China's reluctance to significantly revalue its exchange rate is understandable in a high-growth, high-savings economy based around manufacturing, artificially cheap capital, a very low exchange rate, and a fear of the social consequences of rising unemployment.
The central premise of his argument is that once a relatively low exchange rate is established, investors and businesses have a clear view of the better profit margins on offer from exports and will invest more in the latest machinery and industrial processes.
A reason for preferring devaluation common among emerging economies is that maintaining a relatively low exchange rate helps them build up foreign exchange reserves, which can protect against future financial crises.
Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own :currency.
Maintaining an artificially low exchange rate "is equivalent to a set of import tariffs [and] export subsidies, as far as the trade account is concerned," he notes, adding: "In the last 30 years, we have made great strides in lowering trade barriers.
