This is the move economists and politicians have been waiting for. China doesn’t like it when the West blames it for all its ills. You can see its point. We spend money we don’t have, and then complain when China doesn’t spend like there’s no tomorrow.

For decades the nice men and women in power worried about the world’s poor, and then, just as soon as the largest block of poor in the world start to get rich, we throw ourselves on the floor calling it a foul.

They blame the yuan, or the renminbi as it is also called, for all their troubles. Our workers labouring, hard for a wage that can barely be called decent, find themselves out of work because they can’t compete with workers in sweatshop conditions, protected by a cheap currency.

It is not fair, and it has got to change, they say.

The snag is, US authorities forget that China is adopting very similar policies to those followed by the US when it was still an emerging economy in the nineteenth century. They talk about how the poor countries must do more to help themselves, and then complain bitterly when they start doing that.

One of the problems that beset the Third World is specialisation, or to be precise, a lack of specialisation. The world’s richest countries are the ones that focus on what they are good at. The more they do this, the better they get at it. But China is new at the game.

Self-sufficient peasants are fleeing the horrendous poverty of their birth to work that is awful, but less awful, the sweatshops. This is the stage where they need help. The one occasion when subsidies can be justified is when a country is just beginning to learn how to specialise. It’s the infant industry argument. It’s where China is now, and it is where the US was one and a half centuries ago, a time when it ardently preached the infant industries doctrine.

China is also a hugely complex animal. In parts of the country it is industrialising incredibly quickly, and generating new wealth at an extraordinary pace. In other parts, poverty is rife.

The FT’s Martin Wolf has come up with the word ‘Chermany’ to describe Germany and China, the world’s two great exporters. They must import more. The world would benefit if the currency specific to Chermany was more expensive.

The snag is, just as a more expensive currency in Germany is not possible, because she shares her currency with countries such as Greece, a more expensive yuan would be disastrous for China’s poorer regions. It may be just as true to name another block of countries and call it Chreece, that’s countries such as Greece in the euro, and regions of China, that need a cheap currency.

But what is clear is that in the parts of China where industrialisation is advanced, two things are required. Higher wages for workers (paid for at the expense of corporate profits), and a more expensive currency in order to stop inflation taking off, and to make goods
more affordable for Chinese consumers.

Whether such a policy would help the other regions in China remains to be seen.

Before the economic crisis, China was allowing gradual appreciation of the yuan, but this stopped when the developed world crashed into recession and China worried about the effect this would have on its exports.

This weekend, China experts hinted that at last it was reversing this policy and once again the yuan may be allowed to appreciate slowly.
On balance, the move is probably good news. But many economists have already started saying it is too little and China must do more.

We are not so sure. If China was to let the yuan trade freely, then given the market turbulence right now the result of this policy is unpredictable. But there has to be a chance that markets will rush into the yuan, ditching their dollars and euros and sterling, even gold, and fill up their coffers with yuan. In short, we may see a yuan bubble. And as a result the yuan may rise far too high, and rise to a level that is above purchasing power parity.

This would have a number of effects that could be undesirable all round.

Firstly, a rapidly rising yuan could be the one thing that could trigger inflation in the West.

Secondly, China’s greater purchasing power would make it a much greater economic rival to the US. It is unlikely that the politicians on Capitol Hill who have been lambasting China for its currency policy, really want this.

Thirdly, a rapidly rising yuan would kill off economic growth in some Chinese regions, creating social unrest and possibly political instability. And do you really want political instability in a country that is fast rivalling the US for economic might?

So, it’s good news that China is allowing the yuan to appreciate. But it is even better news that it will be controlled, with gradual appreciation.

But as the world frets over the yuan, George Osborne is fretting over his budget. France is fretting over its plans to cut the deficit, and the CBI is worried about strikers.

See Osborne makes finishing touches as France looks for light touch

© Investment & Business News 2013