Greenspan attacks China's yuan policy; Beijing shrugs

US Federal Reserve Chairman Alan Greenspan yesterday urged China to ease tight controls on its exchange rate for the sake of its own financial health, but China's top central banker said the country's fragile financial system needs more time to prepare.

"I've said on numerous occasions I think it is to the advantage of China to allow a little more flexibility in the exchange rate," Greenspan told a conference of central bankers in Beijing, speaking via satellite video link from Washington.

"It is something that I am certain they will take on reasonably soon," he said during a panel with key central bank officials from China, Japan and Europe.

While Greenspan expects China to move "soon," China's central bank chief suggested there was more work to be done first.

"China needs to prepare -- first, to reform financial institutions to fit into the future environment of foreign exchange flexibility," said Zhou Xiaochuan (周小川), China's central bank governor, speaking at the same conference.

The exchange rate "is an economic issue, not a political issue," Zhou said.

Beijing worries that a sudden shift in the yuan could affect unemployment, economic growth and consumer confidence, Zhou said.

He didn't give any indication when the communist government might allow a freely traded yuan.

Currency expect Chinese authorities to introduce more flexibility to the yuan's exchange rate within the year, possibly by widening the band in which it is allowed to trade versus the US dollar. Should that happen, the yuan is widely expected to appreciate against the US dollar, lifting with it the yen and other Asian currencies against the dollar.

"Basically, China is ready," said Frank Gong, managing director at J.P. Morgan Chase and Co in Hong Kong.

But, China wants "to depoliticize the issue first, then it will move," Gong said, predicting a wider trading band within the next few months.

To maintain its currency controls, China has to buy large quantities of US dollars -- an arrangement that Greenspan said "cannot go on indefinitely."