MPhil W2 Translation

Worse than all these misunderstandings is how the protectionist elements want to respond. Congress may think retribution against Beijing would be politically popular, but this could prove a grave misjudgment. The sort of tariffs envisaged would push up the shopping bills of US consumers at a time when they are already borrowed up to the hilt. And at a time when the Federal Reserve is set to push US interest rates yet higher, the extra inflation caused by making Chinese goods more expensive would only add to the pressure for still more increases.

That is bad enough. But where a protectionist Congress would really be playing with fire is over the impact of any more radical yuan revaluation on a US bond market, where sky-high valuations already look very vulnerable.

So far, the massive Chinese purchases of US Treasury bonds needed for Beijing to restrain any rise in the yuan have helped to drive down Treasury yields, keeping market interest rates for American companies and consumers pleasantly low. If China now curbs or ceases this helpful intervention an inevitable side-effect of it bowing to the US congressional demands the bond market would tumble, and the market rates that determine the mortgage costs of millions of Americans would surge. Recession would be a real risk.

Surely this severe economic and political price is not one that Congress will want to pay simply to score a few cheap points against China.

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