What to Watch for in China: Whether the Yuan Appreciates

Despite signs of a global economic rebound, high-profile financial doomsayers seem to have found a new target for their angst. The seemingly red hot Chinese economy, posting double-digit growth rates, may be on the cusp of implosion according to some pundits.

Big-time short-seller Jim Chanos, for example, has been warning that a big bust in the Chinese property market is on the horizon. And widely followed newsletter write Marc Faber called for an imminent economic crash in May.

Despite a lingering bear market for Chinese stocks, the most recent data have defied the doomsayers. On Tuesday, The Conference Board announced that leading Chinese economic indicators had surged to a 14-month high. And exports jumped by six-year highs of 48.5%, far above analysts' expectations, shrugging off the potential weakness caused by the European debt crisis, according to reports last week.

Still, investors may have plenty of reason to be wary despite the reassuring figures. The data China supplies about its state-dominated economy is sketchy at best, and suspicions of government manipulation of the numbers are rampant.

Fears of a Chinese property bubble are, however, very real. The country's statistics bureau said last week that prices rose another 12.4% across 70 cities, leading to worries about further government tightening that could lead to a broader economic pummeling as it did in 2007.

When Times Were Good, Yuan Rose 22%

Investors may be able to cut through much of the noise by focusing on Beijing's decision about whether or not to let the yuan appreciate against the dollar, John Authers, editor of the Lex column at The Financial Times and author of The Fearful Rise of Markets, said in a video interview with DailyFinance last week (see below).

Letting the yuan rise would slow the Chinese economy and ease fears of overheating. It would also lead to a healthy rebalancing of its economy toward domestic consumption. But perhaps most important, it would be a sign that Chinese officials are confident about the robustness of the economic recovery now under way.

Indeed, China did let the yuan rise during better days. The currency appreciated 22% against the dollar between 2005 and 2008, after which Beijing slammed the brakes to prop up exports in the midst of the global financial crisis.

Rumbling Is Rising Again

With congressional elections fast approaching in the U.S., American accusations that China was siphoning off jobs through currency manipulation are on the rise again, and politicians are clamoring for a boost in the yuan's value. After reaching a fever pitch at the start of the year, that clamor faded as Europe's debt crisis stressed the fragile global recovery and led to swooning stock markets.

But the insistent rumbles are rapidly rising again. Even Treasury Secretary Timothy Geithner, who sidestepped the question of whether to label China a currency manipulator the last time around, recently said that the artificially low yuan was hurting global growth.

As the midterm elections approach amid stratospheric U.S. unemployment levels, the political grandstanding is only likely to increase. This time around, though, the key factor in how Beijing responds may be whether or not it believes its own recovery is for real.