The war of words between the U.S. and China regarding the Chinese currency appears to be entering a new, more serious phase, particularly in light of developments on Taiwan arms sales, visits with the Dalai Lama, and Google’s imminent departure from the country.

Hopefully neither side will be reading Ambrose Evans-Pritchard’s latest thoughts on the matter as this could just push one or both sides over the edge.

China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.

Within a month the US Treasury must rule whether China is a “currency manipulator”, triggering sanctions under US law. This has been finessed before, but we are in a new world now with America’s U6 unemployment at 16.8pc.

“It’s going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we’re not going to get anywhere,” said Paul Krugman, this year’s Nobel economist.

It looks as though Krugman is taking a stand on the China currency issue, citing it as a “significant drag on the global economy” in commentary yesterday.

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