Necessary adjustments in global imbalances are under way. China's current account surplus is down from a peak of 11 per cent to about 6 per cent in 2009, while the US current account deficit is well down from its peak of 6 per cent. Estimates of future surpluses in China are being revised down. Yet the contours of the next imbalance are becoming clear and China's exchange rate is central.

Essentially, the tidal force of capital flows to emerging economies faces only partially flexible currencies. The wave is being caused by a number of factors that have sharply increased returns to capital in emerging markets relative to those in advanced economies.

The biggest factor is the contrasting performance of emerging economies, especially in Asia, which are roaring back, while advanced economies, notably in Europe, are growing anaemically. As a result, the size of these flows is likely to surpass pre-crisis levels.