Federal Reserve Chairman Alan Greenspan on Thursday welcomed China’s decision to move to a more flexible currency system, calling it “a good start.”
Greenspan’s comments during an appearance before the Senate Banking Committee came as the Bush administration, while praising China’s action, said it would monitor the country’s implementation of the new arrangement.
“I welcome China’s announcement today that it is adopting a more flexible exchange rate regime,” Treasury Secretary John Snow said in a statement. “As we have said, reform of China’s currency regime is important for China and the international financial system.”
Snow said the United States would monitor China’s implementation of its new system, which will tie its currency to a marketbasket of currencies rather than linking it at a fixed rate to the U.S. dollar.
The White House also hailed the announcement. “We are encouraged by China’s announcement today that they are adopting a more flexible market-based currency system,” presidential spokesman Scott McClellan said.
Greenspan said he hadn’t had a chance to review details of China’s currency change, but went on to say: “This is certainly a good first step. ... I think it is a good start.”
China’s initial move was to allow the yuan to appreciate by 2 percent against the value of the dollar. That was far below the up to 40 percent that American companies have claimed is the amount the yuan has been undervalued, giving Chinese companies a tremendous competitive advantage against American goods.
Snow did not address the size of the initial revaluation in his statement but did say the administration would be watching to see whether the Chinese currency will move “to alignment with underlying market conditions.”
At a news conference, Snow called China’s announcement “extremely positive” but he refused to say what impact it would have on growing protectionist pressures in this country. Critics have been upset with China’s soaring trade imbalance with the United States, which last year hit $162 billion, the highest deficit the United States has ever recorded with any country.
Snow told reporters that China, by its actions, has made a commitment to move toward a market-based currency, one whose value its set by currency traders on a daily basis. He said they put in place a mechanism that will allow that to occur.
He said China’s new currency system “clearly puts China on the right path.”
Sen. Chuck Schumer, who has been pushing a bill in Congress to impose penalty tariffs of 27.5 percent on all Chinese products unless they revalue their currency, reacted favorably to China’s announcement.
“This is a good first step, albeit a baby step,” Schumer, D-N.Y., said. “It is smaller than we had hoped but to paraphrase the Chinese philosophers, the trip of a thousand miles can well begin with the first baby step.”
The administration has been pushing China for nearly two years to revalue its currency. The administration’s initial demand was for China to allow the yuan’s value to be set in currency markets.