updated 12/11/2003 3:05:06 PM ET 2003-12-11T20:05:06

Federal Reserve Chairman Alan Greenspan on Thursday challenged what he called the "conventional wisdom" that China's manipulation of its currency has given that country a huge competitive advantage against American companies that has cost thousands of American jobs.

"The story on trade and jobs, in my judgment, is a bit more complex, especially with respect to China, than this strain of conventional wisdom would lead one to believe," Greenspan said in remarks prepared for the World Affairs Council of Greater Dallas.

In his speech, Greenspan challenged some of the assumptions which underlie current Bush administration trade dealings with China.

America's besieged manufacturing sector, which has suffered through 40 straight months of jobs losses, has been pushing the administration to pressure China to allow the value of its currency to be set by market forces rather than keeping the currency's value tightly linked to the value of the dollar.

American manufacturers contend that China's currency practices have kept the currency undervalued by as much as 40 percent, giving the country a huge trade advantage that is reflected in the record U.S. trade deficits with China which hit $103 billion last year and is expected to top $120 billion this year.

Greenspan said that if China did allow the value of its currency to float and the currency rose in value, as U.S. manufacturers expect, it might cut Chinese exports of such goods as textiles to the United States. But he said rather than boosting production of textiles in the United States, it was "far more likely" that U.S. imports from other low-wage countries in Asia would simply replace the Chinese textiles.

In addition, Greenspan cautioned that allowing the Chinese currency's value to be set by market forces could threaten to destabilize the Chinese economy as the country relaxes its controls on capital flows as part of a changed currency regime.

"Many in China ... fear that an immediate ending of controls could induce capital outflows large enough to destabilize the country's fragile banking system," Greenspan said.

Copyright 2003 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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