MARKET forces are powerful beasts. Politicians in the West who have vainly tried to keep their currencies at levels well above those which the market thought appropriate have found that out the hard way. Now, Beijing is being taught the same lesson. So are many of the companies which rushed into joint ventures in China. The effective official devaluation of the yuan which is now taking place through the liberalisation of the swap market is part of a general learning curve. What has happened this week on the Shanghai swap market is merely official recognition of what the real market - whether on the mainland or outside Hongkong bank branches - has been reflecting for many weeks. The message that the markets are sending the mainland authorities is the same one that economists and analysts have been reciting: the Chinese economy is running out of control and firm action needs to be taken if another boom-bust cycle is to be avoided. Some say it is already too late, and that the Chinese economy, which has gone up like a rocket, will inevitably come down like a rock. The chances of that happening will have been lowered if the intervention in the Shanghai swap market signals the beginning of the financial reforms and restructuring which China needs to undertake. But the first impact will hopefully be on inflation. At close to 14 per cent this is now going into the red on all gauges, and with money supply still surging ahead, the possibility of a move towards hyperinflation is regarded as real in some circles. What would then follow would have to be a shuddering halt. By taking a firm grip on the foreign exchange markets, the authorities have a chance to control the ballooning money supply. What Hongkong Sinologists would like to see as a follow-up is a real imposition of discipline on the financial markets through a formal unification of the markets in Shanghai, Beijing and Henan. Then a proper foreign exchange policy could be introduced which would give Beijing much more power than current measures it is taking to damp the economy by forcing banks, both local and foreign, to cut back their lending. But it is asking too much for the yuan to be completely liberalised, and the rate allowed to fully reflect the underlying market all at once. This would cost the state enterprises which have taken on heavy import commitments too much. The move will take some of the pressure off the central bank, which has been throwing good money after bad in an attempt to prop up the currency. This week's moves could mean that it is now officially recognised that the foreign reserves have been depleted enough in supporting the official yuan rate. There has to be a suspicion that the central bank was beginning to run out of money. Apart from the implications for inflation and market discipline, the liberalisation will also do no harm to the soaring Chinese trade deficit. With estimates of up to US$2 billion this year, after a $4.4 billion surplus last year, the deficit was another of the vital signs which was signalling serious problems in China's economy. In the short term, the more realistic approach to the yuan will have a beneficial effect on China's trade - with exports receiving a boost and imports becoming more expensive. In most countries, the longer-term effect would be another surge in inflation and hardship for the less well-off as the cost of imports rose in local terms. But with food accounting for only five per cent of imports, but nearly 50 per cent of household expenditure, the effects will be cushioned. There is another potential benign effect: the impact on China's relationship with the United States over its GATT status. The Americans have been complaining that the Chinese have been subsidising exports - and the authorities' money market actions support that view - while impeding imports. The first charge is now lessened by the liberalisation, while the Chinese can truthfully say that the decrease in the competitiveness of imported goods is merely a function of free-market activities. For Hongkong, the move towards more realistic rates is going to be a rapid increase in the osmosis effect as labour-intensive businesses speed up their shift to Guangdong, where the cost of setting up factories, and paying workers, fall. The flip side, and the factor which is bothering the stock market, is that the flow of profits from activities and joint ventures in China is suddenly shrinking - but that's the price of a market economy.