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Source: Reuters -
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Along with the Greek sovereign debt crisis, the other big international issue keeping financial commentators and economists up at night at the moment is the building spat between the US and China over currency manipulation.
While China has long been accused of keeping its currency weak to benefit its exporters, this issue has reached a new alert level in recent weeks...partly because of a debate sparked by the Nobel prize winning economist Paul Krugman.
In this story a couple of weeks ago Krugman argues that the US should play hard ball with China and impose a surcharge or tariff on Chinese imports of 25%.
He believes the US has reached a point where it can no longer afford to sit back and take a softly softy approach to the Chinese having an under-valued currency.
Krugman believes China's current practice of pegging the yuan to the US dollar is costing its trading partners jobs and severely hampering world growth.
A weaker yuan makes China's exports more competitive and also discourages the Chinese from importing more as imports are more costly.
What the likes of Krugman want is for China to step up and start importing more from the world and consuming more. They argue if this was to happen, it would boost global growth, allow others to export more, and lead to a more balanced and robust economic recovery.
Remember China is a massive holder of US debt and has a massive surplus of cash, while the US and other western nations are massively in debt and desperately need to start saving more and increase exports.
Krugman's comments have drawn plenty of flak from within and from outside of the US.
Many commentators feel Krugman is simply looking around for someone to blame for the US's self-inflicted debt problems.
Some don't agree the yuan is actually overvalued, while others, who possibly agree with his analysis on the issue, do not agree with the idea of playing hard ball. They feel China will eventually allow its currency to appreciate on its own accord as it moves to cool rising inflation.
They now worry that China will dig its heels in and take longer than it otherwise would to lets its currency rise...because it can't be seen to be caving into US criticism. The issue of the Chinese currency could really take off on April 15 when the US Treasury is due to give its latest update on whether countries are engaging currency manipulation.
Apparently it usually fudges the issue of China, but this time there is plenty of pressure coming on for it to act tough and not just from Krugman but also members of the US Congress.
An escalation of this spat would not be good; because even a hint of a serious trade dispute between the world's two biggest economies would be bound to spook markets and potentially hurt global confidence and growth.
That is a worry for New Zealand.
In addition - as the IMF recently pointed out - New Zealand, which has seen strong growth in exports to China, is also now at increased risk from any slowdown in the Chinese economy.
These are all risks that are worthy of sleepless nights.
