The two candidates vying for the White House have been locked into "yesterday's war" by claiming that Beijing is manipulating its currency, and they risk overestimating the challenge China's economy is posing to the United States. Consulting financial markets adds some perspective.

Check the offshore "nondeliverable forward" market rate of exchanging Chinese yuan into US dollars and you will find the yuan already depreciating six months from now, signaling a reversal into safe havens like the US of capital flows otherwise heading into the Asian economies and currencies. A recent IMF report has indicated a downward currency trend over the longer term.

Once Chinese mainland's currency begins being overvalued relative to the currency market trend, US policy will be forced to flip and be in sympathy, rather than in conflict, with Beijing keeping the exchange rate fixed, or at least stable. Beijing resisted depreciation pressure on its currency following the 2008 financial crisis, keeping the yuan's value fixed for two straight years.

Both candidates have addressed the fear factor that China's economic growth has been opportunistically overtaking the US. But at Euromoney's Global Borrowers and Asia Investors Forum in Hong Kong last week a speaker declared, the Chinese mainland is "a drag on the Asian economies". She went on to say the rising minimum wage is having a negative impact on the economy, and it will continue to do so as long as there is no transition to higher-end output. At the same time she said Beijing needs to increase the wage share of its economy, which would conveniently crowd out non-reported income. During appreciation of the yuan between 2005 and 2009, the unit labor cost in the Chinese mainland increased 21 percent in favor of the US, "so, it's no wonder the growth rate in China's exports has been collapsing", she said, with the growth rate in exports to the US slowing relative to the growth rate in imports from the US. Meanwhile the US economy has been regaining resilience, with manufacturing being reborn.

The Chinese mainland is the first major economy in history where the investment share of the economy exceeds the consumption share. That makes, as the speaker pointed out, the producer price index, which is now negative, more important than the consumer price index to Beijing. In other words, like Japan, the Chinese mainland "is already in a deflationary environment" caused by investment growth which, while originally promoted to cope with the aftermath of the 1997 Asian financial crisis, has put investment in excess of demand for the past 10 years. Too much investment too fast has resulted in the massive misallocation of capital, and led to the current outflow of capital that's poised to put new downward pressure on the value of the yuan, and preempt another stimulus of the likes of 2009-10.

Remedying the situation entails, in the words of another speaker, "first and foremost squeezing State-owned enterprises to face risk" and to enable "resources to flow where they are best used", to enable massive efficiency improvement and growth through privatization and decontrol of the services sector. Furthermore China needs to further marketize commodity pricing, develop a credit market to enable financing of mergers and acquisitions and social financing" and to disable misuse of the property market as a money market, and reform social services by creating local government revenue sources and putting them on a sustainable footing.

The abundance of low priced shale gas has been a big factor in the US' economic recovery.

China has a golden opportunity to share to an even bigger extent than the US, in the shale gas revolution, as the International Energy Agency estimates that it has 50 percent more shale gas than the US. But China still lacks a robust open-access natural-gas pipeline distribution network, its only missing piece of world-class infrastructure, to get such gas to market.

Clearly the writing is on the wall how the US and China can coordinate their economies for greatest mutual benefit, and it has nothing to do with currency manipulation.

The author is a Beijing-based economic advisor.

(China Daily 10/31/2012 page8)