China risking bubbles with data

Similar arguments have been made over the years. During a chat in 2003 with Hafiz Pasha, an assistant United Nations secretary-general and former Pakistani finance minister, he said: “Poverty reduction is important, but China ought not to do it at the expense of the rest of the region.”

Six years on, it's still a highly sensitive topic that makes last weekend's confab in Cha-am, Thailand, look all the more hollow. Beggar-thy-neighbor policies of the kind China is pursuing make a mockery of talk there of forming an East Asian bloc of 16 nations. Keeping the yuan effectively pegged to the dollar does little for Asian brotherhood.

The more immediate concern is asset bubbles and inflation, which China will regret in a few years. A stronger yuan would take tension out of China's US$4.3 trillion economy. The nation would no longer be standing in its own way.

Yuan convertibility is a bigger issue than officials let on. At a time when China would love to find a replacement for the dollar, its currency stance ensures the yuan won't be it.

To internationalize its economy, China needs to encourage more overseas investment, reduce exports and promote sales of yuan-denominated debt by foreign companies. Instead, China wastes time devaluing its currency, adding to its imbalances and global ones. If it had any teeth at all, this would be an issue for the World Trade Organization to tackle.

China is rightfully worried about fiscal irresponsibility in Washington damaging its vast dollar holdings. Yet a weaker dollar is exactly what the world needs. Nothing would help more than a rebound in the US$14.2 trillion U.S. economy. Also, strength is being able to borrow in your own currency — not owning a mountain of reserves.

If China won't act out of regional fairness, it should out of its own national interests. China's stimulus and lending efforts are fueling asset bubbles in stocks and real estate and creating the illusion of stable growth. Its largess may be paving the way for a bad-loan hangover.

It's time for China to create a healthy economy — not one that is run on steroids, cannibalizes jobs from neighbors or puts today before next year. Realizing how much the yuan is at the core of all these problems would be a good start.

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