To stay competitive, China devalues the renminbi. That breaks Hong Kong's stabilizing currency link with the U.S. dollar and prompts counter-devaluations by Asian competitors. A new wave of business bankruptcies washes over Asia, this time triggering widespread default on foreign debt. Lenders worldwide are rocked. Credit tightens in the West, throttling growth in the United States and Europe, where companies were already losing revenue because their exports were relatively pricey and Asian demand had evaporated.
Prices plummet, stock markets implode and protectionist trade barriers go up.
A deflationary spiral spins the world into depression. Such a prospect, however unlikely, is nonetheless very much on the minds of China's leaders. In recent months, they have steadfastly insisted that their currency would not be devalued, despite the accompanying pain. The pledges would be viewed with more skepticism were it not for the ascendency of Zhu Rongji, Beijing's brilliant, no-nonsense economic czar. After skillfully managing China's economic advance for the past seven years, Zhu sweeps into the top government job surrounded by a group of reformist technocrats with an agenda as long as the Great Wall.