Recently a number of economists, most of them foreign, have called for China to devalue the renminbi, arguing that the more than 30 per cent revaluation since 2005 has left it with an overvalued currency. This, they claim, has hurt Chinese exports and is holding back economic growth.

They are probably wrong about growth and almost certainly wrong about their evaluation of China’s currency regime. The policies of the People’s Bank of China (PBoC) reflect a domestic debate that is as much political as it is economic.

Two main issues matter. First, capital flows are very sensitive to medium-term currency expectations. Any significant change in the direction or pace of capital inflows can hurt the banking system. For 20 years, China’s foreign currency reserves have soared because of net inflows. As the PBoC monetised these inflows, the country’s financial system developed around the consequent rapid money expansion. In recent years, while net inflows have remained high, the bulk of these inflows has switched from the current account to the capital account.