Last month the PMI for manufacturing produced by Markit, fell to 49.4 – suggesting the sector contracted in July. The official PMI stayed above 50 in July, but only just. The good news for August was that both indices were up. The Markit index rose to 51, so that was quite a hike for one month.

The two indices are still low by historical standards, and clearly China needs to look elsewhere if it is to maintain stellar growth in GDP. But at least the forward indicators for manufacturing have lifted.

Meanwhile, the yuan has risen sharply against the dollar. So that will help to pacify US senators. It is of course a complete coincidence that the rise coincided with Larry Summers, who is the head of Barack Obama’s National Economic Council, paying a visit to Beijing.

It’s funny that. The yuan always seems to rise just before these politically sensitive moments – as it did just before the last G20 summit.

Meanwhile, India closes in on China’s position as the world’s fastest growing large economy. GDP in the 12 months to the first quarter of India’s new financial year was 8.8 per cent. India is now breathing right down China’s neck.

India’s growth is to a large extent coming from internal demand. This is not always a good thing, but right now, while the world is still grappling with global imbalances, India’s economic growth may well prove to be more sustainable than China’s.

So that’s China. How is Europe faring? Last week saw the latest GDP figures. Europe’s recovery continues

Uncle Sam enjoys some relief.
China sees manufacturing pull up from recession level as India booms
Europe’s recovery continues
UK stutters

They call it the Dutch disease, after the Dutch guilder was pushed up on the strength of oil exports, leaving the rest of the economy uncompetitive. But the UK has often suffered similarly. Much of the decline in UK manufacturing during the 1980s can be put down to North Sea oil pushing sterling up too high. And more recently the success enjoyed by the City meant UK exporters suffered under a pound that on occasions was ridiculously expensive. You may recall that before the recession, the dollar/sterling exchange rate actually passed 2.10 to the pound. The euro/sterling exchange rate made life for UK exporters to the Eurozone almost impossible.

But since then we have seen a kind of race to the bottom, or would it be more appropriate to call it a limbo dance contest. The dollar, sterling and the euro are all down. And since the yuan is still tied to the dollar, then so is China’s currency. The UK is winning this particular contest, although in recent months, her limbo act has not been quite so impressive, with sterling rising to 1.22 euros this morning.  (Remember, not so long ago some warned that parity with the euro beckoned.)

One of the great losers in the currency limbo dance is Japan. Money has sloshed around the international economy, finally pushing the yen upwards.

Bloomberg quoted Eisuke Sakakibara, the man who once enjoyed the description of Japan’s top currency official, saying “there is a chance the yen will reach an all-time high [relative to the dollar] and stay at that level for the time being.”

And with the yen so high, you can see why her economic performance has deteriorated. Japan’s quarter on quarter growth has fallen from 1 per cent in the first quarter to just 0.1 per cent in Q2.

Germany, by contrast, is growing on the strength of the cheap euro. It was only a year or so ago when China finally surpassed Germany as the world’s biggest exporter. German exports between January and May this year were up 15 per cent compared to the same period last year. On the other hand, France and Italy have each seen exports grow by 10 per cent; Greece has seen exports rise by a mere 1 per cent (figures non seasonally adjusted).

The UK’s export growth has actually been faster than Germany’s, up 17 per cent; it is just that imports have grown 16 per cent, too. The UK’s exports to the Eurozone have grown by 14 per cent and imports by 11 per cent, so, seeing things from the UK’s point of view, at least the balance of trade with Europe has been improving.

Intriguingly, exports to China from the EU shot up by 42 per cent. Imports rose by just 17 per cent (figures seasonally adjusted). So it would appear Europe’s trade position with China is improving quite rapidly.

Unfortunately, the US–China situation is getting no better. According to the Telegraph the yuan actually suffered its biggest fall in almost two years last week. A couple of months ago, just before the G20 summit, China revealed plans to relax the link with the dollar, and allow some appreciation. It seems this was little more than a PR stunt, designed to keep the heat off China at the summit.

The Telegraph quoted Sander Levin, chair of the House Ways and Means Committee, who said: “We must ensure that the international trading system ensures fair rules of competition. There is no real question that China’s deliberately undervalued exchange rate is unfair, contributes to global trade imbalances, and costs the US jobs.” He called for trade sanctions against China.

