W?hile everyone in Washington thinks the renminbi should be revalued, not everyone in China agrees. Maybe the Chinese are right? It is, after all, easy to blame trade imbalances on the evil exchange rate machinations of others. In the mid-1980s Japan’s surplus was supposedly the consequence of a deliberately undervalued yen. But while the yen has since risen a good deal – as shown by last week’s decision by the Bank of Japan to lower the exchange rate – its surplus has stubbornly grown too.

Now it is China that attracts Washington’s ire. The US rightly recognises China as its global rival in the 21st century, one reason Beijing is unenthusiastic about caving in to Washington’s demands. But China’s reluctance also reflects more justified doubts. The conventional wisdom was expressed clearly by Tim Geithner, the US Treasury secretary, in his congressional testimony last week: undervaluation “helps China’s export sector and means imports are more expensive in China than they otherwise would be”, thereby leading to lower domestic consumption. This argument assumes that movements in nominal exchange rates lead to lasting adjustments in competitiveness, and also that these in turn will deliver reductions in current global imbalances. Both the arguments are badly flawed.

On the first, China’s per capita incomes are still low, about $3,000 per annum compared with $40,000 in the US. The gap is slowly closing because of the way China’s new openness has attracted high-quality capital and management which, in combination with a surplus of remarkably cheap labour, makes China super-competitive. In other words, China’s growing share of world trade has nothing to do with undervaluation.