An obvious manifestation is Beijing’s unprecedented foreign exchange reserves, now escalating toward a trillion dollars. They flow from China’s accelerating trade surplus – not the least based on the U.S.’ staggering bilateral deficit. Granted Washington’s problem is almost universal with the U.S. maw gulping imports and credit from all over the world.

But China accounts for something like a quarter of the total. Subsidies [along with cheap labor] back three-quarters of China’s exports which are multinationals’ assembly operations poducts. Chinese currency is undervalued to the dollar, by as much as a quarter, possibly a third. The result: skyrocketing Chinese exports and surpluses plus inflows of hot money. Speculators are betting Beijing inevitably would have to massively revalue.

Beijing is resisting, although it maneuvered toward floating its currency more than a year ago with resulting minor adjustments. In fact, the problem is growing apace.

China has a variety of reasons for stonewalling: Its leaders have the old fashioned mercantilist belief in trade surpluses. China’s own raw materials imports — not the least energy — are mushrooming, partly ironically from higher prices China generates as a new wastrel market.

But more important, a major currency readjustment’s psychological effect would bring on major unforeseen economic and unpredictable political effects — perhaps a run from the yuan no matter how draconian Beijing’s exchange controls. China greybeards remember inflation as much as Communist armed strength decided the civil war for the Communists in the late 1940s.

So Paulson’s entreaties nor some Senators’ threats to slap on emergency tariffs notwithstanding, there is likely to be little movement. The standpat attitude is despite recent signs Hu has consolidated his control, wiping out his predecessor, Jiang Zemi’s Shanghai power base and buying off the military through promotions and increasing their toys. But Hu, nor Wen for that matter, have the stuff of dramatic/risk initiatives but are rather Party hacks that have risen through ducking issues.

At stake may be stability of the system. Managing mushrooming reserves is increasingly difficult since they generate matching local currency leading to uncontrolled expansion and speculation. Most major Chinese cities, for example, have a real estate bubble where loose change is going. Liquidity reinforces growing loss of control by the center over regional Party leaders who plunge into huge infrastructure expenditures to meet growing unemployment. Money sloshing around inhibits reforms of banking, so inefficient they may have bad loans equal to the foreign exchange reserves! It encourages corruption, however iniquitous not just a moral and governance issue, but sapping as much as 13 percent of gross national product. According to government figures, almost $100 million was stolen from Chinese banks in 2005 alone!

One might ask, but isn’t this a Chinese problem? If Beijing is willing to export its savings through underpriced products against an increasingly devaluing dollar and low-interest Treasury securities [supporting American low interest and inflation rates], why worry? True, the U.S. has sacrificed manufacturing jobs — some would argue its industrial base — but American unemployment remains low. Export of China’s incredibly frugal citizens’ savings [official statistics say 50 percent of GDP] is to the U.S. and the rest of the world’s advantage, it could be argued.

The answer is, of course, as China increasingly meshes with the world, can this Ponzi scheme continue? Does it not represent a threat to all members of the increasingly interlaced world economy?

America is addicted to low price Chinese-made consumers goods. Reliance on Chinese markets partially underlies Japan’s recovery after a decade of stagnation. South Korea’s domestic economy, never recovered from the 1997-98 East Asia Financial Crisis, depends on its “China boom”. Australia’s raw materials exports increasingly depend on China. So do higher Mideast oil prices supporting huge recycling of investment from the Persian Gulf worldwide.

In the next few weeks, the bankrupt [by everyone else’s standards] Chinese government banks will continue to float some of the largest IPOs in history. Foreigners, including American banks, are investing billions for minority positions to get access to those fabled savings.

Beijing is still a relatively minor world economic actor but the Chinese tail is wagging the dog. When the China bust comes, as inevitably it must given its fragile structure, globalization will quickly transmit the pain all around the world system.

Sol W. Sanders, (solsanders@cox.net), is an Asian specialist with more than 25 years in the region, and a former correspondent for Business Week, U.S. News & World Report and United Press International. He writes weekly for World Tribune.com and East-Asia-Intel.com.