Asian nations riding on the back of China's red hot economic growth may have to brace themselves for turbulence as the regional giant grapples with an unexpected inflation spiral.
The economies neighboring the world's most populous nation are already reeling from rising prices of their own while coping with rapid capital inflows from the growth-starved West and market volatility stemming from the European debt crisis.
Concerns of a potential slowdown in the advanced economies, including a double-dip recession in the United States, also grip the export-driven region.
Least on their mind is any threat of an economic turmoil in China.
But with Beijing rattling markets last week with a series of measures to contain rising inflation, the spotlight has moved to China and the impact its price-controlling steps will have on economic expansion.
"The market doesn't like to entertain the idea of growth slowing in China, because it is cognizant earnings growth prospects could be curtailed if China isn't firing on all cylinders at a time when growth in advanced economies is still sub-par," said Patrick O'Hare, chief market analyst for U.S.-based Briefing Research.
More money to be kept in reserve
On Friday, for the second time this month, the Chinese central bank raised the amount of money that lenders must keep in reserve.
This was to drain cash from its banking system to cope with the unexpected rise of inflation to 4.4 percent in October from a year earlier, the fastest pace in two years.
The move came two days after the State Council, the executive arm of China's government, unveiled a series of measures, including possible price controls, to cushion increasing prices.
Last month, in another bid to rein in inflation stoked by a credit boom, Beijing raised its benchmark interest rates for the first time in nearly three years.
A key question is whether the Chinese leaders can curb inflation pressures in the world's second-largest economy without slicing too much of growth and derailing the global recovery from the worst crisis in decades.
What investors fear most is the "fallout of the policy measures" taken by Beijing to combat the problem, said Minxin Pei, a China scholar at the Carnegie Endowment for International Peace in Washington.
He said while Beijing needed to take more aggressive measures to tame rising prices, it was likely to become "extremely risk-averse" as politics gets in the way.
"In the end, of course, they will have to clean up the mess. But delay means the price will then be much higher," he said in a commentary in the Financial Times.
The ruling Communist Party will select a new generation of leaders in the next two years and the last thing it wants to see is rising food prices forcing hungry people into the streets.
But some economists believe Beijing may raise interest rates again this year following an Oct. 19 hike, a move that could jack up costs for the big number of state owned firms and debt-strapped local government investment agencies.
This could dampen growth, leaving Asian nations that rely on China as an export destination in a bind.
For many regional economies, China is now the single largest direct export destination, accounting for about 20 percent of the exports of other Asian economies, according to the International Monetary Fund's latest regional economic outlook.
Abrupt China slowdown a "tail" risk
During the recovery from the recent global recession, intra-Asian exports, notably to China, rose about twice as fast as Asian exports to the United States and the European Union.
"Within Asia, a more abrupt slowdown of economic activity in China than expected is a tail risk," the IMF said in the outlook report released last month.
"If such an abrupt slowdown were to occur, it would have implications across the region given the linkages of many regional economies with China through the vertical integration of trade, imports by China of commodities and capital goods from other Asian economies, financial flows, and other channels," the Fund said.
But Yiannis Mostrous, an analyst at U.S. group KCI Investing, said that while economic growth in China and Asia as a whole would slow going into next year, inflationary pressures should also ease.
"Asian inflation usually rises and falls in lockstep with economic growth. Asian GDP growth is expected to come in below eight percent next year, compared to almost nine percent this year, and inflation should follow suit for the next six to seven months."
The IMF believes GDP growth for Asia as a whole will moderate to about seven percent next year.