The reality is that the dollar/yuan arguments are complex. The case against China is not as clear cut as some US politicians would have you believe. See: Truth or myth, free trading yuan is answer to our ills  and China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong

Mind you, the rise in the yen is daft. Japan’s public debt relative to GDP is even higher than Greece’s. Why money is flooding into Japan is a bit of a puzzle.

But with the US economy slowing markedly, and with Japan expanding by a mere 0.1 per cent in Q2, putting it close to recession, the danger is we will see another slow dance, and judging by the row between the US and China, one that will be bereft of smooching.

The latest trade data tells a story of growing imbalances. China’s trade surplus in July was $28.7bn, not far short of an all-time record. Exports have surged 38.1 per cent year on year; imports were up 22.7 per cent, but more to the point have fallen 10 per cent over the last four months on a seasonally adjusted basis.

Earlier this year China posted a surprise trade deficit. Many hailed this as evidence she was relying less heavily on exports. But the truth is, the deficit was a one off, and was probably caused by the surging price of oil. Even then, China’s surplus with the US was as big as ever.

But then again, China is a great assembler of parts made elsewhere. It imports components, assembles them, and then exports them. The fact that imports have been falling may be a sign that exports are set to fall, too.

The latest Purchasing Managers Index from KPMG/Markit suggests Chinese manufacturing is in recession. Furthermore, this is a far better forward indicator than the trade figures. Don’t be surprised if the export recovery has passed its best, and from here on exports fall quite rapidly.

And that brings us to the other piece of China-related news

According to Peter Kirkman, Manager of the JPM Global Consumer Trends Fund: “The rise in aspirational spending, particularly in places like China, has been quite staggering. While some brands, especially luxury brands, may be under pressure in the West, their sales growth in certain emerging markets, powered by consumer demand is rising very quickly. This gives us a chance to play the aspiration story through established Western companies that have been more successful at building their brands globally. This should mean that many established brands will continue to prosper as demand for aspirational goods continues to rise.”

Kirkman has been hailing the emergence of the consumer in the developing world. He said: “It’s clear to us, that there is a global shift in consumption towards emerging markets. By 2015 emerging markets are expected to account for 37% of global consumption, which will make it the largest consumer by region ahead of the US and Europe.”

Kirkman’s predictions relate more to the developing world in general, rather than China in particular. But plenty of others are waxing lyrical about China’s prospects as a great consumer.

Goldman Sachs is such a lyrical waxer. As is Anthony Bolton, the famous fund manager, who now lives in Hong King. He runs Fidelity’s China Special Situations Fund, and recently said: “The key sectors the portfolio is exposed to include a number of retailers such as department stores and sports goods retailers, electrical goods, shoes and jewellery producers and other areas driven by consumer spending such as wine and spirits, restaurants, hotels, automobiles, telecom and internet.”

One thing is for sure: the trend is down, but, with one notable exception, they are still high by historical standards and point to robust growth.

Before we reveal what the PMIs said, just bear this in mind: a score of 50 indicates no change. Anything above 55 is good, 60 exceptional. Anything with a four in front, say, 49, indicates contraction for the particular areas the index relates to. So, if an index measuring employment falls below 50, that means there were net job losses.

The UK PMI, from CIPS/Markit fell, but from a near record high. Back in April and May this index stood at 58, the highest reading since the middle of the 1990s. In June it dipped to 57.6, and in July it was down again to 57.3. The latest reading is still impressive. As you probably know, the UK expanded at 1.1 per cent quarter on quarter in Q2. Economic forecasts for 2010 suggest this growth rate will fall sharply in Q3 and Q4, maybe even fall to zero. But if the PMI is any guide, there are no signs yet of this dip. Q3 started with a PMI score for manufacturing consistent with above average growth. The PMI for services is due out tomorrow; let’s see what that says.

But one nagging worry lingers. The index tracking new export orders fell to 50.7. When you consider the index was at 60.5 in April, that was quite a drop. If the trend continues – well, then the implication is not good.

Across the pond, the PMI for manufacturing, produced by ISM, fell to 55.5 from 56.2 the previous month, and from 60.4 just a few months ago in April. The trend is worrying, but the current level is still consistent with growth of around 4 per cent, which is really not bad at all. The index tracking employment in the manufacturing sector stood at 58.6. The US manufacturing sector now seems to be taking on staff at a healthy rate, and in time this should lead to a rise in consumer spending which should help lift other sectors.

The bad news relates to China. Yesterday it was told here how the PMI from the Chinese Federation of Labour fell from 52.1 in June to 51.2 in July. Then last night, an alternative measure, produced by HSBC/Markit was released, and this index was down to 49.4. It was the first time this index had fallen below 50 since March 2009.

