* Yuan rallies to record high against dollar
* Rally began in July, picks up speed in last week
* Acceleration sparks speculation of political motives
* U.S. presidential candidates have argued over yuan value
* Higher yuan could help China blunt criticism currency
undervalued
By Gabriel Wildau
SHANGHAI, Oct 19 (Reuters) – China’s currency hit a record
high this week in a rally that has been accelerating, prompting
speculation over whether Beijing is behind the move to try to
dampen criticism in the U.S. presidential debate that the yuan
is undervalued.
Washington has been a persistent thorn in China’s side,
complaining for years that the government keeps the yuan’s
exchange rate artificially low to boost its exports and grab
market share, ultimately costing American jobs.
“I don’t disagree that central bank policy could be behind
the yuan’s recent rise,” said Zhang Zhiming, head of China
research for HSBC. “But on the other hand, it’s not like there
are no alternative explanations that can support a strong yuan
without policy buying.”
Most dealers say there are plenty of economic factors to
justify a rally that began in July, such as a pick up in the
country’s trade surplus.
At most the central bank may have used higher daily fixings
in recent weeks to signal its tolerance for a higher exchange
rate, which could help blunt criticism repeated in the U.S.
presidential debate that the yuan is undervalued.
Claudio Piron, head of emerging Asia currency and
fixed-income strategy at Bank of America Merrill Lynch, said
higher yuan fixings could be a response to the U.S. campaign
rhetoric but other elements are probably driving the rally.
“It’s a nice story, but I think there are other factors that
suggest there are limitations to how far it can run,” he said.
The People’s Bank of China (PBOC) has historically
controlled the yuan closely through currency intervention and by
setting a reference rate for the start of trading each day,
known as the daily midpoint.
The currency is limited to a daily trading range against the
dollar of 1 percent either side of the midpoint.
That means the yuan moves more slowly compared with the
currencies of more open economies, which is why a 2.4 percent
rally from a 2012 low in July to a record high on Thursday of
6.2446 per dollar raised eye brows, e sp ecially as it coincided
with deepening concern over the prospects for the world’s
second-biggest economy.
CALCULATING ROMNEY?
As the rally entered September, the central bank appeared
keen to restrain the rise, frequently s etting the daily midpoint
at a weaker level than the day-earlier close.
Last week, it changed course, setting stronger midpoints as
if to endorse the currency’s strength and so raising market
speculation there was a political motive behind the trend.
“We continue to believe that the strong fixings may reflect
China’s desire to support the current U.S. administration ahead
of the U.S. elections in November,” Dariusz Kowalczyk, senior
economist at Credit Agricole CIB, wrote in a research note on
Monday.
The argument is that China would prefer President Barack
Obama to stay in office because Republican challenger Mitt
Romney has promised a tougher line on Beijing on trade and the
currency.
Romney reiterated this week in a televised debate with Obama
that he would label China a currency manipulator on day one of
his presidency if elected on November 6.
Obama defended his tough-on-China credentials. “As far as
currency manipulation, the (Chinese) currency has actually gone
up 11 percent since I’ve been president because we have pushed
them hard,” he said in the debate.
Analysts note that the consequences of the “manipulator”
label are less severe than commonly understood anyway.
“The dirty little secret here is that labelling China a
currency manipulator just triggers consultations on the issue.
Which is why, actually, I think Romney is pushing this – he
knows it doesn’t mean much,” wrote Simon Lester, trade policy
analyst at the Cato Institute, a Washington, D.C.-based think
tank that favours libertarian economic policy, including free
trade.
“Look at the language Romney uses here. He says he will do
this (sanctions) ‘if necessary’. Here, then, he leaves himself
wiggle room. He can take some time to negotiate with China,
study the issue, and ultimately decide that the tariffs are
unnecessary,” Lester wrote.
The U.S. Treasury said earlier this year that labelling
China a currency manipulator was not warranted because the yuan
had risen against the dollar, China’s trade surplus had dropped
and Beijing was committed to currency reforms.
Last week it chose to delay issuing its latest review on the
subject until after the election, prompting further criticism
from the Romney campaign.
STRONG EXPORTS, WEAK DOLLAR
Dealers suggest factors closer to home explain the rise in
the yuan.
Trade surpluses in the four months of June through September
picked up sharply compared with the first five months of the
year, rising to $111 billion from about $38 billion.
That contributed to a rise in China’s foreign exchange
reserves of $50 billion in the third quarter, reversing much of
the previous quarter’s $65 billion drain.
Barclays says that outflows of “hot money”, or speculative
funds, slowed down in the third quarter $54 billion from $166
billion in the previous quarter.
Indeed, economists say there may have been a net inflow of
“hot money” in the quarter as the U.S. Federal Reserve’s
third-round of quantitative easing delivered funds into global
markets.
Some of that money could be backing bets in China that a new
leadership due to be unveiled in November will be more
aggressive in trying to lift the economy. Hong Kong’s Hang Seng
index has rallied for seven straight weeks.
In addition, a factor pushing the yuan higher since late
July has been the recovery of the euro and other non-dollar
currencies in the wake of the Fed’s QE3 and aggressive action by
the European Central bank to stem the euro zone debt crisis.
Last week, PBOC Deputy Governor Yi Gang said the yuan is
close to its equilibrium level and that the central bank has
“dramatically reduced” its intervention in the market.
Analysts say Yi’s comments and the rise in FX reserves
suggest the central bank has not been intervening in the
currency market even if the rise in the yuan helps China fend
off criticism over its currency.
“I think the political consideration is there too,” UBS
economist Wang Tao said.
(Editing by Jason Subler and Neil Fullick)
