Hong Kong's Chengming magazine reports that some $28.8 billion was converted into yuan in the 90 minutes between the final decision to change the yuan value and the actual announcement - a report that, if true, implicates officials at the highest levels in what is effectively an insider-trading scheme to profit off the currency revaluation. That this comes from government officials - and their associates at various state-owned enterprises - presents a troubling problem for Beijing. China's central leadership already has enough trouble keeping local party and government officials in line. Beijing's inability to control local leaders, coupled with a pervasive culture of corruption and nepotism, has left an indelible taint on the government structure that reaches from the lowest levels to the highest. Although Beijing regularly makes examples of officials at many levels, the system of relationships offers protection to the senior cadre and their associates.

A friend of mine says that the marketplace now generates synthetic realities, and I feel that that's very true. That was certainly true about the tech bubble. Anyhow, my view is that this story of unending growth in China is one of those synthetic realities that the market has embraced. The data on China is rubbish. It is an economy that has a very high share of fixed investment in GDP, a very high share of industry; it should be very cyclical. It has growth rates and credit oscillating hugely - depending upon what data series you use and whether you look year-over-year or sequentially and over what time period-between zero and 30%. So you should expect variability in GDP. I mean, even developed countries, which are quite a bit more stable, have fairly variable real GDP growth, quarter to quarter. You'll get up 6, up 3, even if the country's growing at a fairly steady rate. But in China now, you've seen 9.4% real growth reported, give or take a couple of tenths of a percentage point, virtually every quarter over the last three years.

I basically will say the Chinese hard landing will be similar to the '90s experience. A multi-year affair in which the reported growth rate falls to 7% and the real growth rate falls to 3% - but that's a political statement on my part. This time around, we're on the verge of deflation. China is going to go into the deflation as the economy softens - outright price deflation, and with the debt-to-income ratio not at 100%, like at the peak of the last cycle, but at maybe 170%. We all know that the debt and deflation are a nasty combination - that is what we are staring in the face, in China.