Bernanke asks China to end export subsidy through yen
15 Dec 2006
Mumbai: US Federal Reserve Chairman, Ben S. Bernanke, has urged China to allow its currency to appreciate by widening its trading band, thereby ending what he called "an effective subsidy'''' to exporters in China.
He said distortions caused by an undervalued renminbi (the yuan) could leave China with wasteful investments and costly financial instability over the longer term. Bernanke urged China''s policy makers to give primacy to markets and grant independence to the People''s Bank of China in deciding currency policy.
"Further appreciation of the renminbi, combined with a wider trading band and with the ultimate goal of a market-determined exchange rate, would allow an effective and independent monetary policy,'''' Bernanke said at the Sino-US strategic meeting in Beijing. This would ``enhance China''s future growth and stability,'''' he added.
China''s monetary authorities have limited the yuan''s gains to 5.8 per cent since ending its strict peg to the dollar in July 2005. China limits yuan fluctuations to 0.3 per cent a day. The Chinese currency currently trades at around 7.8215 per dollar.
While Bernanke, 53, was specific in his criticism of China''s exchange-rate mechanism, US treasury secretary Henry Paulson who is accompanying Bernanke limited his comments on the yuan to calls for more ``flexibility.''''
Paulson told reporters in Beijing that China has agreed to make its currency more flexible. Exports account for 35 per cent of China''s gross domestic product, which is increasing at rates above 10 per cent. Domestic demand is lagging behind. Consumption last year accounted for the lowest share of GDP since 1978, according to the statistics bureau.
"Together with the large trade and current account deficits of the United States, the Chinese external surpluses are contributing to the current pattern of global imbalances,'''' Bernanke said.
China''s total trade surplus will rise to a record $168 billion this year, according to figures supplied by China''s customs bureau last week.
