US TRADE WITH CHINA

Global imbalances" have been seen as a threat for so long that it's tempting to conclude that the world economy is, in fact, in harmony. That said, many things still look out of whack. From Spanish property to emerging market debt, asset prices and valuations are stretched. Consumer indebtedness, particularly in Anglo-Saxon countries, is at record levels. Other indicators, such as currency market volatility and risk premiums are well away from long-term trends. But the most commonly cited "imbalance" is the US trade deficit.

Many are blaming China and point to its ballooning surplus with the US, which now exceeds $200bn. In Washington, Congress in particular is gunning for sanctions. A simplified solution is for China to revalue its currency and, if vice-premier Wu Yi received a dollar each time this was requested at this week's bilateral talks, she could almost have returned home and solved the trade deficit single handedly.

If this is the biggest problem facing global stability, then worryingly, there appears to be no managed solution in sight. China is well aware of the negative effect that a strong renminbi would have on its export-fuelled growth and has given no ground. And it wouldn't just be Chinese companies that suffer – little is said about the hit to margins for foreign companies with significant manufacturing exposure to China. A sharp appreciation may also cause a shock to the rest of Asia, which, although receiving a step gain in competitiveness, has been grateful for cheap Chinese imports.

That means the deficit will probably have to unwind at the US end. Indeed, the US dollar has already fallen against most other currencies, particularly the euro. The most damaging "solution" would be if imports fall as a result of a contraction in consumption, possibly due to recession. And with Japan still weak, it is debatable whether Europe could support global growth alone. Best to hope these imbalances do not topple over any time soon.