U.S. Federal Reserve Chairman Alan Greenspan on Tuesday urged China to ease tight controls on its exchange rate for the sake of its own financial health, but China's top central banker said the country's fragile financial system needs more time to prepare.
"I've said on numerous occasions I think it is to the advantage of China to allow a little more flexibility in the exchange rate," Greenspan told a conference of central bankers in Beijing, speaking via satellite video link from Washington.
"It is something that I am certain they will take on reasonably soon," he said during a panel with key central bank officials from China, Japan and Europe.
China fixes the exchange rate of its currency, the yuan, at 8.28 to the U.S. dollar. American manufacturers contend that undervalues the yuan by up to 40 percent, giving Chinese exporters an unfair advantage and hurting foreign competitors. Washington has been pressing China to let the yuan trade freely or to raise its state-set exchange rate.
Chinese leaders say they plan eventually to let the yuan trade freely on world markets. But they say doing so now would cause turmoil that would damage Chinese banks and other financial industries that aren't ready to deal with rapid fluctuations in interest rates and other changes that come with a freely traded currency.
"China needs to prepare — first, to reform financial institutions to fit into the future environment of foreign exchange flexibility," said Zhou Xiaochuan, China's central bank governor, speaking at the same conference.
The exchange rate "is an economic issue, not a political issue," Zhou said.
Beijing also worries that a sudden shift in the yuan could affect unemployment, economic growth and consumer confidence, Zhou said.
He didn't give any indication when the communist government might allow a freely traded yuan.
Currency traders expect Chinese authorities to introduce more flexibility to the yuan's exchange rate within the year, possibly by widening the band in which it is allowed to trade versus the dollar. Should that happen, the yuan is widely expected to appreciate against the dollar, lifting with it the yen and other Asian currencies against the dollar.
"Basically, China is ready," said Frank Gong, managing director at J.P. Morgan Chase and Co. in Hong Kong.
But, China wants "to depoliticize the issue first, then it will move," Gong said, predicting a wider trading band within the next few months. "China will make it an economic issue _ a domestic economic issue."
To maintain its currency controls, China has to buy large quantities of U.S. dollars _ an arrangement that Greenspan said "cannot go on indefinitely."
He said the system hurts China by encouraging the inefficient allocation of economic resources, and that changing it would boost China's economy.
"In enhancing global growth, it is important that the structure of the Chinese economy be as flexible and integrated into the world economy as much as possible," he said.
However, a more flexible Chinese exchange-rate system isn't like to have a big impact on the U.S. trade deficit, Greenspan said. Instead, he said, goods from other low-cost countries would replace Chinese goods in the U.S. market.
Zhou echoed that sentiment, saying the world expects too much from a revaluation of the yuan — also known as the renminbi — in terms of resolving global economic difficulties.
"If there are too many expectations for the renminbi and everything is placed on our shoulders, it's not good," he said.