China's exchange rate policy has largely been viewed through the prism of global imbalances. That has had three unfortunate consequences. It has allowed China to deflect attention away from its policy. It has obscured the real victims of this policy. And it has made political resolution of this policy more difficult.

No sooner is China's exchange rate policy criticised for creating global imbalances, and hence contributing to the recent global financial crisis, than the door is opened for China to muddy the intellectual waters. Why single us out, the Chinese say? Why not the other surplus-running countries such as Japan or Germany or the oil exporters? And, in any case, countries on the other side of the imbalance – namely, the large current account deficit-running countries – should carry the greatest responsibility for pursuing irresponsible macroeconomic and regulatory policies that led to “excessive consumption”. This debate cannot be settled. But inconclusiveness is just what China needs – and creates – to escape scrutiny of its policies.

The second consequence of the global imbalance perspective is that it has created an opposition between current account deficit and current account surplus countries, which has become a slanging match between the US and China. But an undervalued exchange rate is above all a protectionist trade policy, because it is the combination of an import tariff and an export subsidy. It follows therefore that the real victims of this policy are other emerging market and developing countries – because they compete more closely with China than the US and Europe, whose source of comparative advantage is very different from China's. In fact, developing countries face two distinct costs from China's exchange rate policy.