Greenspan says days numbered for Japan, China dollar-buying
WTF?
Is Greenspan begging for a lower US$?
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Greenspan says days numbered for Japan, China dollar-buying
WASHINGTON (AFP) - Japan and China must curb massive intervention to depress their currencies or face far-reaching economic consequences, Federal Reserve chairman Alan Greenspan warned.
Combined, the two Asian economies had built up more than a trillion dollars in US assets in a frenetic buying spree: an "awesome" 650 billion dollars for Japan and 420 billion dollars for China, Greenspan said.
Since the start of 2002 alone, Asian central banks -- particularly in China and Japan -- had spent nearly 240 billion dollars on US assets to cap their currencies and protect exports, he said.
At some point, however, the staggering rate of accumulation of dollar assets by Japan must slow and eventually cease, the 77-year-old central bank chief said.
"As the present deflationary situation abates, the monetary consequences of continued intervention could become problematic," Greenspan warned.
"The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan."
Booming exports helped Japan report annualized growth in gross domestic product of 7.0 percent in the third quarter of 2003, its strongest performance in more than 13 years.
Despite the heavy Japanese intervention, the yen appeared to be "elevated" against the dollar because of an extraordinarily heavy Japanese preference for buying yen-denominated assets, he said.
Beijing's massive buying of dollars, meanwhile, threatened to create a glut in the monetary base and a consequent overheating of the Chinese economy, Greenspan said.
Beijing had mopped up some of the excess liquidity created by its purchases of US assets by cutting loans to Chinese commercial banks, selling bonds and requiring banks to keep higher reserves.
But a broad measure of Chinese money supply -- M2 -- had still grown 20 percent in 2003 and a little less so far this year.
"Should this pattern continue, the central bank will be confronted with the choice of curtailing its purchases of dollar assets or facing an overheated economy with the associated economic instabilities," Greenspan warned.
"Lesser dollar purchases presumably would allow the renminbi (yuan), at least temporarily, to appreciate against the dollar."
China's foreign exchange chief Guo Shuqing warned last week the financial authorities risked losing control of the economy as speculative money flooded the banking system on a currency revaluation bet.
"The growing surplus in the balance of payments is putting increasing pressure on the independence of monetary policy," Guo said.
Other East Asian central banks, trying to tie their currencies to the yen or the yuan had accumulated another 120 billion dollars in reserves in 2003 and appeared to have kept up the pace in 2004, Greenspan said.
A widely held view that Asian intervention propped up the euro was probably wrong, he said.
When Asian countries bought dollars from the private sector, those institutions were inclined to buy more dollars to rebalance their investments, he said.
As a result, those deals tended to lower the euro against the dollar.
"The strength of the euro against the dollar thus appears to be the consequence of forces unrelated to Asian intervention."
The recent weakening of the dollar -- down 12 percent against major trading partners' currencies since early 2002 -- should help to curb America's current account shortfall, Greenspan said.
The US deficit appears on track to easily exceed half a trillion dollars in 2003.
But only a free global economy could help avoid a future crisis when the day of reckoning for the US deficit arrived, Greenspan said.
"Should globalization be allowed to proceed and thereby create an ever more flexible international financial system, history suggests that the odds are favorable that current imbalances will be defused with little disruption to the economy or financial markets," Greenspan said.
Worse outcomes were possible, however, he warned.
"Consequently, it is imperative that creeping protectionism be thwarted and reversed."
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