China's GDP accelerated to 10% growth in the first quarter driven by loose money from its banks, and a healthy dollop of importing from the US. The US is in that death spiral of bloated economic regimes: we are relying on "bracket creep" in taxation, and cheaper and cheaper imports to keep our consumption going.

Pressures to revalue the Yuan - the chinese currency - from its current range of about 8 to the US Dollar, have been heard for some time. The people pushing claim that it is about helping US manufacturers, but this is absurd. Devaluation of the dollar from .80 to 1.20 against the Euro has done little to help US manufacturing, and nothing to produce US job growth. Instead, the people pushing know that if the Yuan is to be revalued, and then floated, then China will have to ease currency controls. And it is currency and investment controls, and not manufacturing, that is really at issue.

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Quick detour through an arcane subject: money. In international economics, a country can have pick two of three things: open currency flows, an effective monetary policy, or a fixed currency. Right now China has a basically fixed currency - a narrow trading band for the Yuan against the dollar - and effective monetary policy. To abandon the peg will mean opening the flow of Yuan in and out of the country. But China doesn't want that for two reasons. Reason one is that it doesn't want Chinese citizens, the ordinary kind, to have their money flee the country. The other is that it doesn't want the hundreds of undervalued Chinese companies out there to be bought out by foreigners. It is willing to have some bought up, but wants to hold those hostage as much as it can. A simple example is the sale of a construction equipment company to the Carlyle Group - the Chinese government is holding up the deal while they get a promise that the Group won't sell shares in the company to competitors, which was, of course, what they had hoped to do.

The reasons for this are fairly clear: China neither wants the money of its wealthy people to flee the country looking for safer havens, nor does it want "Thatcherization" of the economy, where assets that are valued far less than they would be in an open economy are snapped up. To change this China needs to have a vibrant internal series of investment markets, and the banks need to pay interest rates to depositors that are closer to the real rate of inflation. By the Starbucks standard, it is close to 10% per year in the coastal areas.

But this project has been moving in reverse: Shanghai's stock exchange is a cesspool of corruption. Chinese companies routinely put out investment memorandums and solicitations based on faked numbers in the hopes of harvesting the huge pool of Chinese mattress money. China has enacted rules requiring foreign investment in many projects simply to slow down the huge scamming of the public that is, daily, going on. China needs to have its equivalent of the landmark Securities Act of 1933, which created the basis for regulating how stock is sold and issued to the public - and in essence, created the securities industry in this country, since it is the disclosures it requires are the basic substance of what stock pickers and research analysts comb through to make their calls of "buy" or "sell". It would give this office the teeth it needs to bring investor confidence to China.

Clearly China also needs a functioning credit market, in the US, credit markets have become larger than equity markets, when one includes such instruments as Mortgage Backed Securities, Collateralized Debt Obligations and the like. The access to an open credit market would free companies from having to go to the central government's banking arms - the Big Four - to gain access to liquidity for expansion and improvment.

The combination of these three facts - the need for regulation, the implosion of Shanghai's exchange, and the need for a credit market - suggest that China needs to take a dramatic step, and soon. That is, it needs to recreate Shanghai as the Chicago of Chinese finance. Hong Kong has reclaimed its place as the premier exchange, in no small part because it is better regulated and hence has better performance. However, there is a clear need for a market for securities to match the Hong Kong market for equities, and Shanghai, as the center of the new manufacturing basin of China, is uniquely well positioned to have this happen. The costs will not be that high, the simplest step would be the most fraught with symbol - creation of credit markets, including secondary mortgage markets, and setting the exchange in Shanghai to be the means to trade these instruments.

The effect would be almost instantaneous - since the Chinese, sensibly, have gone into real estate speculation, since all other forms of investment are either closed, corrupt or simply hopelessly behind the rise in prices. In fact, as land prices have risen, it makes getting 2% on ones savings seem more and more absurd. Why save for a down payment, when every year you will fall farther and farther behind?

By creating a regulated and clean market for chinese debt instruments, it would revive Shanghai's fortunes rather quickly, and create a second financial center in China, one which is linked directly to the economic growth regions of the country. It would also create a second effect - namely, it would mean that the companies of China would be able to have their value rise to the market value, and thus allow China to enter the world markets.

The ability to issue debt, or to find a market for securities, is an essential step toward China entering the world economy on reasonable terms, and the ability to have a functioning financial center in this debt is one of the key missing pieces in the Chinese puzzle box.