China is in a bind trying to deflate its asset bubbles in the stock market and in property. By buying dollars to force the Yuan’s peg to the dollar, Beijing closes one of the few doors it has to cooling hot-money inflows into China. Simon Johnson, an economist, writes a straight-forward and cogent explanation in last week’s New York Times for why the world is so interested in investing in China right now and how too much money can sometimes be more a headache for the leadership than not enough …

The world’s financial markets have decided that Asia is rebounding more quickly than most other parts of the world, and capital is rushing to get into those countries before asset prices rise too much…

The monetary policy authorities know this and — given what we have all seen in the last few years (or is that two decades?) — they are rightly worried about new “bubbles” of various kinds that can destabilize their financial systems and undermine their economies.

But what should these central banks do? If you fear that your economy is growing too fast, and inflation is on the rise, central bank mantra dictates that you should raise interest rates. The same mantra was, in the era of Alan Greenspan, less clear on whether interest rates should be increased to forestall unsustainable financial bubbles. With the puncturing of the Great American Bubble, including the fall of Mr. Greenspan as an icon, most central bankers are quietly willing to tighten monetary policy if they see real estate prices take off.

But this is exactly where the problem lies.

If you raise interest rates in an economy open to capital flows, at the same time as the world’s money centers have low or almost zero interest rates, what happens?

Almost certainly, you will attract more capital from overseas. This capital inflow will likely feed into your domestic credit boom and further the run-up in asset prices, housing construction and other bubble-related phenomena.

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