An employee counts yuan banknotes at a branch of Bank of China in Taiyuan, Shanxi province.STRINGER SHANGHAI/Reuters
Forget Mitt Romney's accusations about China being a currency manipulator. The black-market money changers of Beijing say the country's slowly strengthening yuan is starting to hurt business.
"It is ordinary people, traders who are impacted by this," said a chain-smoking money changer near an eastern Beijing bar district. His magazine stand conceals the piles of cash used to convert the U.S. dollars of his clients – Chinese overseas workers and employees of foreign embassies. But business has been slower than usual, he said, as the stronger yuan gives Chinese more reason to spend their money somewhere else. "The higher our money appreciates, the more Chinese people will go abroad. The rest of us don't enjoy much benefit."
The yuan has hit record highs this fall, driving speculation that the currency, long criticized as artificially undervalued to support the country's export-driven economy, is on a new path upward. But those gains may be nearing an end ahead of a major political transition in China, which begins later this week.
China's currency has long been a political lightning rod. U.S. officials have urged China to allow the yaun to appreciate, which would drive up the cost of many Chinese exports and make U.S. and other goods more price competitive. In a recent debate, Mr. Romney, the Republican presidential candidate, vowed to label China a "currency manipulator" if elected.
But even as the yuan climbs, experts say politics will once again stem the rise. "I think a lot of people are waiting for the U.S. election and the Communist Party congress," predicted Gavin Wang, head of trading at Bank of Montreal China. Mr. Wang said expectations of further currency appreciation are fading.
"We don't see people expecting the Chinese yuan to appreciate in the forward market," he noted. "People are only coming into China for market opportunities such as equities … but they don't have much expectation for the currency itself."
The yuan reached its strongest-ever close against the U.S. dollar – 6.24 yuan per one greenback – on Oct. 31. The gains have been driven by loose monetary policy in the U.S. and a raft of high-profile IMF and World Bank meetings, along with the U.S. election. The People's Bank of China sets a daily midpoint for trade in yuan, also known as the renminbi, which tends to be higher ahead of such events.
The People's Bank pledged in its third-quarter report last week to support China's slower growth in the face of weakening exports, despite evidence of early signs of recovery. Though it said the yuan would be given greater flexibility in trade, its value would remain "basically stable."
Foremost on the minds of bankers and every other Chinese policy maker's mind now, however, is the once-in-a-decade change of power that starts Thursday with the 18th Communist Party Congress opening.
Vice-premier Li Keqiang and vice-president Xi Jinping – the only two members from China's powerful Standing Committee of the Politburo not due to retire – are expected to replace Premier Wen Jiabao and President Hu Jintao. Though the transition will not be complete until March, the composition of the country's new standing committee, which functions as an appointed cabinet, is usually revealed at the congress close, sometime around Nov. 15.
Its makeup will determine how much economic reform lies ahead for the state.
"The Chinese side also has an interest in the future to liberalize its currency," said Li Wei, a professor of economics at Beijing's Cheung Kong Graduate School of Business. "More reforms will come and probably more towards financial market liberalization, widening the trading band further and removing some restrictions on capital flow. All that will help create a deeper market for the yuan to a wider market outside China."
And China's near-abroad market is the influence that Mr. Romney, and even President Barack Obama, may not be taking into account. Researchers at the Washington-based Peterson Institute for International Economics have found that seven of 10 East Asia nations – South Korea, Taiwan, Singapore, Malaysia, Philippines, Indonesia and Thailand – now allow their currencies to follow the yuan more closely than the U.S. dollar, reflecting their growing trade relationships with China.
"This is a new development – and this shows that central banks and markets react to the daily movements of the renminbi. For us, it can be explained by the dominance of China in trade," Martin Kessler, a research analyst at the Peterson Institute, wrote in an e-mail interview. "In this regard, there is very little the U.S. can do to change this trend – especially with aggressive rhetoric. In the long run, economics trump politics, and the importance of China as a trading partner overshadows political pressures."