The U.S. economy is facing enormous imbalances, and there is a rising sense that China's renminbi will be the scapegoat. Two years after recession, real GDP growth is less than half of the rate seen in previous post-war slumps. Unemployment is higher than normal, despite interest rates and inflation at a 40-year low. Exports should be rising about 14 percent, but are actually contracting on an annualised basis. The parts of the economy usually ready to take off at this point -- such as consumer demand, investment and imports -- are starting to fade.

In the run-up to next year's presidential election, there is a very real risk that Washington will look abroad for a quick fix, and that would derail Hong Kong's nascent recovery. Our own first-half slump was SARS-driven, with trade the sole beacon of hope. That critical driver -- three times as important as domestic demand -- is now under threat. The threat is not just the slow U.S. recovery, but also the possible repeat of a horrific policy failure from 1985.

Washington is steeling itself to devalue the dollar much further than has happened to date, and China is being set up as the fall guy.

The U.S. imbalances are getting dangerous. The trade deficit requires US$1.5 billion a day in foreign financing, half again as much as the previous record under Ronald Reagan. The fiscal shortfall, expected to top 5 percent of GDP, is not far below the 20-year-old record.

The so-called twin deficits, trade and fiscal, are a near duplicate of the conditions that led to the Plaza Accord. In September 1985, the U.S., U.K., France, Germany and Japan sat down to reengineer the world's main exchange rates. That agreement saw the dollar fall by half against other major currencies. The result set in place the conditions that caused the Japanese bubble to expand and burst, damaging that economy for more than a decade.

Their goal was to stimulate demand outside the U.S. -- and most particularly in Japan -- to help the world's largest economy reduce its dangerous imbalances. In that they were successful: in real terms, growth in Japanese imports rose from an average of 1.6 percent a year in 1983-85 to 11.3 percent in 1986-88. At the same time, U.S. imports slowed, from 14.5 percent per annum to 6.1 percent a year.

One side effect of this tinkering was to drive down inflation in the then-European Economic Community (now the EU) from 5.9 percent a year in the three years prior to the Plaza Accords to just 2.8 percent. Germany and Japan ran a real risk of deflation in the process, as their average annual rates of household inflation slowed to just 0.4 percent and 0.6 percent, respectively, in 1986-88.

If any of this sounds familiar, substitute China for Japan, and 2003 for 1985. The key factors are in place for a repeat of the disastrous (for Japan) Plaza Accord. The U.S. is feeling tough and aggressive; the economy is out of kilter; unemployment is high and rising; the budget has more red ink than a paint factory; and a single Asian nation is being set up to take the blame. It looks like 1985 all over again.

The differences, however, are critical. First, Chinese imports rose nearly 43 percent in the first seven months of this year and more than 20 percent per annum in the previous four years. This is no under-performer. Second, consumer prices have fallen in three of the past five years, and even when rising have not topped 1 percent since 1997. A sharp appreciation of the renminbi would drive China back into deflation. Third, China is far poorer than Japan was in the mid-1980s, and cannot afford to take the risks associated with exchange rate manipulation. The country needs to create tens of millions of jobs every year, and the star performer is exports.

Our domestic economy has been hammered but trade is doing very well. Two-way commerce, in the 12 months to end-June, was the largest in history, as was our trade with the rest of China. The key factor today is whether trade will remain strong enough to turn Hong Kong's recovery into sustainable growth.

Two-way trade is three times larger than our domestic economy, and every previous recession but one was caused by slumping demand abroad. The reverse is also true: Hong Kong has never had a recession when trade was strong. In 1974-75, 1998-99 and again in 2000-01, the drop in foreign trade pushed Hong Kong into recession. The only exception was in 1985, when growth in trade remained positive.

What would another Plaza Accord mean for Hong Kong? If the renminbi appreciates sufficiently to curb the American appetite for imports, growth in China will slump. Exports will fall and imports barely grow at all. That will hit Hong Kong's trade, hard. Further, the 43 percent of our imports that comes from the rest of China should rise in price. While a little inflation might sound good just now, there would be no corresponding pick-up in our own economic activity.