Federal Reserve Chairman Alan Greenspan said China's economic expansion will probably pressure the nation to allow its currency to rise in value, boosting international markets while providing little benefit to US.
Revaluation of the Chinese yuan is a "fairly reasonable expectation" and an increase in productivity in the world's most populous nation "will drive the exchange rate upward," Greenspan said in response to an audience question after a speech in California.
The yuan's value has been fixed at 8.277 to the dollar since 1995. The dollar, and by extension the yuan, fell about 15 percent against the euro and 8 percent against the yen in the past year.
US manufacturers have complained that a favorable exchange rate and weak lending standards by state-run banks are giving Chinese producers an unfair competitive advantage.
A decision by China to loosen the peg to the dollar probably wouldn't help the US labor market, Greenspan said.
"I don't think the strict issue of revaluing the currency would make any difference" in regard to US employment, he said, because producers would simply relocate to the next low-cost market. It would be "good for the international system to get the yuan in balance." The US has lost 2.3 million jobs in three years, and manufacturing employment has declined each month since July 2000.
The weak labor market has contributed to a sag in popularity for US President George W. Bush, who is seeking re-election in November.
"We are not quite sure at this stage what the extent if any of the undervaluation of the renminbi is," Greenspan said, a reference to another name for the yuan. "There is no doubt there is upward pressure on the currency." Japan's Finance Ministry yesterday said China may favor linking the yuan's value to a basket of currencies, including the US dollar, the euro and the yen, rather than allowing it to fluctuate more freely against the dollar.
The Chinese government sees a basket system, or tying the yuan to several other currencies to produce a single unit of value, as a way to reduce volatility if it decides to remove the yuan's peg to the dollar, Hiroshi Watanabe, head of the ministry's international department, said.
Watanabe recently met with his counterparts from China and South Korea, but declined to say what was discussed. "We had a meeting, but we agreed not to disclose the content," he said.
The Nihon Keizai newspaper reported today that Japan has called on China to value the yuan against a basket of currencies, citing Japan's Finance Ministry. No one was available at the ministry to comment on the report.
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