Has the time for a currency war with China arrived? The answer looks increasingly to be yes. The politics and economics of an assault on Chinese exchange rate policy are increasingly convincing. The idea is, of course, deeply disturbing. But I no longer believe there is an alternative.

We have to address four questions. Is China a “currency manipulator”? If it is, does it matter? What might China reasonably be asked to do? Finally, can other countries shift China’s policies, with limited collateral damage?

The first question is the easiest. If a decision to invest half a country’s gross domestic product in currency reserves is not exchange rate manipulation, what is? Moreover, by sterilising the monetary effects, the Chinese government has also thwarted the mechanism of adjustment in a fixed-rate regime, which was explained by the great Scottish philosopher, David Hume, in the 18th century (see chart below).