China risking bubbles with data

Paul Krugman did it on Oct. 22, raising blood-pressure levels around Beijing. The idea that China is siphoning prosperity from other poor nations using an undervalued currency isn't new. It's just that a Nobel laureate writing it in The New York Times turns heads.

China should boost the yuan now. Not because Krugman wants it or because it would help U.S. Treasury Secretary Timothy Geithner. And perhaps not even because it would help many Asians. China should act because as 2010 nears, its economy desperately needs a measure of restraint.

Six months ago, it was still possible to give China a pass. Raising millions of people out of poverty becomes even harder in a global crisis. China's 4 trillion-yuan (US$586 billion) stimulus plan and liquidity-pumping efforts beat all expectations. The risk now is bubbles, and that's where the yuan comes in.

A stronger currency would help China control its economy today and set the stage for an even brighter future.

China will regret putting quantity before quality. The 8.9 percent annual growth rate it achieved in the third quarter is impressive on the surface. Below the surface, it's not so good.

The opacity of Chinese data is one thing. How statisticians sitting in a room come up with a single figure offering a snapshot of the activities of 1.3 billion people and many industries at various levels of development over a 365-day period is hard to imagine. A recent blog posting by Barry Ritholtz, chief executive officer of research firm Fusioniq in New York, asked: “Who Believes China's Bernie Madoff Data?”

Nor does the conventional wisdom about China masterfully steering around the global crisis make sense. Economist Michael Pettis of Peking University in Beijing sees it as “growth on steroids.” He's right and it raises doubts about how China can find an exit strategy without a sharp slowdown.

China can't until it takes long-lasting steps to boost domestic demand — something a stronger yuan would achieve. It would enhance domestic purchasing power in a way massive public- works spending and rampant lending can't. China is sacrificing the development of an organic economy for rapid growth today.

Hence efforts to hold down the yuan. China's US$2.3 trillion of currency reserves are the clearest manifestation of the determination to maintain a competitive exchange rate.

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