Did China just try to tilt the US election in Obama’s favor?

Obsession
US Election
Obsession
US Election

China’s currency hit a 19-year high against the US dollar today. While the yuan is just barely up on the year, 0.4% stronger versus the dollar, the pace of appreciation has picked up. Since the end of August it is up 1.3%. In Chinese monetary policy, where slow-and-steady is the plan, that’s a big deal. Here’s a look at how many US dollars (cents really) ¥1 has bought over the last 20 years. The big drop on the left is the yuan devaluation of 1994.

CNY USD

And it’s somewhat surprising to see because a strong currency makes China’s exports, the engine of its economy, more expensive to the rest of the world. Since the government sets the exchange rate, most would expect it to be weakening the currency now, when the economy is slowing. So what’s going on here? Well, some think Chinese policy-makers are playing politics with the currency markets.

The Financial Times reports (paywall):

Analysts have put forward different explanations about why the central bank would allow the renminbi to strengthen against such a bleak backdrop.

Dariusz Kowalczyk, a strategist with Crédit Agricole CIB, said the upcoming US presidential election could be a factor.

“It would be in Beijing’s interest to see Obama re-elected, given Romney’s tougher stance on China. Thus, the PBoC may be trying to help Obama to make the argument in the next debate that he has succeeded to pressure Beijing into appreciating the [renminbi],” he wrote in a note.

As we mentioned yesterday, China is notoriously sensitive to the appearance of being told what to do by the West. And Republican presidential hopeful Mitt Romney has taken a decidedly tough line while on the campaign trail, saying he’d label China a “currency manipulator” and accusing President Barack Obama of being too soft on China. Such anti-Chinese positions could be helpful in industrial states such as Michigan and Ohio that are crucial to winning the November vote.

There might be other reasons, though, why China would would allow its currency to appreciate at the moment, as the FT notes. China has been trying to lower rates and ease financial conditions. But even so it is stopping short of the pedal-to-the-metal stimulus that it pumped into the economy during the worst of the financial crisis. While that helped shore up growth, it also spurred twin problems of inflation and risky banking. If China’s currency gets stronger, that acts as a dampener on inflation. So letting the yuan rise in value against the dollar might not be the worst idea right now. And if it China earns a little political capital in the process, so be it.

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