Tussle at the Top; Are conflicts within the Politburo stalling reforms, from revaluing the yuan to slowing the economy?(China)

Byline: Melinda Liu and Jonathan Ansfield (With Craig Simons in Beijing)

Not so long ago many Western CEOs couldn't even say what the renminbi was, much less whether it should appreciate. Today China's currency, also known as the yuan, is all the buzz. Each fresh rumor that Beijing is about to loosen its longstanding currency peg--which, at about 8.3 to the U.S. dollar, is thought to be substantially undervalued--sets off more hot money, more hot gossip--and more hot politics in China.

The men on the hot seat are President Hu Jintao and Prime Minister Wen Jiabao, part of a new klatch of leaders who lack the dominating charisma of a communist titan like Deng Xiaoping. Their task is to gradually bring China's high-flying economy down to a sustainable level of growth; Wen in particular has his hands on a number of macroeconomic levers designed to curb investment in overheated sectors, like real estate, cement and steel. For now, he seems loath to tackle the yuan as well. Last week, at a meeting of Southeast Asian leaders in Laos, Wen pointedly reminded everyone that "the more [yuan] speculation there is... the less likely it is that we'll take the necessary [corrective] measures." Beijing officials insist they'll move only when foreign pressure comes to an end. But "that condition is never going to be met," says Arthur Kroeber, managing editor of the China Economic quarterly. "The renminbi is a perpetual issue."

The yuan debate is just a taste of the challenges facing Hu and Wen, and by extension the world. Leaders from Washington to London to Berlin are clamoring for action from Beijing. China's economy hasn't overheated this seriously since 1993, when the regime waited too long and suddenly had to jam on the brakes to stop double-digit inflation. Economic activity slowed precipitously and half-finished construction projects littered the landscape. "This time officials aren't making the same mistakes," says Yang Yiyong of the Institute of Economic Research. But internal divisions, including a fierce debate over precisely how and when to tamp down the economy, are preventing Hu and Wen from making any dramatic moves.

Part of the problem is that the Chinese economy is more complex than ever before. Another is that the leadership includes a greater diversity of voices than in recent years. Hu and Wen themselves are not dominating figures like predecessors Deng and Jiang Zemin; at the same time, their Politburo comrades boast more technical expertise than previously. One of the remarkable things about a Politburo blowup in July--in which senior colleagues blamed Wen for slowing growth in coastal areas--is that the heated exchange was laced with facts. Wen ultimately managed to win an agreement from leaders of the influential "Shanghai Faction," including Zeng Qinghong, to continue cracking down on government lending, land sales and some over-the-top construction projects. But the consensus came at a price: Wen promised to resign if his initiatives went bad. "Wen has to be careful. His economic reforms can generate political consequences beyond his control," says Zheng Yongnian of the National University of Singapore.

The issue is more than a routine tussle between the provinces ...