Greenspan clashes with White House
[greenspan is toast - he will not be reappointed chair]
The US Federal Reserve chairman fears the effects of floating China's currency
THE White House insisted last night that it still wants China to float its currency on world markets — despite a warning from Alan Greenspan that this would be a high-risk move posing serious dangers to global recovery.
The Federal Reserve Chairman’s stark advice on the potential fallout from a yuan float came in a letter that Richard Shelby, chairman of the US Senate’s powerful Banking Committee, released.
Mr Greenspan wrote that if China moved to abandon the yuan’s controversial peg to the dollar it could lead to a flood of money out of China, destabilising its financial and banking system. The Fed Chairman went on to give warning that if this were to happen the resulting upheaval could also undercut recovery in America and around the world.
The blunt comments from Mr Greenspan appeared to be a tacit warning to the growing band of US politicians responding to popular unease over Chinese competition for jobs and markets with demands that Beijing float the yuan.
But with the US presidential election only eight months away and Senator John Kerry, the leading Democratic challenger, increasingly leaning towards protectionist rhetoric, the White House insisted that it still wanted the yuan’s value set on the currency markets.
“Our policy remains the same. Our policy is very well known,” said Scott McClellan, President Bush’s press secretary.
In his letter to Senator Shelby, the Fed Chairman said: “Many in China fear that removal of capital controls that restrict the ability of domestic investors to invest abroad, and to sell and to purchase foreign currency, which is a necessary step to allow a currency to float freely, could cause an outflow of deposits from Chinese banks, destabilising the system.”
Up to 50 per cent of Chinese bank loans are going unpaid, Mr Greenspan noted. He said that this was only sustainable because Chinese bank depositors did not withdraw their funds.
The Fed Chairman suggested that if a yuan float did destabilise China’s vast economy, the consequences would not be restricted to within its own borders, nor to within Asia. “Financial instability in a major emerging market economy such as China would present a risk to the global economic outlook,” he wrote.
American critics of China believe its dollar peg is holding the yuan at artificially low levels, giving a huge boost to its exports to the US. The politically sensitive US trade gap with China hit a record $124 billion (£67.5 billion) last year.
Chinese exports to other countries have also surged as the dollar’s fall has taken the yuan’s value sharply lower against rival currencies, making Chinese goods cheaper worldwide.
Under China’s present policy, the yuan is kept in a tight range of 0.04 per cent around a peg of 8.278 per dollar.
But the stance also creates substantial problems for Beijing. All of China’s foreign currency earnings from its exports are converted into yuan by its companies.
Unlike Western central banks, the Chinese are unable to neutralise the inflationary effects by selling bonds to mop up the extra cash since there is no private market for such paper.
The result is surging foreign reserves at its central bank, and an overheating of the domestic Chinese economy.
For these reasons, most analysts expect that China will move to a more flexible exchange rate — but only gradually, and at its own pace.
“I think they will move to suit their own domestic needs,” said Gerard Lyons, chief economist at Standard Chartered.
“The key issue (for them) is domestic economic stability.”
Mr Lyons believes that the most likely first step would be for Beijing to widen the band in which the yuan moves, later this year. But he does not expect a revaluation of more than 10 per cent.
Mr Greenspan’s letter acknowledged first steps by Beijing to lay the groundwork for change. The Chinese Government “seems to be moving to strengthen their banking system”.
But the Fed chief added that steps to “eliminate state interference in banking decisions” and forge a “viable credit system” would be required before any eventual free float of the yuan.
business.timesonline.co.uk |
