Nov. 18 (Bloomberg) -- If China, now the third-biggest economy, is so mighty, why do its leaders fear the Internet?

I never thought I would be asking this question 11 years after Bill Clinton’s visit to Beijing. There, I watched the former U.S. president mix it up with local students after a speech carried live on television in China. George W. Bush, his successor, enjoyed similar transparency in a 2002 visit.

Not Barack Obama. His forum with students in Shanghai this week ran into China’s other Great Wall -- censorship. Call it the anti-Google model. Its persistence is a bigger problem than China’s leaders and many investors realize. It makes 10 percent growth harder to achieve.

At 8.9 percent, its economy is just about there. As impressive as it is, though, China’s boom isn’t driven by healthy doses of fresh job growth at startup companies. It’s fueled by massive government stimulus, lax lending and China’s undervalued currency.

That’s fine for the moment, considering the global economy is in crisis. The question is how China thinks it can compete in an information-based global economy while censoring search engines provided by Google Inc. and Yahoo! Inc. Sadly, this story cuts both ways. The quest for the almighty yuan often has companies conspiring with China to control information.

Criticism Works

That gets us to the most important moment yet of Obama’s five-city Asia tour: Telling China’s leaders that criticism is a vital part of being a competitive nation and that he disagrees with censorship of cyberspace.

The media looked elsewhere. Oh no, Obama bowed to Japan’s Emperor Akihito! Oh no, he didn’t get a climate-change deal in Singapore! Oh no, he didn’t get a currency deal with China! The key moment was largely ignored.

“Unrestricted Internet access is a source of strength, and I think, should be encouraged,” Obama said, adding that the criticism he gets in the U.S. “makes me a better leader because it forces me to hear opinions that I don’t want to hear.”

If only China’s leaders allowed the nation of 1.3 billion to hear more critical opinions. Why they don’t is clear enough. Free expression would mean doing more to fight corruption; rounding up and jailing fewer dissidents; offering greater rights and protections to workers; and demanding that companies stop raping the environment.

Greater Openness

Greater openness would put more pressure on local governments to perform. It would force public officials to slow the acceleration in the gap between rich and poor. It would nudge executives to improve corporate governance, and stimulate debate about whether a weak yuan does more to hold China back than propel it forward.

Yes, messy stuff all around that most leaders would prefer to avoid. And yet progress on these fronts and more are needed for China to reach its potential. The key is accountability, and that’s just the problem.

The cult of GDP prevails in China. The deal is this: We will make you richer, you won’t question the government. Hence the importance of 10 percent gross domestic product growth. It’s the Communist Party’s plan for survival and it has worked masterfully. Ever since joining the World Trade Organization in 2001, China hasn’t looked back.

Nor has it looked forward enough under President Hu Jintao. Sure, China has been savvy about doling out billions of dollars to developing nations and scoring energy contracts. Yet it hasn’t evolved very much in terms of coping with the Internet and the cheap yuan.

Weight of Technology

Clinton’s Beijing debate on live TV in 1998 convinced many that technology and the Internet would change China. The idea was that its leaders would wilt under the sheer weight of technology. In reality, China is having its way with the Internet. On June 4, the 20th anniversary of the Tiananmen Square crackdown, China even blocked Twitter Inc.

China is among the oldest civilizations, and you would be hard-pressed to find anyone who thinks China isn’t a rising superpower. Obama finds himself treading carefully with a nation that holds almost $800 billion worth of U.S. debt. And yet so much time and energy goes into controlling what is said about China, and counterproductively so.

The undervalued yuan, meanwhile, is becoming a bubble all its own to complement the nation’s frothy asset markets and $2.3 trillion of reserves. The yuan is giving China an economic advantage that is fueling hard feelings globally in the short run and dimming longer-term prospects.

The quality of growth matters as much as the quantity. A stronger currency would increase the purchasing power of Chinese consumers, accelerating the shift from exports to domestic demand-led growth. It would boost pressure on companies to become more globally competitive and create more incentives for entrepreneurs to do their thing.

Those would-be innovators need unfettered access to information to hone their skills. By not allowing it, China’s leaders are hurting the private sector’s development and the nation’s, too. Bravo to Obama for highlighting this most self- inflicted of economic wounds.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

Last Updated: November 17, 2009 16:00 EST