Time to hit the brakes.

The article looks at the economy in China as of May 2004. Can China's policymakers be successful in steering their racing economy on to a more sustainable path? Rumors are rife that the People's Bank of China is about to raise interest rates for the first time in nine years. The fact that this is even being discussed shows how concerned the Chinese leadership is about the investment boom. The key question is: will China's economy slow gently or will it crash? China's banking system, which is virtually all state-owned, does not allocate credit efficiently, and the misallocation of funds gets worse as growth speeds up. China's pegged exchange rate is not only causing problems at home. America accuses China of stealing jobs by keeping the yuan artificially low. But almost all poorer countries look cheap by this gauge, and over the past decade China's real exchange rate has risen.