China faces a serious set of challenges. Clearly manufacturing is in the doldrums. With its main export market – Europe – in such dire straits, and in any case trying to import less and export more, it is hard to see how China’s export led boom can continue at the level it has become used to. With bank loans to local governments looking decidedly iffy, China desperately needs its consumers to spend like they have never spent before. See: China’s double whammy
http://www.investmentandbusinessnews.co.uk/china/chinas-double-whammy/

And finally, we have the global PMI produced by JPMorgan/Markit. This fell from 55 in June to 54.3, the lowest reading seen this year. However, while the index is down, it remains above the historical average. The PMIs in the first half of this year had the highest average readings since the first half of 2004.

China aside, it is too early to tell whether the fall in PMI is simply the inevitable consequence of the sky high levels they reached earlier in the year, in which case there’s room for optimism; or whether the downward trend points to trouble ahead.

So here is your question for today. In which country have wages increased sevenfold since 2000, when measured in US dollars?

Answer: Russia. You won’t be surprised to learn that with a wage growth rate like that, the consumer sector has boomed, but, says HSBC, is still in its infancy by Western standards.

As for the stock market, the Russian stock market is trading at just five times 2011 earnings.

Contrast this with India, for example, where the stock market is trading at 14.2 times earnings.

But HSBC struck a pretty bullish note in general on the BRICs, with Nick Timberlake, Head of Emerging Market Equities at HSBC Global Asset Management, saying: “Key emerging economies now have the financial fire power to mitigate the effects of lower export growth through home grown consumption.” He said: “A rising middle class combined with low penetration and pent up demand for goods such as computers, mobile phones and automobiles, has unleashed strong internal demand within these markets.” He added: “Amid a population of 2.7 billion people in the BRIC markets, representing approximately 40% of the world’s population, rising affluence is fuelling growing demand for goods. Domestic consumption is also a key driver of intra-BRIC market trade. The BRIC markets are no longer as heavily dependent on the developed world. For example, Brazil’s biggest trading partner is no longer the US but China.”

If HSBC is right it is good news all round. The developing BRIC economies, which typically produced more than they bought, had become reliant on Western borrowing to fuel their growth. It may have taken a major economic shock to have the desired effect, but it is becoming clear the all-important readjustment is occurring.

As the middle class across the BRIC block becomes both larger and richer, an opportunity emerges for the West too, as export markets at last begin to open up.

But while the HSBC report makes interesting reading, in the longer run Russia is in danger of suffering from a Japanese-type malaise. Its population is expected to fall from 141 million to 126 million in 2050. Its elderly support ratio, that is to say working adults to retired, is expected to fall from 6 to 3 by 2050. India is expected to see its elderly support ratio fall from 13 to 5; China from 9 to 3; and Brazil from 10 to 3. Like Russia, China’s population is expected to rise modestly, from 1.3 to 1.4 billion; India’s is expected to grow from 1.2 to 1.8 billion; and Brazil’s from 193 million to 215 million. But Russia’s demographic challenge is more immediate, with 13 per cent of its population currently over 65, compared to 8 per cent in China, 7 per cent in Brazil and just 5 per cent in India.

Russia could solve this problem through increasing immigration, but let’s face it, unless your name is Tony Hayward, it seems unlikely you would want to migrate to Siberia.

China is a lucky country. In the UK, US and Europe we have to content ourselves with one Purchasing Managers Index (PMI) for Manufacturing. China has got two. It’s got one report produced by the Chinese Federation of Labour, another produced by HSBC and Markit. Yesterday saw the release of the Chinese Federation of Labour measure. This has now fallen to its lowest level in 17 months. The other report is due out later today.

The Chinese PMI fell from 52.1 in June to 51.2 in July. You need to bear the following in mind. Firstly, any score under 50 is meant to indicate recession; secondly, the average in 2009 was between 55 and 56; and thirdly, the index has now fallen for three successive months. In fact, last month, this column picked up on the fall in the index and warned that if there was another drop in July then we know it is time to get concerned.

There are mitigating factors. Well, there is one mitigating factor. Traditionally the May to July period has always been one in which the PMI has performed badly. So, while a further fall in the index over the next few months would point to recession, history tells us it is more likely to rise.

