPL) coming up short on iPad sales expectations — it was China’s (FXI) bold move to assert a major leadership position regarding global currency liquidity.

Yesterday, US stocks took a blood bath and newbies in Gold got taken to the alter for slaughter. I was at the 3rd annual Global Financial Leadership Conference where the theme for the future was clear: China is in the driver’s seat and US diplomats are scrambling to keep our interests protected as China’s MapQuest offers a different route than Ben Bernanke’s Google Maps.

So, will China’s rate hike crush the global recovery? Here are three perspectives:

No, Only the Recoveries Based on Artificial Liquidity Will Get Hurt

Yesterday’s slate of incredible minds made clear that fast growing economies such as China and Brazil must ward off inflation to prevent a crisis for their middle classes. Therefore, these countries cannot sit around and let Japan and the US continue flooding the world with liquidity.

If Japanese and American politicians cannot tell their people the truth about reigning in spending, we should continue to see China, Brazil, India, Australia, and others tighten in defense. Although this will cause their economies to cool, it will do much more damage to the US and Japan.

No, It’s Just a Shot Across the Bow in the Currency Wars

One rate hike does not make a trend. It’s possible China hiked to get the world’s attention. Now that all serious investors are perched and listening, future negotiations and conversations may lead to outcomes other than continued hikes.

Yes, Get Ready for The Greatest Depression

China’s move is a serious one. If the US continues to play the house of cards game of quantitative easing, China can do serious damage. A stream of rate hikes would pull capital out of equities and commodities. It would also continue to increase the relative strength of the Yuan over the US Dollar. The US Debt-to-GDP level is already in the > 60% yellow zone. If GDP takes a hit while debts remain stable or worsen, we could start staring at the > 80% red zone. As David Gergen said yesterday at the Global Financial Leadership Conference, the red zone has been the Bermuda Triangle for global empires.

China’s rate hike is only one data point. What do you think the future holds? Let us know in the comments below …