Yuan Rules and the 2010 U.S. Election

November 18, 2009

A shift away from the yuan’s fixed peg at 6.83 per dollar had been a top goal of Team Obama’s Asian trip and is now one the week’s largest embarrassments.  Chinese officials rebuffed the request more forcefully than necessary and turned the object of complaint around to Washington’s neglectful dollar policy.  This public posturing backs Beijing officials into corner.  Although it is not known if they were more compromising in private talks and just how lively the internal debate has been among Chinese officials over the pros and cons of a resumed yuan appreciation, it would be hard for Beijing to reverse its denial of Obama’s request soon without losing face.  This is November 2009.  If the Fed funds rate is still under 0.25% a year from now, which is hardly an unreasonable assumption, the U.S. recovery will have been sufficiently unstable to expect the dollar to be any stronger, and it is highly unlikely that the yuan will have decoupled from the dollar.  Already, China’s currency has relinquished half of its post-3Q07 trade-weighted gains and in such terms has risen only marginally more than 3% per annum on balance since the initial dollar peg observed in 1997-2005 was detached.  The yuan’s net rise will be even smaller by November 2010.

All this spells trouble for the Democrats in next year’s mid-term elections.  They’ve been counting on sustained economic recovery to recapture their voter appeal, but elections respond to trends in wealth and jobs, not GDP.  President Bush was reelected in 2004 with just 2.3% per annum U.S. growth in his first term, whereas Carter was trounced in 1980, taking just 49 electoral votes to Reagan’s 489 votes in spite of U.S. growth of 3.2% over the prior four years.  Growth is unlikely to be fast enough to reduce U.S. unemployment much, if at all, but there will be enough U.S. and global expansion to generate significant increases in the U.S. and Chinese trade imbalances.  A failure by Obama to influence yuan policy will hit the administration with a two-fisted punch, eroding its image for competence in both foreign and economic policy.  A war in Afghanistan with no end in sight would constitute strike three, and health care is yet another possible third rail.  The urgency for a breakthrough on yuan policy will mount as the coming twelve months unfold.  One wonders where Team Obama will find the leverage to prod greater flexibility on that issue from their Chinese counterparts.  The danger is that U.S.-Sino relations are about to become more confrontational.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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