- The Washington Times - Thursday, February 16, 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.

Mr. Bernanke said he does not believe China will do so, because that would not be in its economic interest. But he said if it does withdraw its money, the U.S. would be able to find other ways of financing the deficits.

While cautioning against a retrenchment on trade, Mr. Bernanke was not as forceful as his predecessor, Alan Greenspan, in warning Congress about the dangers of protectionism.

The popularity of the Schumer bill, which passed the Senate overwhelmingly in a vote last year, has raised fears among businesses and analysts because of its potential to touch off a trade war.

To pre-empt retaliatory action in Congress, the Bush administration moved earlier this week to step up enforcement of intellectual property rights and other U.S. trade grievances against China.

Treasury Secretary John W. Snow also has been testing the waters to see how the financial markets would react if he cited China for illegally manipulating its currency under a provision of U.S. law.

The move could be counterproductive if it triggered a run on the dollar that plunged the U.S. into a self-made financial crisis.

Any designation by Treasury before an April 15 deadline would be intended to trigger negotiations between the U.S. and China to prevent more serious trade sanctions from being imposed.

Mr. Snow, during a tour of the Chicago Mercantile Exchange yesterday, expressed dissatisfaction with China’s limited move in July to revalue the yuan.

In a one-time action, China allowed the yuan to rise 2.1 percent against the dollar. Since then, the Chinese currency has moved up less than 1 percent.

“It’s clear that China has not been as flexible as they need to be and they have not lived up to what they said they would do,” Mr. Snow told Bloomberg News. “We’re not satisfied and we want to see them move.”

China’s currency “should be where the market would take it,” he said. “We know they can’t go to a fully flexible arrangement instantly tomorrow, but they can get on a path to it and that’s what we want to see them do.”

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