Paul Krugman has joined the political fray in the US on this question in recent months. In his New York Times column on 11 March he used Australian economist Trevor Swan’s famous analysis to tag the renminbi as a currency that must appreciate.

That’s where the agreement between Krugman and Huang (and other American economists like Bhagwati) ends. What is important to note is the distinction between the nominal exchange rate (what the rate of exchange between renminbi and US dollars is in the market today) and the real exchange rate (how each currency tracks against the other after changes in Chinese prices and American prices are taken into account). It is the real exchange rate that ultimately affects competitiveness. And if the renminbi exchange is held down, competitive markets in China will lead to inflation and appreciation of the real exchange rate (as holding the renminbi exchange rate up during the Asian financial crisis to take the pressure off China’s neighbours led to deflation and depreciation of the real exchange rate). There are some laws in economics that you can’t escape. The Chinese authorities seem to understand this pretty well. And appreciation of the currency to alleviate inflationary pressures is, as Krugman suggests, in China’s national interest.

But Huang is right that a whole lot of other things need to be done in America as well as China to ‘deal with’ the current account deficit and unemployment in the US and the current account surplus and other problems in China. A sharp nominal appreciation of the Chinese currency could be damaging to the global economy. The rest of us need to keep a very clear head on this if the storm breaks over China and the US as it threatens to do. We shall have more analysis of the storm as it brews.