The other piece of worrisome news relates to a rumour flying around last week that only a quarter of bank loans to Chinese local government investment vehicles are likely to be repaid from the projects that the bank loans funded. Of the rest, around half are expected to be repaid, but from non project-related revenues. And around 23 per cent are unlikely to be repaid at all.

Capital Economics has worked out that even if bank loans go bad on that rather horrific scale, the Chinese government can comfortably afford a banking bailout.

But whether China can afford a banking bailout or not, is surely not the point.

The fact that loans to local governments are going so horribly wrong is yet another indication of the Great Bubble of China. Billions of dollars have been invested into projects that seem to be worth nothing. And China sees roads that appear to lead nowhere, shopping malls bereft of customers, and a growing catalogue of investment projects sitting idle.

Combine this with the plight in the PMI, then one is left asking where will future growth come from?

Superficially, the answer is obvious: it’s China’s consumer. This is why news that China’s unions have successfully won big pay awards for the workers they represent is greeted as being good for the economy.

In the longer term the challenge facing China is a bit more complex than that.

Take a sideways move for a moment and consider one of economic theory’s more important ideas: the Solow-Swan growth model. The idea behind this theory is that in a mature economy, new investment has little impact upon economic growth. In such an economy, only innovation can create an environment ripe for growth. It is worth re-reading that, it is an important point: in a mature economy, investment does not lead to growth.

Now that may seem a little daft, but see the theory from the point of view of a farmer. Our farmer has a good, reliable combine harvester, and reckons his farm is about as efficient as it can be. There is no point in the farmer buying another combine harvester, as the second machine would just be lying idle. Sure, the farmer would need to ensure his combine harvester is maintained, and when the machine gets old he may need to replace it, but there would be no need to increase the value of his farm’s capital goods. Only if there is a new innovation leading to more efficient combine harvesters, would there be a good reason to buy a new one. Such a farm is analogous to a mature economy.

At the end of the Second World War none of the world’s economies were at that mature stage. All of them were deficient in capital goods and infrastructure. And so it was that investment led to a rise in production capacity, and the global economy enjoyed a golden age of 25-years of growth. This age surely came to an end when the gap between potential and actual had fallen so that new investment hardly led to more growth at all.

In short, by the mid 1970s, the developed world had become a block of mature economies, reliant on innovation creating the potential for more growth. Alas, consumer demand still continued to rise at the rates seen in the previous quarter of a century; as a result demand outstripped supply, and we got inflation.

China is still way off the mature economy stage. Its potential growth is still very significant.

Sure, it has factories and shopping malls lying idle, and sure, debt levels in some parts of the economy are too high, but China can grow into this spare capacity, in much the same way a child can grow into a coat that initially was too big. As long as growth is greater than the rate of interest, then debts are affordable.

Doubtless house prices may be too high in parts of China, but growth will mean these proprieties will become affordable quite rapidly. If sustainable property prices are defined by the relationship between average wages and average price, and the ratio is too high, then one of two things can happen to bring the ratio back into balance. Either prices can fall, or salaries rise. In the West we don’t really have the luxury of the second option; in China they do.

Clearly China has problems ahead, although an outright recession seems highly unlikely. Clearly the economy is riddled with bubbles, but that is inevitable in any fast growing economy.

But any comparison with Japan twenty years ago, when stellar growth turned to a lost decade, is wrong. Japan had simply moved from developing to mature economy status. Its problems since can be explained in part by the inevitable upheaval that comes when an economy moves into this mature stage, and in part by the ageing of its workforce. China has neither of these two problems, not yet.

China’s challenge is different. It is so large that a question mark hangs over where the consumer demand will come from to meet the rises in potential capacity. We now know that the rest of the world is just too small to provide this demand indefinitely. The economy is now adjusting, with the consumer taking up some of the slack. But it is inevitable that there will be times during this changeover when demand rises either too fast or too slow, and China will need to get used to suffering from an economic cycle, complete with booms and recession, just like the rest of us.

This is a tad ironic, because it seems that the IMF can’t even make up its own mind over whether the yuan is undervalued at all.

Yesterday saw the publication of a new report from the IMF on China. And it was good.

“Growth is expected to continue to be robust, while the inflation outlook appears benign,” said the IMF report.

Of course China does have a problem, or is that problems.

Capital Economics put it well yesterday: “China is seeking to rein in bank lending and hold to a conservative fiscal stance while maintaining rapid economic growth. It cannot do all three.”

