Front Page > Business Page

Fed chairman warns Congress on China surplus

By Patrice Hill
THE WASHINGTON TIMES
February 17, 2006

Federal Reserve Chairman Ben Bernanke yesterday said China needs to take steps to rein in its massive trade surplus with the U.S. but Congress must be patient and not touch off a trade war with the Asian giant.
    "I agree they need to do more" to stop holding down the value of their currency and allow it to rise against the dollar, which would help curb the surplus by making Chinese goods more expensive in the U.S., the Fed chief told the Senate Banking, Housing and Urban Affairs Committee.
    "It is in their own long-term interest to do so," he said, although China admittedly is doing very well making inroads into U.S. markets by fostering a cheap currency.
    Allowing the yuan to float freely like the dollar and other major currencies "will give them more monetary policy independence, it will reduce the overdependence of their economy on exports" and will allow China to assume a greater leadership role in global economic deliberations, he said.
    Mr. Bernanke said the U.S. is having difficulty adjusting to the rise of China as a major economic power, just as it had trouble adjusting to the rise of Japan and the "Asian tigers" in previous decades.
    While the ascendance of these Asian powers raises conflicts and tensions, it also presents immense opportunities for expanding trade and enriching the U.S. and global economies, he said.
    Sen. Charles E. Schumer, New York Democrat, asked the newly installed Fed chief for advice on how to handle the increasingly hot-button conflict with China, which many on Wall Street fear will degenerate into a trade war in Congress.
    Mr. Schumer said he realizes his legislation to slap 27.5 percent tariffs on all Chinese imports if it does not significantly revalue its currency, though popular in Congress, is not the best course of action as it would hurt both China and U.S. consumers.
    China says it will not take action if it is threatened or bullied, but it also refuses to act on its own, he said, leaving Congress with little recourse.
    "I appreciate your frustration, senator," said Mr. Bernanke, but he cautioned that Congress and the Bush administration can do little more than keep using "persuasion" and offering technical assistance so China can move more quickly toward changing its currency regime.
    While China has been one of the principal engines driving up the U.S. trade deficit, it also has become a top source of financing for the deficit, as it regularly recycles much of its export earnings by purchasing U.S. Treasury bonds and other assets.
    Lawmakers questioned whether that doesn't give China inordinate power over U.S. finances, and asked what would happen if China decided to withdraw its money and stop financing the U.S. deficits.

Want to use this article? Click here for options! Copyright 2006 The Washington Times