CHINA lays disputed claim to the invention of chess, and, appropriately, yesterday’s latest, carefully timed move to liberalise its foreign exchange regime was a cunning gambit worthy of a grandmaster.

Simultaneously, the easing of capital controls deployed by Beijing makes it diplomatically harder for the US to accuse China of failing to push on with exchange rate reform; politically easier for the Bush Administration to try to quell congressional demands for retaliation against the Chinese; and economically delivers greater benefits to China than to America.

It is a strategy almost worthy of Sun Tzu, China’s renowned 6th century military genius.

It is obvious that the decision to announce the freeing-up of China’s official restrictions on outflows of capital is designed to ease simmering trade tensions with the US.

With yesterday’s action, Beijing underlined for Washington consumption its commitment to further foreign exchange reform.

President Hu Jintao can now fly into the US capital with an unchallengeable claim that he has made the yuan regime more market-orientated, just as the White House, US Treasury, senators and congressmen have demanded. China can argue that capital-account liberalisation is an essential prelude to a free float of the yuan.

At the same time, with the US Treasury and the White House reluctant to see the economic confrontation with China escalate, Beijing’s ploy will give the Administration vital ammunition to fend off the more aggressive protectionist elements in Congress at a time when the imminence of November’s US mid-term elections is making China-bashing one of the most popular games on Capitol Hill.

The reality, that yesterday’s measures were merely yet another small, technical step in China’s slow and incremental passage towards a liberalised currency system, does not much diminish the political and diplomatic potency of the steps taken.

But any expectation in Washington that Beijing is ready to move from such small stepping stones to take the great leap of a substantial yuan revaluation, or a float of the Chinese currency, are grossly misplaced.

China is not ready for that phase of the game and will not be for some time. A modest revaluation of the yuan is welcome to Beijing as China’s authorities seek to prevent the booming economy overheating and stem the inflationary side-effects that spill over from their aggressive currency market intervention.

However, China still needs robust growth, for political stability if nothing else, and a sharp rise in the value of the yuan, making its exports less competitive at a time when its cost base is already rising markedly would threaten that.

Beijing will also be acutely conscious of the potential that still-rising US interest rates may yet put the dollar on an upward path this year. With China’s yuan still effectively linked to the dollar, that may drive up its value against other leading currencies. Already, this phenomenon has pushed the yuan’s overall, trade-weighted value up by 10 per cent last year.

Nor is China likely to concede to the US a target for a further appreciation in the yuan, which has been creeping slowly but steadily upwards since last July’s revaluation.

As Julian Jessop of Capital Economics points out, that would conflict with Beijing’s insistence that the currency’s value is now determined by “market supply and demand” — even if this is not really true. It would also encourage speculators’ belief that the yuan is a one-way bet, and can only rise, encouraging a further flood of “hot money” into China and adding to its challenge in fending off inflation.

So instead, Beijing is likely to continue attempting to placate the US with further tactical gambits like yesterday’s.

But the irony of yesterday’s capital-account liberalisation is that while easing the diplomatic tensions between the two sides, and the domestic political pressure on the White House, it makes the yuan more prone to depreciate than to rise.

By allowing more capital to flow out of its economy, the scale of present upward pressure on the yuan will be curbed — even if, in practice, the initial impact will be muted by a range of more powerful forces pushing in the opposite direction. And, crucially, China has not said how much capital it will allow to flow overseas.

With America’s political temperature rising ahead of the mid-term polls, the temptation will still be for senators to pursue a range of Bills in Congress seeking retribution against China for unfair competition. And shortly after Mr Hu flies back to Beijing, the Administration will have to take the tough decision on whether to denounce China as a currency manipulator in the Treasury’s twice-yearly currency report to Capitol Hill. For now, it is “your move, Mr Bush”.

Times Recommends

• Darling under pressure on record public debt
• Mortgage drought deepens on 32% lending fall
• Oil prices firm after 10% drop to below $130