Stronger Yuan Good for China: Bernanke

If China made its currency more flexible, it would improve the standard of the living of the Chinese people and foster economic stability around the world, Federal Reserve Chairman Ben Bernanke said Friday.

Treasury Secretary Henry Paulson announced in Beijing on Friday that China had pledged greater exchange rate flexibility but gave no timetable at the end of two days of talks between U.S. and Chinese officials.

Paulson was speaking at a joint briefing with his Chinese counterpart, Vice Premier Wu Yi, who issued a statement but did not mention the currency dispute.

Bernanke, in his most extensive remarks to date on the economy of the rapidly growing Asian giant, laid out a case for why it is in China's best interest to move ahead on economic reforms and let its currency, the yuan, rise in value against the dollar.

That's something that the United States keenly wants, believing it would bolster U.S. exports and bring some relief to record-high trade deficits.

China's current currency system represents an increasing threat, including higher inflation, to the Chinese economy, said Bernanke, who became Fed chairman in February. It was the same argument that had been made by his predecessor, Alan Greenspan.

Thus, moving toward a more market-driven currency system will "enhance China's future growth and stability," Bernanke said in prepared remarks to the Chinese Academy of Social Sciences in Beijing.

A copy of his remarks was made available in Washington on Friday before the announcement by Paulson that China had agreed to greater flexibility.

Paulson, heading a high-level U.S. delegation in China this week, prodded Beijing to move more quickly in overhauling its currency policies. Bernanke is a member of that delegation.

The U.S. trade deficit with China mushroomed to $202 billion last year, the largest ever with a single country. The United States is on track to log an even bigger trade shortfall with the Asian power this year as Americans continue to buy far more Chinese goods than the Chinese buy American goods.

Manufacturers and other critics contend that Beijing is keeping the yuan artificially low, giving it an unfair trade advantage, hurting U.S. exports and contributing to the loss of U.S. factory jobs. A weaker yuan, relative to the dollar, makes Chinese goods cheaper in the United States and U.S.-made goods more expensive in China.

Against that backdrop, the Chinese have racked up big trade surpluses, while the United States has logged massive deficits. Economists warn that such lopsided trade schemes could eventually upset the global economy.

Taking steps to narrow its trade surpluses, therefore, would not only "contribute to global financial stability, it would also be in China's economic interest," Bernanke said.

The United States, meanwhile, needs to do its part to trim its trade deficits, he said.

A stronger yuan would make goods made by the United States as well as other countries flowing into China cheaper and more affordable to the Chinese.

"Policies aimed at increasing household consumption would clearly benefit the Chinese people, notably by improving standards of living and allowing the fruits of economic development to be shared more widely," Bernanke said.

To clamp down on China and its currency practices, lawmakers in Congress have suggested hefty tariffs on Chinese goods, among other measures. Bernanke, however, once again warned against such protectionist actions.

The new Democratic-controlled Congress, which convenes in early January, is likely to take a tougher stance toward China and be more skeptical of free-trade deals in general than Republicans, who have run Capitol Hill for most of the past 12 years.

Paulson's delegation includes other members of President Bush's Cabinet as well as Bernanke.

Editor's note:
Real inflation is 3 to 4 times more than we’re told -- Read More Here