A major spat is growing between the two world superpowers, the historic No.1, the US, and the rapidly expanding economic force of China. The Americans have been trying to push China into revaluing its currency, the renminbi, for some time now, and their patience is wearing thin. The Chinese, however, are quite happy to continue with what is effectively a fixed rate to the dollar.

So what have the Americans done to raise the stakes? They've gone and put quotas on Chinese exports of trousers, shorts and underwear. Given the vast behinds of a large proportion of US society, this must be a huge market.

With the Chinese currency pegged to the dollar, China's current account surplus is growing, and that of the US is in deficit. This is compounded by the fact that 75 per cent of the current account surpluses of the world's surplus countries, not just China, are invested in the US, keeping the dollar high. Japan, China and South Korea together hold more than a third of the world's central bank foreign exchange reserves.

One solution for the US would be for it to do a Harold Wilson, and devalue its own currency. This would be unpopular domestically, and be massively opposed in Europe, particularly among exporters taking advantage of what has been a relatively high dollar exchange rate.

So, what about China? They have argued that their financial systems are not sophisticated enough to cope with a free floating renminbi. This excuse can only hold for a limited time, as the country is clearly very good at making money in the first place.

China is effectively two economies rolled into one. The more familiar coastal China, including Shanghai, has 450 million people living in a wealthy, vibrant, emerging market. The less familiar inland China, relying mainly on agriculture, has 750 million people still living in a poor developing country. With even less credibility than the UK's unemployment figures, it is estimated that China's rural unemployment is more than 150 million.

This merely emphasises quite how dynamic the coastal areas are. Emerging markets typically fare best with flexible exchange rates, so, on balance, it would suit everyone for the Chinese currency to be allowed to appreciate.

The recent fall in the dollar/sterling exchange rate has helped the dollar earners within the UK stock market. As global earners, we are talking about larger companies, predominantly among the FTSE 100. Giants such as BP, HSBC, Vodafone and GlaxoSmithKline have taken advantage, pushing the FTSE back towards the 5000 level.

Vodafone, the world's largest mobile phone group, announces full year results today. With cash being generated in huge amounts, it is hoped that the current miserly dividend can be increased significantly.

Barely a day has gone by in recent weeks without a well-known retailer warning of a slump in consumer spending. Certain to share in the gloom is Marks & Spencer, which announces full-year results today. Last month's trading update warned that the clothing division had seen an underlying fall of seven per cent in sales last year, while food sales were down by 2.8 per cent on a like-for-like basis.

Burberry, favourite of the chavs and the chav-nots, is doing better. It also opened a new store in Beijing last month, so if the Americans are short of checked trousers, they know where to go.

* For investment advice contact Anthony Platts on 01642 608855.

Published: 24/05/2005