A recent by Dani Rodrik paper in Vox outlines the advantages of China's currency policy:
If growth depends primarily on the supply of modern manufactured products and other tradables as opposed to services and non-tradables, as I think it does, the Chinese position has more force than critics give it credit. The conventional fix for China’s current account surplus, consisting of a combination of expenditure expansion and currency appreciation, will shift the structure of the economy away from tradables and towards non-tradables. This may be good for macroeconomic balance in China and elsewhere, but it will almost certainly have adverse effects on China’s growth – perhaps large enough to even endanger the country’s social and political stability.
Rodrik then makes the case for currency undervaluation as a tool for development:
The reason that undervaluation of the currency works as a powerful force for economic growth is that it acts as a kind of industrial policy. By raising the domestic relative price of tradable economic activities, it increases the profitability of such activities, and spurs capacity and employment generation in the modern industrial sectors that are key to growth. As discussed in detail in Rodrik (2008), the association between undervalued currencies and high growth is a very robust feature of the post-war data, particularly for lower-income countries.
But isn't this a justification for a "beggar thy neighbor currency" policy, which will trigger south-south trade tensions? The cheap renminbi not only harms Italian shoemakers and American tire factories, but also Vietnamese, Indian and Bangladeshi manufacturers. If China can use currency undervaluation to grow itself out of poverty, why shouldn't every other developing country?
Rodrik argues that China could replace the cheap renminbi with direct subsidies of tradable goods, which would boost domestic consumption while keeping Chinese exports competitive:
It is possible to let the renminbi appreciate, and hence eliminate the trade surplus, as long as complementary policies are put in place to support modern tradables more directly. Such policies, combined with macroeconomic policies targeted at the current account, can achieve both external balance and structural change in favour of modern tradables. It is better to subsidise tradables directly than to subsidise them indirectly through the exchange rate which also happens to tax the domestic consumption of tradables.
But wouldn't this mean that other would-be industrial powers would have to do the same? Isn't this a zero-sum game, with the biggest player setting the rules?