There is little question that China is sensitive about public criticism of any kind. Nevertheless, this is not a question to be avoided.So let us consider three questions: first, is China a currency manipulator? Second, if so, is it an important problem? Finally, how should the US deal with this vexed topic?

First, of course, China is a currency manipulator. It is so in a precise sense: it intervenes very heavily in the foreign currency market and it also sterilises the monetary consequences of the intervention. This means China is targeting the real exchange rate. Moreover, contrary to the views of some economists, it has been able to do so for a long while and continues to be able to do so.

Second, the exchange rate is, none the less, not the central issue. That issue is Chinese domestic spending. If domestic spending rises relative to potential output, the current account surplus will diminish automatically.