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Thursday, July 17, 2003

Now Greenspan Joins the Act

Now it's Alan Greenspan's turn to try to put pressure on the Chinese authorities to revalue the yuan. While an upward adjustment is inevitable, and eventually will be desireable, my feeling is similar to that of Stephen Roach: this is not the time, and this is not the solution to the global growth problem. At the same time Andy Xie cogently argues that any such revaluation would only add to internal deflationary pressure, and would do little to change US and global prices.

Alan Greenspan, chairman of the US Federal Reserve, on Wednesday warned that the Chinese authorities could not continue to peg their currency without endangering their domestic economy. The comments, in front of a congressional committee, add to a chorus of concern among policymakers about China's insistence on fixing the renminbi against the dollar. Mr Greenspan suggested that the renminbi would have to be allowed to float, saying the current campaign of intervention to support it was unsustainable. "It has required them to. . . be very heavy purchasers of US dollar-denominated assets," Mr Greenspan said. "At some point they will no longer be able to do that, because it will create an inability of their monetary system to function well."

Asked directly if the authorities should let the renminbi float, Mr Greenspan said: "I think that from an economic point of view, it's going to be increasingly evident that that is what is going to have to happen if the existing cost structures around the world remain as they are. And I think the Chinese are sufficiently sophisticated to understand that."

Inflows of "hot money" into China have recently forced the central bank to buy an average of $600m (£422m) a day to keep the currency steady against the dollar. This pushed China's foreign exchange reserves above $340bn by the end of June from $316bn at the end of March. The surge is viewed by many as evidence of the undervaluation of the currency. Mr Greenspan noted that John Snow, the US Treasury secretary, had already advised the Chinese authorities that they should float their currency.

The Fed chairman's words are part of an increased willingness among American policymakers publicly to discuss floating the renminbi. Though they have generally avoided directly pressing China on the issue - believing that it might be counter-productive - US officials have praised moves towards greater flexibility in the Chinese exchange rate.

Mr Greenspan on Wednesday questioned whether public pressure on the Chinese would actually help move their private discussion along. The US administration is also under pressure from the US business lobby, particularly manufacturing, which says that Asian currency manipulation is costing American jobs. China's trade surplus with the US grew from $28.2bn in 2001 to $43.3bn in 2002.
Source: Financial Times

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