Greenspan urges more flexible yuan

Greenspan urges more flexible yuan

Peter Harmsen, Agence France-Presse, Beijing

U.S. Federal Reserve Chairman Alan Greenspan on Tuesday urged China to adopt a more flexible exchange rate system for its currency, the yuan or renminbi (RMB), saying he believed it would happen "reasonably soon."

"The issue of allowing flexibility in some form in the RMB strikes me as very much to the advantage of China and indeed it's something that I am certain they'll take on reasonably soon," he told a banking conference in Beijing.

At the same time, the American economy was unlikely see major benefits from a more flexible Chinese currency, he said via satellite from the United States.

"In the event the RMB rises relative to the U.S. dollar, the United States will likely import less goods from China but that does not mean that our current account deficit or our trade deficit will shrink very much, if at all."

Goods from China would simply be displaced by goods from "other, only slightly lesser low-cost sources," and the American net balance of payments structure would not see a major impact, he said.

Contradicting Greenspan's belief of an early Chinese move on the currency, the country's central bank governor Zhou Xiaochuan told the same conference that China needs time to bring about greater exchange rate flexibility.

"We will push forward the reforms step by step. Past experience has told us that gradual reform is successful," Zhou said.

"China needs to prepare exchange rate reform in several ways. We must reform financial institutions to prepare for the future environment of exchange rate flexibility," he said.

He addressed the idea that a Chinese currency appreciation would be panacea for solving the world's economic woes, saying excessive expectations would be "too heavy a burden on our shoulders."

China has never given a timetable for loosening up its exchange rate system and insists it will not be forced into one.

European Central Bank president Jean-Claude Trichet told the same conference that even though China would benefit from a stronger currency, it was up to Beijing to make the decision.

"It's in the interest of China to augment the value of its currency vis-a-vis other currencies in the world," said Trichet, arguing it would improve the terms of trade for China.

But he added: "It's an issue for the Chinese authorities. They have to make up their minds what's best for them."

Toshiro Muto, the deputy governor of the Bank of Japan, also argued that "it is up to Chinese colleagues to select specific exchange rate regime and to determine the timing for its introduction."

One of effects of the ongoing delay has been to push the central bank into aggressive mopping up operations to soak up the extra investment money flows betting on a yuan revaluation that have entered the banking system.

In part the inflows are being blamed for triggering overheating in an already fast growing economy.

Greenspan said the cost of this sterilization exercise, aimed at reducing the impact of such foreign fund inflows on China's domestic money supply, cannot continue forever.

"The sterilization of foreign assets cannot go on indefinitely and the pegging of the exchange rate and the way it is being done subsidizes certain types of inefficient capital allocation in the Chinese economy," he said.

The yuan is effectively pegged at 8.28 to one US dollar and China has come under sharp criticism from trade partners for maintaining an exchange rate that is seen as giving its exporters an unfair advantage.

International ratings agency Fitch Ratings said on Tuesday China is unlikely to adjust its exchange rate policy in the near future.

Any move towards a more flexible exchange rate would trigger a drop in fixed-asset investment, the main driver of economic growth, and lead to a slowdown, it said.