China's Bubble Trouble

Its white-hot economy accounted for over a quarter of the world's growth rate in recent years - more than the US. Its hunger for imports helped pull Japan out of a long slump. And its surplus dollars are financing the US debt.

China's economy, zipping along at close to 10 percent growth, has become more than a dragon that no nation dare ignore. Recently, it's a dragon that can't be allowed to falter.

In late April, Beijing began to take urgent steps to cool an overheated economy for fear that many sectors, such as property and steel, were financial bubbles waiting to burst. Easy credit and inefficient banks have put too much money in the wrong places in China's government-led economy.

The question is whether such steps will carefully deflate the market bubbles or pop them. US Federal Reserve chief Alan Greenspan warned last month that financial trouble in China would "create significant problems" for the US. For China, the problem would be a train wreck of bad debts and destabilizing joblessness.

Unless China reforms its government-run banks and state-owned enterprises, loans will continue to be used with little regard for profits. The economy has too much investment money for a system that still badly allocates capital. It's time to commercialize the core financial institutions.

Beijing may succeed in tweaking the economy down to a more sustainable 7 percent growth rate. But it can't ignore moving more of the state-run economy into the free market.