the fed and the yuan

[Jonathan Lassen <jjlassen@xxxxxxxxxxxxxxxxxxx>]

Hi,

What do people make of the nearly unanimous call for China to revalue the
yuan and/or go off the dollar peg? Industrialists, US senators and now Alan
Greenspan and EU officials have jumped on the bandwagon.

Cheers,

Jonathan

2003-07-16
Financial Times
<http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1057562469743>http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1057562469743


by Alan Beattie and Christopher Swann

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 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.

Commenting on the US economy, Mr Greenspan sought to correct a false
impression that he had completely ruled out the use of unusual measures
such as buying Treasury bonds outright to combat deflation. Bond yields
rose sharply on Tuesday after Mr Greenspan said that such measures were
most unlikely to be needed.

The Fed chairman said it was not clear whether resurrecting the 30-year
Treasury bond, which was discontinued in 2001, was a good idea even in view
of the mounting deficits faced by the US.