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Be careful what you wish for, as the Chinese like to say. Washington wanted the world’s third biggest economy to curtail exports and, as a means to that end, to stop “manipulating” its currency. Ta-da. Chinese exports bombed 25.7 per cent in February, partly because its currency is at its strongest in real trade-weighted terms since 1993.

But keep the champagne on ice. Renminbi strength is a headache for Beijing and, ultimately, the rest of the world. For one, it suggests China might no longer be competitive. That sounds counter-intuitive. China’s persistent trade surplus also suggests it can’t be true. Yet Chinese companies might only export because they have to, not because it is profitable. Guangdong’s leaders reckon an eighth of foreign joint ventures in their region are closing.

The traditional response to such problems is to devalue. The odds are China will not actively do this. But it might sit by while market forces do their work. In recent years, when investors wanted exposure to fast growing economies, Beijing struggled to control speculative inflows. If these now reverse, local investors could join foreigners and switch out of renminbis. China’s mighty pile of foreign exchange reserves would then contract. The trade surplus is shrinking, although January and February tend to generate smaller surpluses. So, too, is foreign direct investment. Rationally, a depleted forex kitty should matter little to China, but it would dampen sentiment, speeding the renminbi’s depreciation.

The ripple effect from that could be huge. The price of Chinese exports would fall. That could likely spark a wave of beggar-thy-neighbour devaluations by other Asian exporters – and put pressure on countries further afield. Germany, the world’s largest exporter, is already struggling against the expensive euro. Protectionist pressures could rise, especially in the US. It is not a pretty picture.

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