Clearly China cannot rely on exports as its engine of growth – the US and European consumer has run out of puff. China is trying limit bank lending, and is spooked by its fiscal deficit. Actually, China’s fiscal deficit is a mere 2 per cent of GDP, but after lecturing Western economists on their recklessness, China’s attitude towards government borrowing is one of extreme caution.

The best piece of news on China has been the recent trend of wage increases. What China needs is to see a higher proportion of the money that corporate china is generating to be taken out of those profits and fed into wages.

But what about the yuan?

This is what the IMF said: “Several directors agreed that the exchange rate is undervalued.”

But then it also said: “However, a number of others disagreed with the staff’s assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus.”

The truth is, the cheap yuan is not the demon it is made out to be.

The arguments have been rehearsed here before, but here is a brief recap.

China’s policy of keeping the yuan cheap is little different from the policy adopted by the US in the nineteenth century when it was a developing economy. So the US is being just a touch hypocritical in calling for China to do things that it patently did not do.

China is a big country. While it could be argued that a more expensive yuan would benefit some regions, other regions desperately need the yuan to stay cheap. There is a parallel here with the problems in the eurozone.

If China was to truly open itself up to international markets, then Chinese savers may well put their money into investments abroad. No one knows what effect this would have, but there is a possibility it would keep the yuan down.

If the yuan was allowed to appreciate, then China’s international standing would automatically become greater. Its GDP measured in dollars would close in on US GDP; its defence budget would be similar in size to the US budget; its companies would enjoy much higher capitalisation – for example, Petro China would dwarf Exxon Mobil. It seems unlikely that the US politicians who are so vocal in their call for a floating yuan have factored in the resulting rise in China’s political might.

The above arguments do not mean that the yuan should not be allowed to appreciate. China needs more consumer spending, and a more expensive yuan would be an important step in that direction.

But the arguments are complicated, and the case for a rising yuan is not as clear cut as some would have you believe.

What has that got to do with anything? Well this toeing and froing seems to be a phenomenon of the economy, too. And in best Chuckle Brothers fashion, the object they are passing back and forth is not very pleasant.

First off it was the US economy with its sub prime woe. “From me, to you,” said Uncle Sam, as the eurozone picked up the debt burden and plunged into debt crisis.

But the last few days have seen the economic poison passed ever more rapidly. Two days ago, doubts that China was going to crash into recession were growing. But the bad news was passed on, and over the weekend talk of a US double dip recession seemed to drown out everything else. What could possibly top that, you might ask? Well, Uncle Sam has had enough already: “From me to you,” he said this morning, and this time we could see a crisis spasm, but in Hungary. Don’t be dismissive of the problem in the making just because it is only little old Hungary. This one has got legs.

But at least one development out of China, or at least a part of China, could change things for the better.

Uncle Sam’s latest double dip warnings

First off, then, what is the latest evidence to point to double dip in the US?

You probably know, a second fall in US house prices seems inevitable. The inventory of unsold stock is so large, and demand so low, that it is difficult to imagine any other outcome.

Last week saw a report from the Council of Economic Advisers indicating that the US government’s $862bn fiscal stimulus package created between 2.5 and 3.6 million jobs. It seems there are two major arguments against creating jobs from fiscal stimulus. The first argument is that such injections of money can crowd out the private sector. A bloated public sector means less innovation and fewer dynamic businesses creating new opportunity. However, while we have some sympathy with this argument when applied to the UK, in the US this criticism may not be valid. After all, this recession has seen not only US unemployment soar, but also productivity. This points to a private sector that is becoming more dynamic, and has plenty of spare capacity. It certainly does not indicate that the public sector is crowding out the private sector.

The second argument against fiscal stimulus relates to what will happen when the stimulus is over. The US government cannot boost the economy via massive borrowing indefinitely. So if an unsustainable fiscal stimulus created around 3 million jobs, presumably an austerity drive like the ones that are being enacted in Europe, and which is surely inevitable for the US eventually, would lead to large-scale job losses.

So that was Exhibit A amongst the most recent evidence pointing towards a US double dip.

Exhibit B is US consumer confidence. There are two key US consumer confidence indices. This column tends to focus on one, the index from the Conference Board. Last week we told how this had fallen sharply in June. But although the drop was severe, all it did was to cancel out the rather impressive rises seen in the previous two months. So the drop needs to be seen in context.

The latest development is from the other index, from the University of Michigan, and we are breaking our normal practice and reporting on it. The index plummeted from 76 to 65.5, and in the process pretty much cancelled out all the rises seen over the last year. In other words, consumer confidence is now at the same level it was at during the recession.

