July 22 (Bloomberg) -- John Snow and his colleagues at the U.S. Treasury should stop patting themselves on the back and put away the champagne glasses. It wasn't the U.S. that forced China to revalue the yuan -- it was rapid growth.

Granted, this baby-step of a currency shift, boosting the yuan 2.1 percent to 8.11 per U.S. dollar, seems tailor-made to silence U.S. politicians. Economist Carl Weinberg of High Frequency Economics Ltd. puts it well: ``This is a nice token move, but it is no economic knockout.''

This was indeed the tiniest move Asia's No. 2 economy could make, and the motivation seems purely political. China, it seems, wants to buy some time to placate U.S. officials growing impatient with China's trade advantage and threatening sanctions.

Keep two things in mind.

One, officials in Beijing had no intention of going for a knockout punch. You don't mess with a 10-year-old currency peg that's the backbone of your economy more than you have to the first time out.

Two, could it really be a coincidence that China moved a day after reporting that it's economy accelerated to a blistering 9.5 percent growth rate in the second quarter? Perhaps, yet it's highly unlikely.

Panic in Beijing?

China's revaluation isn't exactly a sign of panic that it's losing control over inflation. Yet there is a whiff of fear. It came just 24 hours after China reported a $39.6 billion trade surplus and data showing rising consumer spending and investment in power plants, mines and factories.

Economists like Julian Jessop of Capital Economics in London argue that the latest GDP figures must have persuaded China its economy ``was strong enough to be able to take a change'' in the exchange rate. That's sound reasoning, although China more likely acted on concern its economy will overheat.

The revaluation, as timid as it seems, will give Chinese policy makers more flexibility to manage things and achieve the soft landing neighboring economies and investors have hoped for.

Micro Challenge

While China's macro-economy looks great, the micro-economy is troubled by untold numbers of non-performing loans in the banking system. It means that no matter how fast China grows, its boom is on a fragile footing.

This is all about control, or lack thereof. China's economy is as centrally planned as they go, but officials in Beijing are realizing just how unwieldy it's become. As the economy evolved, it took on a dual structure: One is the top-down economy controlled in Beijing, the other is comprised of provinces and cities.

The top-down economy is being cooled with lending curbs to prevent excessive expansion by state-owned companies and in real estate. Runaway growth in the other part of the regional economy has proven surprisingly difficult to tackle. Thanks to China's centrally managed financial structure and underdeveloped bond market, interest rates are of little use in cooling growth.

Vested Interest

China faces challenges unprecedented in modern economics. Its influence far exceeds the size of its $1.6 trillion economy. Should China stumble, so may international demand for many commodities. Japan's recovery might be jeopardized; global markets could slide into chaos.

China, you could argue, has a Herculean task on its plate. It needs to find some centralized mechanisms for controlling its expansion -- in other words a pair of reins -- and it needs to fasten them to the overall economy and guide it to a safe landing.

After the latest GDP figure sunk in, Chinese officials probably felt it was time to try a stronger currency. Yesterday's move, and others that may follow, will make China less competitive and crimp exports. At the same time, some of the speculative investment now rushing to China may move elsewhere to competing Asian economies.

It's the Economy, Stupid

Raising the value of the yuan and linking it to a basket of currencies also may usher in more tolerance for higher currencies throughout Asia. Malaysia, for example, followed China, scrapping the ringgit's seven-year peg to the dollar. Higher exchange rates could help the region withstand the inflationary effects of higher oil prices.

Bottom line, China's currency shift reflects growing risks in its domestic economy. Faced with the prospect of ever-accelerating growth, China is beginning to pull out all the stops to avoid overheating. U.S. officials are free to take credit for China's move, yet it's the cold, hard data that deserve it.

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

Last Updated: July 21, 2005 16:42 EDT