Exhibit C is news on US inflation. Consumer prices fell 0.1 per cent in June. The annual rate was 1.1 per cent. Paul Ashworth, Senior US Economist at Capital Economics said: “With the unemployment rate still above 9% and the recovery showing signs of faltering, the medium-term risk of deflation (meaning the next few years rather than the next 12 months) is even greater than before. The reality is that prices and wages react with a considerable lag to shifts in output and employment. Japan’s deflation didn’t begin until 1994, four years after the collapse in asset prices began. Accordingly, we would caution that the most recent rebound in core prices is no reason to declare victory over deflation. The threat will be with us for a number of years yet.”

Hungary’s resistance to austerity proves futile

Meanwhile in Europe, the IMF and Hungary’s government have had a falling out.

The row is over austerity. The IMF wants Hungary to impose more of it, the government said no. As a result, the IMF has withdrawn the remainder of its lending facility to the country.

Of course, the financial package from Hungary is a joint deal put together by the IMF and the EU. Maybe we are seeing a good cop–bad cop act, with the IMF playing the nasty one. But we know Germany must be grateful. Germans hate the idea of their money being used to bail out countries that are not willing to undergo the pain that they themselves went through under reunification.

The jury is out on the long-term implications of the IMF–Hungary dispute. If Hungary cannot raise the money it needs from this source, then default may be the alternative. If Hungary defaults, other Eastern European countries may follow.

The other side of the jury argues that the fallout will force Hungarian politicians, and maybe more importantly voters across indebted Europe, to face reality.

Our money is on default. It has been argued here many times that the real problem is not debt, it is saving. Globally, we had a savings glut before the credit crunch, and it has not gone away. Default is the inevitable consequence.

Stress tests

Meanwhile, the results of the stress tests of EU banks are being dismissed before they have even been revealed. Well, actually, it seems half the banking world are worried about what the tests will reveal. The other half says they won’t reveal much, and as a result we should ignore them.

Do remember, in the build up to the Iraq war, the US government said Iraq must be hiding weapons of mass destruction from the weapons inspector, otherwise he would have found them.

It is like that with the stress tests. Either they will reveal bad news at the banks, say the cynics, or the tests have been fiddled.

Maybe that’s part of the problem. We are so busy looking for bad news, that it increases the chances of that bad news actually emerging.

Hong Kong reveals minimum wage

It is funny how a measure that for so long has been hailed as socialist policy, is being celebrated by capitalists.

From next year there will be a minimum wage in Hong Kong. From 2011 it will be illegal to pay workers in Hong Kong less than the equivalent of US$4.23 an hour. For a place as maddeningly expensive as Hong, that rate is pretty low. Pity the worker who earns just that amount and has no family to fall back on.

Even so, it is still the latest of several signs pointing to higher wages in China. Earlier in the year the Chinese government revealed plans to get wages up. Since then waves of strikes have led to wage increases.

Don’t be dismissive of the importance of this.

It is popular in the UK to blame the union movement as the cause of Britain’s plight back in the 1970s.

Just recall, economic growth is still a youngster. Until the 1820s GDP per capita had risen at a snail’s pace for millennia. In an innovative economy, demand must rise in tandem with potential, or else the economy is derailed.

In Roman times, economic growth per person was tiny, because the economy was built on slavery and through conquest. The story of the Roman economy is the story of the slowest inflating and then bursting bubble in history.

The Victorian trade union movement may have been the surprising catalyst for the economic miracle of the last 200 years. (That and the development of a banking system based on debt.)

It could be argued of course, that just as China’s currency should be more expensive, so too should Germany’s.

The snag is, Greece and the rest of the so-called PIIGS share the same currency with Germany.

But, as we have said here before, China is more complicated than that. Other parts of China are poor, and actually need a cheap currency. So that is why we have said you could describe another region of the world as Chreece.
But the analogy breaks down, we said, because the poor regions of China don’t have the same issues of debt as Greece does. Well, it appears even that is wrong.

According to Liu Jiayi, who is the top man at China’s National Audit Office, the problem of debt in some regions of China “is large, and the burden is quite heavy.” The Telegraph quoted Mr Liu as saying that “the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc.”

The Telegraph also quoted Victor Shih, a professor at Northwestern University in the United States, as saying “The worst case is a pretty large-scale financial crisis around 2012.”

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